UNITED STATES
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 September 28, 2014July 5, 2015
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. 001-06462
TERADYNE, INC.
(Exact name of registrant as specified in its charter)
Massachusetts | 04-2272148 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |
600 Riverpark Drive, North Reading, Massachusetts | 01864 | |
(Address of Principal Executive Offices) | (Zip Code) |
978-370-2700
(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 ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files) Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):
Large accelerated filer | x | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The number of shares outstanding of the registrant’s only class of Common Stock as of October 31, 2014August 7, 2015 was 216,494,252210,834,989 shares.
TERADYNE, INC.
INDEX
Page No. | ||||||
PART I. FINANCIAL INFORMATION | ||||||
Item 1. | Financial Statements (Unaudited): | |||||
Condensed Consolidated Balance Sheets as of | 1 | |||||
2 | ||||||
3 | ||||||
4 | ||||||
Notes to Condensed Consolidated Financial Statements | 5 | |||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |||||
Item 3. | Quantitative and Qualitative Disclosures about Market Risk | |||||
Item 4. | Controls and Procedures | |||||
PART II. OTHER INFORMATION | ||||||
Item 1. | Legal Proceedings | |||||
Item 1A. | Risk Factors | |||||
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | |||||
Item 4. | Mine Safety Disclosures | |||||
Item 6. | Exhibits |
PART I
Item 1: | Financial Statements |
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 28, 2014 | December 31, 2013 | July 5, 2015 | December 31, 2014 | |||||||||||||
(in thousands, except per share information) | (in thousands, except per share information) | |||||||||||||||
ASSETS | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 211,704 | $ | 341,638 | $ | 300,685 | $ | 294,256 | ||||||||
Marketable securities | 594,801 | 586,882 | 452,040 | 533,787 | ||||||||||||
Accounts receivable, less allowance for doubtful accounts of $2,438 and $2,912 at September 28, 2014 and December 31, 2013, respectively | 321,312 | 157,642 | ||||||||||||||
Inventories: | ||||||||||||||||
Accounts receivable, less allowance for doubtful accounts of $2,424 and $2,491 at July 5, 2015 and December 31, 2014, respectively | 296,654 | 151,034 | ||||||||||||||
Inventories, net: | ||||||||||||||||
Parts | 64,588 | 84,232 | 67,285 | 70,821 | ||||||||||||
Assemblies in process | 11,147 | 15,539 | 17,376 | 10,347 | ||||||||||||
Finished goods | 32,642 | 38,168 | 37,156 | 23,961 | ||||||||||||
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108,377 | 137,939 | 121,817 | 105,129 | |||||||||||||
Deferred tax assets | 68,791 | 72,478 | 58,345 | 57,239 | ||||||||||||
Prepayments | 88,732 | 136,374 | 80,249 | 95,819 | ||||||||||||
Other current assets | 7,304 | 7,324 | 6,596 | 6,582 | ||||||||||||
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Total current assets | 1,401,021 | 1,440,277 | 1,316,386 | 1,243,846 | ||||||||||||
Net property, plant and equipment | 335,805 | 275,236 | ||||||||||||||
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Property, plant and equipment, net | 291,929 | 329,038 | ||||||||||||||
Marketable securities | 374,808 | 271,078 | 275,882 | 470,789 | ||||||||||||
Deferred tax assets | 5,353 | 5,217 | 6,836 | 7,494 | ||||||||||||
Other assets | 9,853 | 14,591 | 13,364 | 10,419 | ||||||||||||
Retirement plans assets | 8,871 | 9,342 | 13,850 | 12,896 | ||||||||||||
Intangible assets, net | 197,477 | 252,291 | 279,126 | 190,600 | ||||||||||||
Goodwill | 361,819 | 361,792 | 495,434 | 273,438 | ||||||||||||
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Total assets | $ | 2,695,007 | $ | 2,629,824 | $ | 2,692,807 | $ | 2,538,520 | ||||||||
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LIABILITIES | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Accounts payable | $ | 60,309 | $ | 62,874 | $ | 86,463 | $ | 47,763 | ||||||||
Accrued employees’ compensation and withholdings | 91,053 | 95,619 | 94,544 | 100,994 | ||||||||||||
Deferred revenue and customer advances | 60,178 | 55,404 | 77,347 | 71,603 | ||||||||||||
Other accrued liabilities | 98,424 | 63,712 | 85,470 | 50,247 | ||||||||||||
Contingent consideration | 15,092 | 895 | ||||||||||||||
Accrued income taxes | 19,840 | 11,360 | 43,163 | 20,049 | ||||||||||||
Current debt | — | 186,663 | ||||||||||||||
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Total current liabilities | 329,804 | 475,632 | 402,079 | 291,551 | ||||||||||||
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Long-term deferred revenue and customer advances | 23,248 | 13,756 | 25,354 | 19,929 | ||||||||||||
Retirement plans liabilities | 88,670 | 91,517 | 107,557 | 108,460 | ||||||||||||
Deferred tax liabilities | 35,911 | 40,686 | 38,624 | 23,315 | ||||||||||||
Long-term other accrued liabilities | 27,466 | 23,139 | 24,468 | 13,830 | ||||||||||||
Long-term contingent consideration | 20,503 | 2,455 | ||||||||||||||
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Total liabilities | 505,099 | 644,730 | 618,585 | 459,540 | ||||||||||||
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Commitments and contingencies (Note O) | ||||||||||||||||
Commitments and contingencies (See Note P) | ||||||||||||||||
SHAREHOLDERS’ EQUITY | ||||||||||||||||
Common stock, $0.125 par value, 1,000,000 shares authorized, 216,482 shares and 191,731 shares issued and outstanding at September 28, 2014 and December 31, 2013, respectively | 27,060 | 23,966 | ||||||||||||||
Common stock, $0.125 par value, 1,000,000 shares authorized, 212,507 shares and 216,613 shares issued and outstanding at July 5, 2015 and December 31, 2014, respectively | 26,563 | 27,077 | ||||||||||||||
Additional paid-in capital | 1,431,100 | 1,390,896 | 1,462,349 | 1,437,135 | ||||||||||||
Accumulated other comprehensive income | 4,859 | 4,000 | ||||||||||||||
Accumulated other comprehensive (loss) income | (3,162 | ) | 4,689 | |||||||||||||
Retained earnings | 726,889 | 566,232 | 588,472 | 610,079 | ||||||||||||
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Total shareholders’ equity | 2,189,908 | 1,985,094 | 2,074,222 | 2,078,980 | ||||||||||||
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Total liabilities and shareholders’ equity | $ | 2,695,007 | $ | 2,629,824 | $ | 2,692,807 | $ | 2,538,520 | ||||||||
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The accompanying notes, together with the Notes to Consolidated Financial Statements included in Teradyne’s Annual Report on Form 10-K for the year ended December 31, 2014, are an integral part of the condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months Ended | For the Six Months Ended | |||||||||||||||
July 5, 2015 | June 29, 2014 | July 5, 2015 | June 29, 2014 | |||||||||||||
(in thousands, except per share amount) | ||||||||||||||||
Revenues: | ||||||||||||||||
Products | $ | 437,243 | $ | 452,488 | $ | 709,568 | $ | 707,874 | ||||||||
Services | 75,496 | 73,079 | 145,572 | 138,703 | ||||||||||||
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Total revenues | 512,739 | 525,567 | 855,140 | 846,577 | ||||||||||||
Cost of revenues: | ||||||||||||||||
Cost of products | 181,491 | 202,411 | 300,487 | 326,859 | ||||||||||||
Cost of services | 32,680 | 32,743 | 63,662 | 62,258 | ||||||||||||
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Total cost of revenues (exclusive of acquired intangible assets amortization shown separately below) | 214,171 | 235,154 | 364,149 | 389,117 | ||||||||||||
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Gross profit | 298,568 | 290,413 | 490,991 | 457,460 | ||||||||||||
Operating expenses: | ||||||||||||||||
Engineering and development | 75,832 | 73,414 | 147,282 | 140,499 | ||||||||||||
Selling and administrative | 77,073 | 77,489 | 149,114 | 155,492 | ||||||||||||
Acquired intangible assets amortization | 15,258 | 18,271 | 29,066 | 36,542 | ||||||||||||
Restructuring and other | (385 | ) | 572 | (385 | ) | 572 | ||||||||||
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Total operating expenses | 167,778 | 169,746 | 325,077 | 333,105 | ||||||||||||
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Income from operations | 130,790 | 120,667 | 165,914 | 124,355 | ||||||||||||
Non-operating (income) expense: | ||||||||||||||||
Interest income | (1,674 | ) | (1,266 | ) | (3,490 | ) | (2,302 | ) | ||||||||
Interest expense | 444 | 159 | 606 | 6,576 | ||||||||||||
Other (income) expense, net | (116 | ) | 382 | (5,776 | ) | 562 | ||||||||||
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Income before income taxes | 132,136 | 121,392 | 174,574 | 119,519 | ||||||||||||
Income tax provision | 29,257 | 20,187 | 38,908 | 17,385 | ||||||||||||
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Net income | $ | 102,879 | $ | 101,205 | $ | 135,666 | $ | 102,134 | ||||||||
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Net income per common share: | ||||||||||||||||
Basic | $ | 0.48 | $ | 0.52 | $ | 0.63 | $ | 0.53 | ||||||||
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Diluted | $ | 0.48 | $ | 0.47 | $ | 0.62 | $ | 0.45 | ||||||||
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Weighted average common shares—basic | 213,845 | 194,408 | 215,516 | 193,860 | ||||||||||||
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Weighted average common shares—diluted | 215,496 | 216,568 | 217,154 | 226,526 | ||||||||||||
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Cash dividend declared per common share | $ | 0.06 | $ | — | $ | 0.12 | $ | 0.06 | ||||||||
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The accompanying notes, together with the Notes to Consolidated Financial Statements included in Teradyne’s
Annual Report on Form 10-K for the year ended December 31, 2013,2014, are an integral part of the condensed
consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONSCOMPREHENSIVE INCOME
(Unaudited)
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
September 28, 2014 | September 29, 2013 | September 28, 2014 | September 29, 2013 | |||||||||||||
(in thousands, except per share amount) | ||||||||||||||||
Net revenues: | ||||||||||||||||
Products | $ | 402,987 | $ | 365,825 | $ | 1,110,861 | $ | 943,212 | ||||||||
Services | 75,023 | 67,551 | 213,726 | 199,420 | ||||||||||||
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Total net revenues | 478,010 | 433,376 | 1,324,587 | 1,142,632 | ||||||||||||
Cost of revenues: | ||||||||||||||||
Cost of products | 182,591 | 150,365 | 509,450 | 405,569 | ||||||||||||
Cost of services | 34,298 | 28,717 | 96,556 | 88,119 | ||||||||||||
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Total cost of revenues (exclusive of acquired intangible assets amortization shown separately below) | 216,889 | 179,082 | 606,006 | 493,688 | ||||||||||||
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Gross profit | 261,121 | 254,294 | 718,581 | 648,944 | ||||||||||||
Operating expenses: | ||||||||||||||||
Engineering and development | 71,953 | 68,918 | 212,452 | 199,442 | ||||||||||||
Selling and administrative | 73,064 | 72,917 | 228,556 | 210,037 | ||||||||||||
Acquired intangible assets amortization | 18,271 | 18,064 | 54,813 | 54,163 | ||||||||||||
Restructuring and other | (405 | ) | 889 | 167 | 1,480 | |||||||||||
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Total operating expenses | 162,883 | 160,788 | 495,988 | 465,122 | ||||||||||||
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Income from operations | 98,238 | 93,506 | 222,593 | 183,822 | ||||||||||||
Interest income | 1,922 | 948 | 4,224 | 2,923 | ||||||||||||
Interest expense and other (income) expense | (510 | ) | 6,902 | 6,628 | 20,262 | |||||||||||
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Income before income taxes | 100,670 | 87,552 | 220,189 | 166,483 | ||||||||||||
Income tax provision | 17,721 | 18,093 | 35,106 | 23,879 | ||||||||||||
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Net income | $ | 82,949 | $ | 69,459 | $ | 185,083 | $ | 142,604 | ||||||||
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Net income per common share: | ||||||||||||||||
Basic | $ | 0.40 | $ | 0.36 | $ | 0.93 | $ | 0.75 | ||||||||
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Diluted | $ | 0.38 | $ | 0.29 | $ | 0.83 | $ | 0.61 | ||||||||
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Weighted average common shares—basic | 207,381 | 191,307 | 198,367 | 190,521 | ||||||||||||
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Weighted average common shares—diluted | 218,333 | 235,828 | 223,795 | 235,165 | ||||||||||||
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Cash dividend declared per common share | $ | 0.06 | $ | — | $ | 0.12 | $ | — | ||||||||
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For the Three Months Ended | For the Six Months Ended | |||||||||||||||
July 5, 2015 | June 29, 2014 | July 5, 2015 | June 29, 2014 | |||||||||||||
(in thousands) | ||||||||||||||||
Net income | $ | 102,879 | $ | 101,205 | $ | 135,666 | $ | 102,134 | ||||||||
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Other comprehensive (loss) income, net of tax: | ||||||||||||||||
Foreign currency translation adjustments, net of tax of $0 | (6,267 | ) | — | (6,267 | ) | — | ||||||||||
Available-for-sale marketable securities: | ||||||||||||||||
Unrealized (losses) gains on marketable securities arising during period, net of tax of $(1,648), $558, $(944), $1,242 | (2,675 | ) | 1,165 | (876 | ) | 2,304 | ||||||||||
Less: Reclassification adjustment for gains included in net income, net of tax of $(40), $(141), $(209), $(243) | (231 | ) | (272 | ) | (561 | ) | (448 | ) | ||||||||
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(2,906 | ) | 893 | (1,437 | ) | 1,856 | |||||||||||
Defined benefit pension and post-retirement plans: | ||||||||||||||||
Amortization of net prior service benefit included in net periodic pension expense and post-retirement benefit income, net of tax of $(42), $(42), $(85), $(85) | (74 | ) | (74 | ) | (147 | ) | (147 | ) | ||||||||
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Other comprehensive (loss) income | (9,247 | ) | 819 | (7,851 | ) | 1,709 | ||||||||||
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Comprehensive income | $ | 93,632 | $ | 102,024 | $ | 127,815 | $ | 103,843 | ||||||||
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The accompanying notes, together with the Notes to Consolidated Financial Statements included in Teradyne’s
Annual Report on Form 10-K for the year ended December 31, 2013,2014, are an integral part of the condensed
consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMECASH FLOWS
(Unaudited)
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
September 28, 2014 | September 29, 2013 | September 28, 2014 | September 29, 2013 | |||||||||||||
(in thousands) | ||||||||||||||||
Net income | $ | 82,949 | $ | 69,459 | $ | 185,083 | $ | 142,604 | ||||||||
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Other comprehensive income (loss): | ||||||||||||||||
Available-for-sale marketable securities: | ||||||||||||||||
Net unrealized gains (losses) on marketable securities arising during period, net of tax (benefit) expense of $(139), $358, $1,103, $(367) | (138 | ) | 623 | 2,166 | (640 | ) | ||||||||||
Less: Reclassification adjustment for net gains included in net income, net of tax (benefit) of $(348), $(109), $(591), $(231) | (638 | ) | (189 | ) | (1,086 | ) | (401 | ) | ||||||||
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(776 | ) | 434 | 1,080 | (1,041 | ) | |||||||||||
Defined benefit pension and post-retirement plans: | ||||||||||||||||
Amortization of net prior service benefit included in net periodic pension expense and post-retirement income, net of tax (benefit) of $(42), $(40), $(127), $(119) | (74 | ) | (69 | ) | (221 | ) | (207 | ) | ||||||||
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Other comprehensive income (loss) | (850 | ) | 365 | 859 | (1,248 | ) | ||||||||||
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Comprehensive income | $ | 82,099 | $ | 69,824 | $ | 185,942 | $ | 141,356 | ||||||||
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For the Six Months Ended | ||||||||
July 5, 2015 | June 29, 2014 | |||||||
(in thousands) | ||||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 135,666 | $ | 102,134 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation | 36,230 | 33,785 | ||||||
Amortization | 31,395 | 42,990 | ||||||
Stock-based compensation | 15,405 | 23,530 | ||||||
Provision for excess and obsolete inventory | 15,881 | 15,071 | ||||||
Non cash charge for the sale of inventories revalued at the date of acquisition | 595 | — | ||||||
Tax benefit related to employee stock compensation awards | (892 | ) | (1,671 | ) | ||||
Contingent consideration adjustment | (1,600 | ) | — | |||||
Gain from the sale of an equity investment | (5,406 | ) | — | |||||
Deferred taxes | (10,371 | ) | (5,697 | ) | ||||
Other | 1,154 | 1,165 | ||||||
Changes in operating assets and liabilities, net of business acquired: | ||||||||
Accounts receivable | (142,493 | ) | (143,125 | ) | ||||
Inventories | 23,500 | 18,469 | ||||||
Prepayments and other assets | 14,054 | 27,000 | ||||||
Accounts payable and other accrued expenses | 53,392 | 52,796 | ||||||
Deferred revenue and customer advances | 5,685 | 13,800 | ||||||
Retirement plans contributions | (1,999 | ) | (2,388 | ) | ||||
Accrued income taxes | 23,261 | 5,495 | ||||||
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Net cash provided by operating activities | 193,457 | 183,354 | ||||||
Cash flows from investing activities: | ||||||||
Purchases of property, plant and equipment | (46,110 | ) | (91,389 | ) | ||||
Acquisition of business, net of cash acquired | (282,332 | ) | — | |||||
Purchases of available-for-sale marketable securities | (590,250 | ) | (523,306 | ) | ||||
Proceeds from sales of available-for-sale marketable securities | 631,400 | 152,818 | ||||||
Proceeds from maturities of available-for-sale marketable securities | 231,416 | 377,436 | ||||||
Proceeds from the sale of an equity investment | 5,406 | — | ||||||
Proceeds from life insurance | 1,098 | 4,391 | ||||||
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Net cash used for investing activities | (49,372 | ) | (80,050 | ) | ||||
Cash flows from financing activities: | ||||||||
Issuance of common stock under employee stock purchase and stock option plans | 17,878 | 10,643 | ||||||
Tax benefit related to employee stock compensation awards | 892 | 1,671 | ||||||
Repurchase of common stock | (128,316 | ) | — | |||||
Dividend payments | (25,857 | ) | (11,656 | ) | ||||
Payment of revolving credit facility costs | (2,253 | ) | — | |||||
Payments of long-term debt | — | (190,975 | ) | |||||
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Net cash used for financing activities | (137,656 | ) | (190,317 | ) | ||||
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Increase (decrease) in cash and cash equivalents | 6,429 | (87,013 | ) | |||||
Cash and cash equivalents at beginning of period | 294,256 | 341,638 | ||||||
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Cash and cash equivalents at end of period | $ | 300,685 | $ | 254,625 | ||||
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The accompanying notes, together with the Notes to Consolidated Financial Statements included in Teradyne’s
Annual Report on Form 10-K for the year ended December 31, 2013,2014, are an integral part of the condensed
consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine Months Ended | ||||||||
September 28, 2014 | September 29, 2013 | |||||||
(in thousands) | ||||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 185,083 | $ | 142,604 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation | 52,832 | 41,873 | ||||||
Amortization | 62,122 | 69,495 | ||||||
Stock-based compensation | 31,873 | 27,227 | ||||||
Provision for excess and obsolete inventory | 21,505 | 9,616 | ||||||
Deferred taxes | (8,747 | ) | (19,211 | ) | ||||
Contingent consideration fair value adjustment | (630 | ) | — | |||||
Tax benefit related to stock options and restricted stock units | (1,726 | ) | (807 | ) | ||||
Retirement plans actuarial gains | — | (1,359 | ) | |||||
Impairment loss on property, plant and equipment | — | 1,074 | ||||||
Other | 2,110 | 1,088 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (163,670 | ) | (55,963 | ) | ||||
Inventories | 38,267 | 34,194 | ||||||
Prepayments and other assets | 47,784 | (26,312 | ) | |||||
Accounts payable and other accrued expenses | 29,109 | (17 | ) | |||||
Deferred revenue and customer advances | 14,266 | (9,249 | ) | |||||
Retirement plans contributions | (3,281 | ) | (3,569 | ) | ||||
Accrued income taxes | 10,208 | 13,750 | ||||||
|
|
|
| |||||
Net cash provided by operating activities | 317,105 | 224,434 | ||||||
Cash flows from investing activities: | ||||||||
Purchases of property, plant and equipment | (146,352 | ) | (82,925 | ) | ||||
Purchases of marketable securities | (844,056 | ) | (658,564 | ) | ||||
Proceeds from maturities of marketable securities | 495,565 | 401,901 | ||||||
Proceeds from sales of marketable securities | 236,060 | 332,968 | ||||||
Proceeds from life insurance | 4,391 | — | ||||||
|
|
|
| |||||
Net cash used for investing activities | (254,392 | ) | (6,620 | ) | ||||
Cash flows from financing activities: | ||||||||
Issuance of common stock under employee stock purchase and stock options plans | 21,030 | 16,778 | ||||||
Tax benefit related to stock options and restricted stock units | 1,726 | 807 | ||||||
Payments of dividend | (24,428 | ) | — | |||||
Payments of long-term debt | (190,975 | ) | (1,063 | ) | ||||
Payments of contingent consideration | — | (388 | ) | |||||
|
|
|
| |||||
Net cash (used for) provided by financing activities | (192,647 | ) | 16,134 | |||||
|
|
|
| |||||
(Decrease) increase in cash and cash equivalents | (129,934 | ) | 233,948 | |||||
Cash and cash equivalents at beginning of period | 341,638 | 338,920 | ||||||
|
|
|
| |||||
Cash and cash equivalents at end of period | $ | 211,704 | $ | 572,868 | ||||
|
|
|
|
The accompanying notes, together with the Notes to Consolidated Financial Statements included in Teradyne’s
Annual Report on Form 10-K for the year ended December 31, 2013, are an integral part of the condensed
consolidated financial statements.
TERADYNE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A. The Company
Teradyne, Inc. (the “Company” or “Teradyne”(“Teradyne”) is a leading global supplier of automatic test equipment.equipment and collaborative robots. Teradyne’s automatic test equipment and collaborative robots products and services include:
On June 11, 2015, Teradyne acquired Universal Robots A/S (“Universal Robots”) for approximately $284 million of cash plus up to an additional $65 million of cash if certain performance targets are met extending through 2018. Universal Robots is the leading supplier of collaborative robots which are low-cost, easy-to-deploy and simple-to-program robots that work side by side with production workers to improve quality and increase manufacturing efficiency.
B. Accounting Policies
Basis of Presentation
The consolidated interim financial statements include the accounts of Teradyne and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated. These interim financial statements are unaudited and reflect all normal recurring adjustments that are, in the opinion of management, necessary for the fair presentation of such interim financial statements. Certain prior year’syear amounts were reclassified to conform to the current year presentation. The December 31, 20132014 condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.
The accompanying financial information should be read in conjunction with the consolidated financial statements and notes thereto contained in Teradyne’s Annual Report on Form 10-K, filed with the U.S. Securities and Exchange Commission (“SEC”) on February 28, 2014,27, 2015, for the year ended December 31, 2013.2014.
Preparation of Financial Statements and Use of Estimates
The preparation of consolidated financial statements requires management to make estimates and judgments that affect the amounts reported in the financial statements. Actual results may differ significantly from these estimates.
Revenue Recognition
Teradyne recognizes revenue when there is persuasive evidence of an arrangement, title and risk of loss have passed, delivery has occurred or the services have been rendered, the sales price is fixed or determinable and collection of the related receivable is reasonably assured. Title and risk of loss generally pass to Teradyne’s customers upon shipment or at delivery destination point. In circumstances where either title or risk of loss pass
upon destination, acceptance or cash payment, Teradyne defers revenue recognition until such events occur except when title transfer is tied to cash payment outside the United States. Outside the United States, Teradyne recognizes revenue even if it retains a form of title to products delivered to customers, provided the sole purpose is to enable Teradyne to recover the products in the event of customer payment default and the arrangement does not prohibit the customer’s use or resale of the product in the ordinary course of business.
Teradyne’s equipment has non-software and software components that function together to deliver the equipment’s essential functionality. Revenue is recognized upon shipment or at delivery destination point, provided that customer acceptance criteria can be demonstrated prior to shipment. Certain contracts require Teradyne to perform tests of the product to ensure that performance meets the published product specifications or customer requested specifications, which are generally conducted prior to shipment. Where the criteria cannot be demonstrated prior to shipment, revenue is deferred until customer acceptance has been received. Teradyne also defers the portion of the sales price that is not due until acceptance, which represents deferred profit.
For multiple element arrangements, Teradyne allocates revenue to all deliverables based on their relative selling prices. In such circumstances, a hierarchy is used to determine the selling price for allocating revenue to deliverables as follows: (i) vendor-specific objective evidence of selling price (“VSOE”), (ii) third-party evidence of selling price (“TPE”), and (iii) best estimate of the selling price (“BESP”). For a delivered item to be considered a separate unit the delivered item must have value to the customer on a standalone basis and the delivery or performance of the undelivered item must be considered probable and substantially in Teradyne’s control.
Teradyne’s post-shipment obligations include installation, training services, one-year standard warranties, and extended warranties. Installation does not alter the product capabilities, does not require specialized skills or tools and can be performed by the customers or other vendors. Installation is typically provided within five days of product shipment and is completed within one to two days thereafter. Training services are optional and do not affect the customers’ ability to use the product. Teradyne defers revenue for the selling price of installation and training. Extended warranties constitute warranty obligations beyond one year and Teradyne defers revenue in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 605-20,“Separately Priced Extended Warranty and Product Maintenance Contracts” and ASC 605-25, “Revenue Recognition Multiple-Element Arrangements.” Service revenue is recognized over the contractual period or as services are performed.
Teradyne’s products are generally subject to warranty and related costs of the warranty are provided for in cost of revenue when product revenue is recognized. Teradyne classifies shipping and handling costs in cost of revenue. Teradyne generally does not provide its customers with contractual rights of return for any of its products.
Translation of Non-U.S. Currencies
The functional currency for all non-U.S. subsidiaries is the U.S. dollar, except for the Industrial Automation segment for which the local currency is its functional currency. All foreign currency denominated monetary assets and liabilities are remeasured on a monthly basis into the functional currency using exchange rates in effect at the end of the period. All foreign currency denominated non-monetary assets and liabilities are remeasured into the functional currency using historical exchange rates. Net foreign exchange gains and losses resulting from remeasurement are included in other (income) expense, net. For Industrial Automation, assets and liabilities are translated into U.S. dollars using exchange rates in effect at the end of the period. Revenue and expense amounts are translated using an average of exchange rates in effect during the period. Translation adjustments are recorded within accumulated other comprehensive income (loss).
C. Recently Issued Accounting Pronouncements
On July 18, 2013, Financial Accounting Standards Board (“FASB”)April 7, 2015, the FASB issued Accounting Standard Update (“ASU”)No. 2013-11, ASU 2015-03,“Income Taxes (Topic 740):Simplifying the Presentation of an Unrecognized Tax Benefit WhenDebt Issuance Costs,” which requires debt issuance costs to be presented in the balance sheet as a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.”Under this ASU, unrecognized tax benefits willdirect deduction from the carrying value of the associated debt liability, consistent with the presentation for debt discount. The guidance in the new standard is limited to the presentation of debt issuance costs and does not affect the recognition and measurement of debt issuance costs. Therefore the amortization of such costs should continue to be netted against all available same-jurisdiction loss or other tax carryforwards that wouldcalculated using the interest method and be utilized, rather than only against carryforwards that are created by unrecognized tax benefits. The provisions of this ASU arereported as interest expense. For Teradyne, the standard is effective for interim and annual periodsfinancial statements issued for fiscal years beginning on or after December 15, 2013. Teradyne’s implementation of this2015, and interim periods within those years. This ASU did notis expected to have a materialno impact on Teradyne’s financial position and results of operations.
In May 2014, the FASB issued ASUAccounting Standard Update (“ASU”) 2014-09,“Revenue from Contracts with Customers (Topic 606),” which will replace numerous requirements in U.S. GAAP, including industry-specific requirements, and provide companies with a single revenue recognition model for recognizing revenue from contracts with customers. The
core principle of the new standard is that a company should recognize revenue to show the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled to in exchange for those goods or services. TheOn April 1, 2015, the FASB proposed a deferral of the effective date of the new revenue standard will be effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period.by one year, until January 1, 2018. This deferral was approved on July 22, 2015. For Teradyne, the standard will be effective in the first quarter of 2017.2018. Early adoption is permitted but not before the original effective date (that is, annual periods beginning after December 15, 2016). The two permitted transition methods under the new standard are the full retrospective method, in which case the standard would be applied to each prior reporting period presented, or the modified retrospective method, in which case the cumulative effect of applying the standard would be recognized at the date of initial application. Teradyne has not yet selected a transition method. Teradyne is currently evaluating the impact of this ASU on its financial position and results of operations.
D. Acquisitions
Universal Robots
On June 11, 2015, Teradyne acquired all of the outstanding equity of Universal Robots located in Odense, Denmark. Universal Robots is the leading supplier of collaborative robots which are low-cost, easy-to-deploy and simple-to-program robots that work side by side with production workers to improve quality and increase manufacturing efficiency. Universal Robots is a separate operating and reportable segment, Industrial Automation.
The total purchase price of $317.7 million consisted of $283.9 million of cash paid and $33.8 million of contingent consideration, measured at fair value. The contingent consideration is payable upon the achievement of certain thresholds and targets for earnings before income taxes, depreciation and amortization (“EBITDA”) for calendar year 2015, revenue for the period from July 1, 2015 to December 31, 2017 and revenue for the period from July 1, 2015 to December 31, 2018. The maximum amount of contingent consideration that could be paid is $65 million.
The valuation of the contingent consideration utilized the following assumptions: (1) probability of meeting each target; (2) expected timing of meeting each target; and (3) discount rate reflecting the risk associated with the expected payments. The probabilities and timing for each target were estimated based on a review of the historical and projected results. Discount rates of 6 percent, 8 percent and 10 percent, respectively, were based on corporate bond yields adjusted for the level of difficulty to achieve and the term of the earn out payment. A significant portion of the risk in achieving the contingent consideration was captured in the probabilities assigned to meeting each target.
The Universal Robots acquisition was accounted for as a business combination and, accordingly, the results have been included in Teradyne’s consolidated results of operations from the date of acquisition. The allocation of the total purchase price to Universal Robots’ net tangible liabilities and identifiable intangible assets was based on their estimated fair values as of the acquisition date. The excess of the purchase price over the identifiable intangible assets and net tangible liabilities in the amount of $226.5 million was allocated to goodwill, which is not deductible for tax purposes. The purchase price allocation is preliminary pending the final determination of the fair value of contingent consideration, acquired assets and assumed liabilities.
The following table represents the preliminary allocation of the purchase price:
Purchase Price Allocation | ||||
(in thousands) | ||||
Goodwill | $ | 226,501 | ||
Intangible assets | 119,950 | |||
Tangible assets acquired and liabilities assumed: | ||||
Current assets | 10,853 | |||
Non-current assets | 3,415 | |||
Accounts payable and current liabilities | (11,453 | ) | ||
Long-term deferred tax liabilities | (25,736 | ) | ||
Long-term other liabilities | (5,844 | ) | ||
|
| |||
Total purchase price | $ | 317,686 | ||
|
|
Teradyne estimated the fair value of intangible assets using the income and cost approaches. Acquired intangible assets are amortized on a straight-line basis over their estimated useful lives. Components of these intangible assets and their estimated useful lives at the acquisition date are as follows:
Fair Value | Estimated Useful Life | |||||||
(in thousands) | (in years) | |||||||
Developed technology | $ | 88,890 | 4.9 | |||||
Trademarks and tradenames | 21,680 | 10.0 | ||||||
Customer relationships | 9,380 | 2.0 | ||||||
|
| |||||||
Total intangible assets | $ | 119,950 | 5.6 | |||||
|
|
For the period from June 12, 2015 to July 5, 2015, Universal Robots contributed $3.7 million of revenues and had a $(1.7) million loss from operations before income taxes.
The following unaudited pro forma information gives effect to the acquisition of Universal Robots as if the acquisition occurred on January 1, 2014. The unaudited pro forma results are not necessarily indicative of what actually would have occurred had the acquisition been in effect for the periods presented:
For the Three Months Ended | For the Six Months Ended | |||||||||||||||
July 5, 2015 | June 29, 2014 | July 5, 2015 | June 29, 2014 | |||||||||||||
Revenue | $ | 520,217 | $ | 533,578 | $ | 873,188 | $ | 861,774 | ||||||||
Net income | 99,719 | 94,138 | 126,644 | 86,362 | ||||||||||||
Net income per common share: | ||||||||||||||||
Basic | $ | 0.47 | $ | 0.48 | $ | 0.54 | $ | 0.45 | ||||||||
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|
|
|
|
|
|
| |||||||||
Diluted | $ | 0.46 | $ | 0.43 | $ | 0.58 | $ | 0.38 | ||||||||
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|
|
|
|
|
|
Pro forma results for the three and six months ended July 5, 2015 were adjusted to exclude $1.0 million of acquisition related costs incurred in 2015, and $0.6 million of non-recurring expense related to the fair value adjustment to acquisition-date inventory.
Pro forma results for the six month ended June 29, 2014, were adjusted to include $1.6 million of non recurring expense related to fair value adjustment to acquisition-date inventory and $1.0 million of acquisition related costs.
Avionics Interface Technologies, LLC.
On October 31, 2014, Teradyne acquired substantially all of the assets and liabilities of Avionics Interface Technologies, LLC (“AIT”) located in Omaha, Nebraska. AIT is a supplier of equipment for testing state-of-the-art data communication buses. The acquisition of AIT complements Teradyne’s Defense/Aerospace line of bus test instrumentation for commercial and defense avionics systems. AIT is included in Teradyne’s System Test segment.
The total purchase price of $21.2 million consisted of $19.4 million of cash paid and $1.8 million of contingent consideration, measured at fair value. The contingent consideration is payable upon achievement of certain revenue and gross margin targets in 2015 and 2016. The maximum amount of contingent consideration that could be paid is $2.1 million.
The valuation of the contingent consideration utilized the following assumptions: (1) probability of meeting each target; (2) expected timing of meeting each target; and (3) discount rate reflecting the risk associated with the expected payments. The probabilities and timing for each target were estimated based on a review of the historical and projected results. A discount rate of 4.7 percent was selected based on the estimated cost of debt for the business. A significant portion of the risk in achieving the contingent consideration was captured in the probabilities assigned to meeting each target.
The AIT acquisition was accounted for as a business combination and, accordingly, the results have been included in Teradyne’s consolidated results of operations from the date of acquisition. The allocation of the total purchase price to AIT’s net tangible and identifiable intangible assets was based on their estimated fair values as of the acquisition date. The excess of the purchase price over the identifiable intangible and net tangible assets in the amount of $10.5 million was allocated to goodwill, which is deductible for tax purposes.
The following table represents the final allocation of the purchase price:
Purchase Price Allocation | ||||
(in thousands) | ||||
Goodwill | $ | 10,516 | ||
Intangible assets | 9,080 | |||
Tangible assets acquired and liabilities assumed: | ||||
Current assets | 2,452 | |||
Non-current assets | 359 | |||
Accounts payable and current liabilities | (1,164 | ) | ||
|
| |||
Total purchase price | $ | 21,243 | ||
|
|
Teradyne estimated the fair value of intangible assets using the income approach. Acquired intangible assets are amortized on a straight-line basis over their estimated useful lives. Components of these intangible assets and their estimated useful lives at the acquisition date are as follows:
Fair Value | Estimated Useful Life | |||||||
(in thousands) | (in years) | |||||||
Customer relationships | $ | 5,630 | 5.0 | |||||
Developed technology | 2,580 | 4.8 | ||||||
Trademarks and tradenames | 380 | 5.0 | ||||||
Non-compete agreement | 320 | 4.0 | ||||||
Customer order backlog | 170 | 0.3 | ||||||
|
| |||||||
Total intangible assets | $ | 9,080 | 4.8 | |||||
|
|
E. Financial Instruments and Derivatives
Cash Equivalents
Teradyne considers all highly liquid investments with maturities of three months or less at the date of acquisition to be cash equivalents.
Financial InstrumentsMarketable Securities
Teradyne accounts for its investments in debt and equity securities in accordance with the provisions of ASCAccounting Standards Codification (“ASC”) 320-10, “Investments—Debt and Equity Securities.” ASC 320-10 requires that certain debt and equity securities be classified into one of three categories; trading, available-for-sale or held-to-maturity securities. As of September 28, 2014,July 5, 2015, Teradyne’s investments in debt and equity securities were classified as available-for-sale and recorded at their fair market value.
On a quarterly basis, Teradyne reviews its investments to identify and evaluate those that have an indication of a potential other-than-temporary impairment. Factors considered in determining whether a loss is other-than-temporary include:
Teradyne uses the market and income approach techniques to value its financial instruments and there were no changes in valuation techniques during the three and ninesix months ended September 28, 2014 and September 29, 2013.July 5, 2015. As defined in ASC820-10, “Fair Value Measurements and Disclosures,”, fair value is the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. ASC 820-10 requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:
Level 1: Quoted prices in active markets for identical assets as of the reporting date.
Level 2: Inputs other than Level 1, that are observable either directly or indirectly as of the reporting date. For example, a common approach for valuing fixed income securities is the use of matrix pricing. Matrix pricing is a mathematical technique used to value securities by relying on the securities’ relationship to other benchmark quoted prices, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.and is considered a Level 2 input.
Level 3: Unobservable inputs that are not supported by market data. Unobservable inputs are developed based on the best information available, which might include Teradyne’s own data.
Substantially all of Teradyne’s available-for-sale fixed income securities are classified as Level 2, with the exception of investments in equity and debt mutual funds, which are classified as Level 1, and contingent2. Contingent consideration which
is classified as Level 3. The vast majority of Teradyne’s Level 2 securities are priced by third party pricing vendors. These pricing vendors utilize the most recent observable market information in pricing these securities or, if specific prices are not available, use other observable inputs like market transactions involving identical or comparable securities.
Realized losses recorded in the three and six months ended July 5, 2015 were $0.1 million and $0.1 million, respectively. There were no realized losses recorded in the three and six months ended June 29, 2014. Realized gains recorded in the three and six months ended July 5, 2015 were $0.4 million and $1.0 million, respectively. Realized gains recorded in the three and six months ended June 29, 2014 were $0.4 million and $0.7 million, respectively. Realized gains and realized losses are included in interest income and interest expense, respectively. Unrealized gains and losses are included in accumulated other comprehensive income (loss). The cost of securities sold is based on the specific identification method.
During the ninesix months ended September 28,July 5, 2015 and June 29, 2014, and September 29, 2013, there were no transfers in or out of Level 1, Level 2 or Level 3 financial instruments.
Realized gains and (losses) for the three and nine months ended September 28, 2014 and September 29, 2013 were as follows:
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
September 28, 2014 | September 29, 2013 | September 28, 2014 | September 29, 2013 | |||||||||||||
(in thousands) | ||||||||||||||||
Realized gains | $ | 986 | $ | 235 | $ | 1,677 | $ | 569 | ||||||||
Realized (losses) | — | — | — | — |
The following table sets forth by fair value hierarchy Teradyne’s financial assets and liabilities that were measured at fair value on a recurring basis as of September 28, 2014July 5, 2015 and December 31, 2013.2014.
September 28, 2014 | ||||||||||||||||
Quoted Prices in Active Markets for Identical Instruments (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||
(in thousands) | ||||||||||||||||
Assets | ||||||||||||||||
Cash | $ | 100,633 | $ | — | $ | — | $ | 100,633 | ||||||||
Cash equivalents | 99,979 | 11,092 | — | 111,071 | ||||||||||||
Available-for-sale securities: | ||||||||||||||||
U.S. Treasury securities | — | 459,240 | — | 459,240 | ||||||||||||
U.S. government agency securities | — | 285,617 | — | 285,617 | ||||||||||||
Commercial paper | — | 99,774 | — | 99,774 | ||||||||||||
Corporate debt securities | — | 94,357 | — | 94,357 | ||||||||||||
Certificates of deposit and time deposits | — | 18,522 | — | 18,522 | ||||||||||||
Equity and debt mutual funds | 12,099 | — | — | 12,099 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 212,711 | $ | 968,602 | $ | — | $ | 1,181,313 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Liabilities | ||||||||||||||||
Contingent consideration | $ | — | $ | — | $ | 1,600 | $ | 1,600 | ||||||||
Derivatives | — | 546 | — | 546 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | — | $ | 546 | $ | 1,600 | $ | 2,146 | ||||||||
|
|
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|
|
Assets Cash Cash equivalents Available-for-sale securities: U.S. Treasury securities U.S. government agency securities Corporate debt securities Certificates of deposit and time deposits Commercial paper Equity and debt mutual funds Non-U.S. government securities Total Liabilities Contingent consideration Derivatives Total July 5, 2015 Quoted Prices
in Active
Markets for
Identical
Instruments
(Level 1) Significant
Other
Observable
Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3) Total (in thousands) $ 154,396 $ — $ — $ 154,396 145,256 1,033 — 146,289 — 281,522 — 281,522 — 183,768 — 183,768 — 122,696 — 122,696 — 76,876 — 76,876 — 48,446 — 48,446 14,174 — — 14,174 — 440 — 440 $ 313,826 $ 714,781 $ — $ 1,028,607 $ — $ — $ 35,595 $ 35,595 — 87 — 87 $ — $ 87 $ 35,595 $ 35,682
Reported as follows:
(Level 1) | (Level 2) | (Level 3) | Total | |||||||||||||
(in thousands) | ||||||||||||||||
Assets | ||||||||||||||||
Cash and cash equivalents | $ | 200,612 | $ | 11,092 | $ | — | $ | 211,704 | ||||||||
Marketable securities | — | 594,801 | — | 594,801 | ||||||||||||
Long-term marketable securities | 12,099 | 362,709 | — | 374,808 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
$ | 212,711 | $ | 968,602 | $ | — | $ | 1,181,313 | |||||||||
|
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|
|
|
|
|
| |||||||||
Liabilities | ||||||||||||||||
Other accrued liabilities | $ | — | $ | 546 | $ | — | $ | 546 | ||||||||
Long-term other accrued liabilities | — | — | 1,600 | 1,600 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
$ | — | $ | 546 | $ | 1,600 | $ | 2,146 | |||||||||
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|
|
|
December 31, 2013 | ||||||||||||||||
Quoted Prices in Active Markets for Identical Instruments (Level 1) | Significant Other Observable Inputs (Level��2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||
(in thousands) | ||||||||||||||||
Assets | ||||||||||||||||
Cash | $ | 117,242 | $ | — | $ | — | $ | 117,242 | ||||||||
Cash equivalents | 165,865 | 58,531 | — | 224,396 | ||||||||||||
Available-for-sale securities: | ||||||||||||||||
U.S. Treasury securities | — | 467,895 | — | 467,895 | ||||||||||||
U.S. government agency securities | — | 202,588 | — | 202,588 | ||||||||||||
Commercial paper | — | 105,598 | — | 105,598 | ||||||||||||
Corporate debt securities | — | 65,387 | — | 65,387 | ||||||||||||
Equity and debt mutual funds | 13,156 | — | — | 13,156 | ||||||||||||
Certificates of deposit and time deposits | — | 3,258 | — | 3,258 | ||||||||||||
Non-U.S. government securities | — | 78 | — | 78 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | 296,263 | 903,335 | — | 1,199,598 | ||||||||||||
Derivatives | — | 153 | — | 153 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 296,263 | $ | 903,488 | $ | — | $ | 1,199,751 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Liabilities | ||||||||||||||||
Contingent consideration | $ | — | $ | — | $ | 2,230 | $ | 2,230 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | — | $ | — | $ | 2,230 | $ | 2,230 | ||||||||
|
|
|
|
|
|
|
|
(Level 1) | (Level 2) | (Level 3) | Total | |||||||||||||
(in thousands) | ||||||||||||||||
Assets | ||||||||||||||||
Cash and cash equivalents | $ | 299,652 | $ | 1,033 | $ | — | $ | 300,685 | ||||||||
Marketable securities | — | 452,040 | — | 452,040 | ||||||||||||
Long-term marketable securities | 14,174 | 261,708 | — | 275,882 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
$ | 313,826 | $ | 714,781 | $ | — | $ | 1,028,607 | |||||||||
|
|
|
|
|
|
|
| |||||||||
Liabilities | ||||||||||||||||
Other current liabilities | $ | — | $ | 87 | $ | — | $ | 87 | ||||||||
Contingent consideration | — | — | 15,092 | 15,092 | ||||||||||||
Long-term contingent consideration | — | — | 20,503 | 20,503 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
$ | — | $ | 87 | $ | 35,595 | $ | 35,682 | |||||||||
|
|
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|
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|
|
Assets Cash Cash equivalents Available-for-sale securities: U.S. Treasury securities U.S. government agency securities Corporate debt securities Commercial paper Certificates of deposit and time deposits Equity and debt mutual funds Non-U.S. government securities Total Liabilities Contingent consideration Derivatives Total December 31, 2014 Quoted Prices
in Active
Markets for
Identical
Instruments
(Level 1) Significant
Other
Observable
Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3) Total (in thousands) $ 111,471 $ — $ — $ 111,471 160,218 22,567 — 182,785 — 402,154 — 402,154 — 258,502 — 258,502 — 141,467 — 141,467 — 140,638 — 140,638 — 49,036 — 49,036 12,333 — — 12,333 — 446 — 446 $ 284,022 $ 1,014,810 $ — $ 1,298,832 $ — $ — $ 3,350 $ 3,350 — 149 — 149 $ — $ 149 $ 3,350 $ 3,499
Reported as follows:
(Level 1) | (Level 2) | (Level 3) | Total | |||||||||||||
(in thousands) | ||||||||||||||||
Assets | ||||||||||||||||
Cash and cash equivalents | $ | 283,107 | $ | 58,531 | $ | — | $ | 341,638 | ||||||||
Marketable securities | — | 586,882 | — | 586,882 | ||||||||||||
Long-term marketable securities | 13,156 | 257,922 | — | 271,078 | ||||||||||||
Other current assets | — | 153 | — | 153 | ||||||||||||
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$ | 296,263 | $ | 903,488 | $ | — | $ | 1,199,751 | |||||||||
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Liabilities | ||||||||||||||||
Long-term other accrued liabilities | $ | — | $ | — | $ | 2,230 | $ | 2,230 | ||||||||
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$ | — | $ | — | $ | 2,230 | $ | 2,230 | |||||||||
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Contingent consideration relates to Teradyne’s acquisition of ZTEC Instruments, Inc. (“ZTEC”) on October 25, 2013. The total purchase price included $2.2 million in fair value of contingent consideration payable upon achievement of certain customer order and revenue targets through 2015. The maximum amount of contingent consideration that could be paid is $5.0 million. Based on the projected results for the acquisition, no value was assigned to the revenue component of the contingent consideration.
The acquisition date valuation of the customer order component of the contingent consideration utilized the following assumptions: (1) probability of meeting each benchmark; (2) expected timing of meeting each benchmark; and (3) discount rate reflecting the risk associated with the expected payments. The probabilities and timing for each benchmark were estimated based on a review of the historical and projected results. A discount rate of 5.2 percent was selected based on the cost of debt for the business, as a significant portion of the risk in achieving the customer order contingent consideration was captured in the probabilities assigned to meeting each benchmark. Teradyne assesses these assumptions and estimates on a quarterly basis as additional data impacting the assumptions is obtained. During the three and nine months ended September 28, 2014, the fair value of the customer order component of the contingent consideration was reduced by $0.6 million based on updated assumptions and estimates. The fair value reduction was recorded as a gain in restructuring and other in the statement of operations.
(Level 1) | (Level 2) | (Level 3) | Total | |||||||||||||
(in thousands) | ||||||||||||||||
Assets | ||||||||||||||||
Cash and cash equivalents | $ | 271,689 | $ | 22,567 | $ | — | $ | 294,256 | ||||||||
Marketable securities | — | 533,787 | — | 533,787 | ||||||||||||
Long-term marketable securities | 12,333 | 458,456 | — | 470,789 | ||||||||||||
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$ | 284,022 | $ | 1,014,810 | $ | — | $ | 1,298,832 | |||||||||
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Liabilities | ||||||||||||||||
Other current liabilities | $ | — | $ | 149 | $ | — | $ | 149 | ||||||||
Contingent consideration | — | — | 895 | 895 | ||||||||||||
Long-term contingent consideration | — | — | 2,455 | 2,455 | ||||||||||||
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$ | — | $ | 149 | $ | 3,350 | $ | 3,499 | |||||||||
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Changes in the fair value of Level 3 contingent consideration for the three and ninesix months ended September 28,July 5, 2015 and June 29, 2014 and September 29, 2013 were as follows:
Contingent consideration related to Teradyne’s acquisition of ZTEC in October 2013 | For the Three and Nine Months Ended | |||
September 28, 2014 | ||||
(in thousands) | ||||
Balance at December 31, 2013 | $ | 2,230 | ||
Contingent consideration payments | — | |||
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| |||
Balance at March 30, 2014 | 2,230 | |||
Contingent consideration payments | — | |||
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Balance at June 29, 2014 | 2,230 | |||
Fair value adjustment | (630 | ) | ||
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Balance at September 28, 2014 | $ | 1,600 | ||
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For the Three Months Ended | For the Six Months Ended | |||||||||||||||
July 5, 2015 | June 29, 2014 | July 5, 2015 | June 29, 2014 | |||||||||||||
(in thousands) | ||||||||||||||||
Balance at beginning of period | $ | 3,350 | $ | 2,230 | $ | 3,350 | $ | 2,230 | ||||||||
Acquisition of Universal Robots | 33,845 | — | 33,845 | — | ||||||||||||
Fair value adjustment(a) | (1,600 | ) | — | (1,600 | ) | — | ||||||||||
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Balance at end of period | $ | 35,595 | $ | 2,230 | $ | 35,595 | $ | 2,230 | ||||||||
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Contingent consideration related to Teradyne’s acquisition of LitePoint in October 2011 Balance at December 31, 2012 Contingent consideration payments Balance at March 31, 2013 Contingent consideration payments Balance at June 30, 2013 Contingent consideration payments Balance at September 29, 2013 For the Three and Nine Months
Ended September 29, 2013 (in thousands) $ 388 (313 ) 75 (75 ) — — $ —
(a) | The fair value measurement of the contingent consideration for the earn-out in connection with the acquisition of ZTEC Instruments, Inc. was reduced to $0 because Teradyne and the Securityholder Representative, on behalf of the ZTEC securityholders, agreed to terminate the earn out prior to the end of the December 31, 2015 earn-out period, with no payout in connection with the resolution of indemnity claims asserted by both Teradyne and the Securityholder Representative. |
The following table provides quantitative information associated with the fair value measurement of Teradyne’s Level 3 financial instruments:
Liability | July 5, 2015 Fair Value | Valuation Technique | Unobservable Inputs | Weighted Average | ||||||
(in thousands) | ||||||||||
Contingent consideration (Universal Robots) | $33,845 | Income approach- discounted cash flow | EBITDA earn-out for calendar year 2015 probability | 99 | % | |||||
Discount rate | 6.0 | % | ||||||||
Revenue earn-out for period July 1, 2015—December 31, 2017 probability | 72 | % | ||||||||
Discount rate | 8.0 | % | ||||||||
Revenue earn-out for period July 1, 2015—December 31, 2018 probability | 29 | % | ||||||||
Discount rate | 10.0 | % | ||||||||
Contingent consideration (AIT) | $1,750 | Income approach- discounted cash flow | Revenue earn-out for calendar years 2015 and 2016 probability | 90 | % | |||||
Discount rate | 4.7 | % |
The significant unobservable inputs used in the Universal Robots fair value measurement of contingent consideration are the probabilities of successful achievement of revenue thresholds and targets in the periods July 1, 2015—December 31, 2017 and July 1, 2015—December 31, 2018 and EBITDA threshold and target for calendar year 2015, and respective discount rates. Increases or decreases in the revenue and EBITDA probabilities and the period in which results will be achieved would result in a higher or lower fair value measurement. The maximum amount of contingent consideration in connection with the acquisition of Universal Robots that could be paid is $65 million. The earn-out periods in connection with the Universal Robots acquisition end on December 31, 2015, December 31, 2017 and December 31, 2018.
The significant unobservable inputs used in the AIT fair value measurement of contingent consideration are the probabilities of successful achievement of calendar year 2015 and 2016 revenue thresholds and targets, and a discount rate. Increases or decreases in the revenue probabilities and the period in which results will be achieved would result in a higher or lower fair value measurement. The maximum amount of contingent consideration in connection with the acquisition of AIT that could be paid is $2.1 million. The earn-out periods in connection with the AIT acquisition end on December 31, 2015 and December 31, 2016.
The carrying amounts and fair values of Teradyne’s financial instruments at September 28, 2014July 5, 2015 and December 31, 20132014 were as follows:
September 28, 2014 | December 31, 2013 | |||||||||||||||
Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||||
(in thousands) | ||||||||||||||||
Cash and cash equivalents | $ | 211,704 | $ | 211,704 | $ | 341,638 | $ | 341,638 | ||||||||
Marketable securities | 969,609 | 969,609 | 857,960 | 857,960 | ||||||||||||
Convertible debt(1) | — | — | 185,708 | 611,433 | ||||||||||||
Japan loan | — | — | 955 | 955 |
July 5, 2015 | December 31, 2014 | |||||||||||||||
Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||||
(in thousands) | ||||||||||||||||
Assets | ||||||||||||||||
Cash and cash equivalents | $ | 300,685 | $ | 300,685 | $ | 294,256 | $ | 294,256 | ||||||||
Marketable securities | 727,922 | 727,922 | 1,004,576 | 1,004,576 | ||||||||||||
Contingent consideration | 35,595 | 35,595 | 3,350 | 3,350 | ||||||||||||
Liabilities | ||||||||||||||||
Derivatives | $ | 87 | $ | 87 | $ | 149 | $ | 149 |
The fair values of cash and cash equivalents, accounts receivable, net and accounts payable approximate the carrying amountvalue due to the short-term nature of these instruments.
The following tables summarize the composition of available-for-sale marketable securities at September 28, 2014July 5, 2015 and December 31, 2013:2014:
September 28, 2014 | ||||||||||||||||||||
Available-for-Sale | Fair Market Value of Investments with Unrealized Losses | |||||||||||||||||||
Cost | Unrealized Gain | Unrealized (Loss) | Fair Market Value | |||||||||||||||||
(in thousands) | ||||||||||||||||||||
U.S. Treasury securities | $ | 458,958 | $ | 373 | $ | (91 | ) | $ | 459,240 | $ | 64,267 | |||||||||
U.S. government agency securities | 285,528 | 195 | (106 | ) | 285,617 | 66,700 | ||||||||||||||
Commercial paper | 99,767 | 11 | (4 | ) | 99,774 | 23,722 | ||||||||||||||
Corporate debt securities | 92,883 | 1,734 | (260 | ) | 94,357 | 56,393 | ||||||||||||||
Certificates of deposit and time deposits | 18,508 | 14 | — | 18,522 | — | |||||||||||||||
Equity and debt mutual funds | 10,199 | 1,933 | (33 | ) | 12,099 | 1,074 | ||||||||||||||
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$ | 965,843 | $ | 4,260 | $ | (494 | ) | $ | 969,609 | $ | 212,156 | ||||||||||
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Available-for-Sale U.S. Treasury securities U.S. government agency securities Corporate debt securities Certificates of deposit and time deposits Commercial paper Equity and debt mutual funds Non-U.S. government securities July 5, 2015 Fair Market
Value of
Investments
with Unrealized
Losses Cost Unrealized
Gain Unrealized
(Loss) Fair Market
Value (in thousands) $ 281,963 $ 221 $ (662 ) $ 281,522 $ 21,403 183,601 170 (3 ) 183,768 10,341 123,176 1,021 (1,501 ) 122,696 61,348 76,849 32 (5 ) 76,876 11,009 48,438 10 (2 ) 48,446 13,233 12,083 2,118 (27 ) 14,174 1,074 440 — — 440 — $ 726,550 $ 3,572 $ (2,200 ) $ 727,922 $ 118,408
Reported as follows:
Cost | Unrealized Gain | Unrealized (Loss) | Fair Market Value | Fair Market Value of Investments with Unrealized Losses | Cost | Unrealized Gain | Unrealized (Loss) | Fair Market Value | Fair Market Value of Investments with Unrealized Losses | |||||||||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||||||||||
Marketable securities | $ | 594,500 | $ | 319 | $ | (18 | ) | $ | 594,801 | $ | 66,188 | $ | 451,854 | $ | 196 | $ | (10 | ) | $ | 452,040 | $ | 53,028 | ||||||||||||||||||
Long-term marketable securities | 371,343 | 3,941 | (476 | ) | 374,808 | 145,968 | 274,696 | 3,376 | (2,190 | ) | 275,882 | 65,380 | ||||||||||||||||||||||||||||
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$ | 965,843 | $ | 4,260 | $ | (494 | ) | $ | 969,609 | $ | 212,156 | $ | 726,550 | $ | 3,572 | $ | (2,200 | ) | $ | 727,922 | $ | 118,408 | |||||||||||||||||||
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December 31, 2013 | December 31, 2014 | |||||||||||||||||||||||||||||||||||||||
Available-for-Sale | Fair Market Value of Investments with Unrealized Losses |
Available-for-Sale | Fair Market Value of Investments with Unrealized Losses | |||||||||||||||||||||||||||||||||||||
Cost | Unrealized Gain | Unrealized (Loss) | Fair Market Value | Cost | Unrealized Gain | Unrealized (Loss) | Fair Market Value | |||||||||||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||||||||||
U.S. Treasury securities | $ | 468,084 | $ | 94 | $ | (283 | ) | $ | 467,895 | $ | 108,212 | $ | 402,197 | $ | 362 | $ | (405 | ) | $ | 402,154 | $ | 317,771 | ||||||||||||||||||
U.S. government agency securities | 202,573 | 75 | (60 | ) | 202,588 | 84,498 | 258,452 | 135 | (85 | ) | 258,502 | 104,642 | ||||||||||||||||||||||||||||
Corporate debt securities | 139,374 | 2,414 | (321 | ) | 141,467 | 96,998 | ||||||||||||||||||||||||||||||||||
Commercial paper | 105,583 | 16 | (1 | ) | 105,598 | 7,993 | 140,616 | 26 | (4 | ) | 140,638 | 41,747 | ||||||||||||||||||||||||||||
Corporate debt securities | 65,747 | 762 | (1,122 | ) | 65,387 | 40,355 | ||||||||||||||||||||||||||||||||||
Certificates of deposit and time deposits | 49,048 | 11 | (23 | ) | 49,036 | 20,684 | ||||||||||||||||||||||||||||||||||
Equity and debt mutual funds | 10,463 | 2,742 | (49 | ) | 13,156 | 702 | 10,492 | 1,870 | (29 | ) | 12,333 | 1,234 | ||||||||||||||||||||||||||||
Certificates of deposit and time deposits | 3,258 | — | — | 3,258 | — | |||||||||||||||||||||||||||||||||||
Non-U.S. government securities | 78 | — | — | 78 | — | 446 | — | — | 446 | — | ||||||||||||||||||||||||||||||
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$ | 855,786 | $ | 3,689 | $ | (1,515 | ) | $ | 857,960 | $ | 241,760 | $ | 1,000,625 | $ | 4,818 | $ | (867 | ) | $ | 1,004,576 | $ | 583,076 | |||||||||||||||||||
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Reported as follows:
Cost | Unrealized Gain | Unrealized (Loss) | Fair Market Value | Fair Market Value of Investments with Unrealized Losses | Cost | Unrealized Gain | Unrealized (Loss) | Fair Market Value | Fair Market Value of Investments with Unrealized Losses | |||||||||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||||||||||
Marketable securities | $ | 586,818 | $ | 85 | $ | (21 | ) | $ | 586,882 | $ | 137,670 | $ | 533,833 | $ | 99 | $ | (145 | ) | $ | 533,787 | $ | 240,234 | ||||||||||||||||||
Long-term marketable securities | 268,968 | 3,604 | (1,494 | ) | 271,078 | 104,090 | 466,792 | 4,719 | (722 | ) | 470,789 | 342,842 | ||||||||||||||||||||||||||||
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$ | 855,786 | $ | 3,689 | $ | (1,515 | ) | $ | 857,960 | $ | 241,760 | $ | 1,000,625 | $ | 4,818 | $ | (867 | ) | $ | 1,004,576 | $ | 583,076 | |||||||||||||||||||
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As of September 28, 2014,July 5, 2015, the fair market value of investments with unrealized losses was $212.2$118.4 million. Of this value, $5.0$0.2 million had unrealized losses greater than one year and $207.2$118.2 million had unrealized losses less than one year. As of December 31, 2013,2014, the fair market value of investments with unrealized losses was $241.8$583.1 million. Of this value, $0.9$2.3 million had unrealized losses greater than one year and $240.9$580.8 million had unrealized losses less than one year.
Teradyne reviews its investments to identify and evaluate investments that have an indication of possible impairment. Based on this review, Teradyne determined that the unrealized losses related to these investments at September 28, 2014July 5, 2015 and December 31, 2013,2014, were temporary.
The contractual maturities of investments held at September 28, 2014July 5, 2015 were as follows:
September 28, 2014 | July 5, 2015 | |||||||||||||||
Cost | Fair Market Value | Cost | Fair Market Value | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
Due within one year | $ | 594,500 | $ | 594,801 | $ | 451,854 | $ | 452,040 | ||||||||
Due after 1 year through 5 years | 330,340 | 330,412 | 218,798 | 219,045 | ||||||||||||
Due after 5 years through 10 years | 5,772 | 5,859 | 6,481 | 6,512 | ||||||||||||
Due after 10 years | 25,032 | 26,438 | 37,334 | 36,151 | ||||||||||||
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Total | $ | 955,644 | $ | 957,510 | $ | 714,467 | $ | 713,748 | ||||||||
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Contractual maturities of investments held at September 28, 2014July 5, 2015 exclude equity and debt mutual funds as they do not have a contractual maturity date.dates.
Derivatives
Teradyne conducts business in a number of foreign countries, with certain transactions denominated in local currencies. The purpose of Teradyne’s foreign currency management is to minimize the effect of exchange rate fluctuations on certain foreign currency denominated monetary assets and liabilities. Teradyne does not use derivative financial instruments for trading or speculative purposes.
To minimize the effect of exchange rate fluctuations associated with the remeasurement of monetary assets and liabilities denominated in foreign currencies, Teradyne enters into foreign currency forward contracts. The change in fair value of these derivatives is recorded directly in earnings, and is used to offset the change in value of the monetary assets and liabilities denominated in foreign currencies.
The notional amount of foreign currency forward contracts was $67.9$100.7 million and $74.8$73.0 million at September 28, 2014July 5, 2015 and December 31, 2013,2014, respectively.
The fair value of the outstanding contracts was a loss of $0.6 million and a gain of $0.2 million at September 28, 2014July 5, 2015 and December 31, 2013,2014 were losses of $0.1 million and $0.1 million, respectively. The following table summarizes the fair value of derivative instruments at September 28, 2014 and December 31, 2013:
Balance Sheet Location | September 28, 2014 | December 31, 2013 | ||||||||
(in thousands) | ||||||||||
Derivatives not designated as hedging instruments: | ||||||||||
Foreign currency forward contracts | Other current assets | $ | — | $ | 153 | |||||
Other accrued liabilities | 546 | — | ||||||||
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| |||||||
$ | 546 | $ | 153 | |||||||
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Teradyne had no offsetting foreign exchange contracts at September 28, 2014 and December 31, 2013.
In the three and nine months ended September 28, 2014,July 5, 2015, Teradyne recorded a net realized gains (losses)gain of $0.2$1.6 million and $(1.6) million, respectively, related to foreign currency forward contracts hedging net monetary positions. In the six months ended July 5, 2015, Teradyne recorded a net realized loss of $1.9 million related to foreign currency forward contracts hedging net monetary positions.
In the three and ninesix months ended SeptemberJune 29, 2013,2014, Teradyne recorded net realized gainslosses of $0.0$1.1 million and $4.1$1.9 million, respectively, related to foreign currency forward contracts hedging net monetary positions. Gains and losses on foreign currency forward contracts and foreign currency remeasurement gains and losses on monetary assets and liabilities are included in interestother (income) expense, and other.net.
The following table summarizes the fair value of derivative instruments at July 5, 2015 and December 31, 2014:
Balance Sheet Location | July 5, 2015 | December 31, 2014 | ||||||||
(in thousands) | ||||||||||
Derivatives not designated as hedging instruments: | ||||||||||
Foreign exchange contracts | Other current liabilities | $ | 87 | $ | 149 | |||||
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| |||||||
Total derivatives | $ | 87 | $ | 149 | ||||||
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Teradyne had no offsetting foreign exchange contracts at July 5, 2015 and December 31, 2014.
The following table summarizes the effect of derivative instruments recognized in the statement of operations during the three and ninesix months ended September 28, 2014July 5, 2015 and SeptemberJune 29, 2013.2014. The table does not reflect the corresponding gains (losses)and losses from the remeasurement of the monetary assets and liabilities denominated in foreign currencies. For the three and nine months ended September 28, 2014, (losses) gainsJuly 5, 2015, net losses from the remeasurement of the monetary assets and liabilities denominated in foreign currencies were $(0.4) million and $0.9 million, respectively.$2.1 million. For the three and ninesix months ended September 29, 2013, lossesJuly 5, 2015, net gains from the remeasurement of the monetary assets and liabilities denominated in foreign currencies were $(0.4)$2.2 million. For the three and six months ended June 29, 2014, net gains from the remeasurement of monetary assets and liabilities denominated in foreign currencies were $0.7 million and $(5.0)$1.3 million, respectively.
Location of Gains (Losses) Recognized in Statement of Operations | For the Three Months Ended | For the Nine Months Ended | Location of (Gains) Losses Statement of Operations | For the Three Months Ended | For the Six Months Ended | |||||||||||||||||||||||||||||||||
September 28, 2014 | September 29, 2013 | September 28, 2014 | September 29, 2013 | July 5, 2015 | June 29, 2014 | July 5, 2015 | June 29, 2014 | |||||||||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||||||||
Derivatives not designated as hedging instruments: | ||||||||||||||||||||||||||||||||||||||
Foreign exchange contracts | Interest expense and other | $ | 237 | $ | — | $ | (1,632 | ) | $ | 4,068 | Other (income) expense, net | $ | (1,547 | ) | $ | 1,122 | $ | 1,878 | $ | 1,869 | ||||||||||||||||||
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Total Derivatives | $ | (1,547 | ) | $ | 1,122 | $ | 1,878 | $ | 1,869 | |||||||||||||||||||||||||||||
$ | 237 | $ | — | $ | (1,632 | ) | $ | 4,068 |
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See Note E:F: “Debt” regarding derivatives related to the convertible senior notes.
E.F. Debt
LoanRevolving Credit Facility
On April 27, 2015, Teradyne entered into a Credit Agreement (the “Credit Agreement”) with Barclays Bank PLC, as administrative agent and collateral agent, and the lenders party thereto. The Credit Agreement provides for a five-year, senior secured revolving credit facility of $350 million (the “Credit Facility”). The Credit Agreement further provides that, subject to customary conditions, Teradyne may seek to obtain from existing or new lenders incremental commitments under the Credit Facility in an aggregate principal amount not to exceed $150.0 million.
Proceeds from the Credit Facility may be used for general corporate purposes and working capital. During the three months ended July 5, 2015, Teradyne incurred $2.3 million in costs related to the revolving credit facility. These costs are being amortized over the five year term of the revolving credit facility and are included in interest expense in the statement of operations. As of August 14, 2015, Teradyne has not borrowed any funds under the Credit Facility.
The interest rates applicable to loans under the Credit Facility are, at Teradyne’s option, equal to either a base rate plus a margin ranging from 0.00% to 1.00% per annum or LIBOR plus a margin ranging from 1.00% to 2.00% per annum, based on the Consolidated Leverage Ratio of Teradyne and its Restricted Subsidiaries. In
addition, Teradyne will pay a commitment fee on the unused portion of the commitments under the Credit Facility ranging from 0.125% to 0.350% per annum, based on the then applicable Consolidated Leverage Ratio.
Teradyne is not required to repay any loans under the Credit Facility prior to maturity, subject to certain customary exceptions. Teradyne is permitted to prepay all or any portion of the loans under the Credit Facility prior to maturity without premium or penalty, other than customary LIBOR breakage costs.
The Credit Agreement contains customary events of default, representations, warranties and affirmative and negative covenants that, among other things, limit Teradyne’s and its Restricted Subsidiaries’ ability to sell assets, grant liens on assets, incur other secured indebtedness and make certain investments and restricted payments, all subject to exceptions set forth in the Credit Agreement. The Credit Agreement also requires Teradyne to satisfy two financial ratios measured as of the end of each fiscal quarter: a consolidated leverage ratio and an interest coverage ratio. As of July 5, 2015, we were in compliance with all covenants.
The Credit Facility is guaranteed by certain of Teradyne’s domestic subsidiaries and collateralized by assets of Teradyne and such subsidiaries, including a pledge of 65% of the capital stock of certain foreign subsidiaries.
Convertible Senior Notes
On March 31, 2009, Teradyne K.K., Teradyne’s wholly-owned subsidiary in Japan, entered into an underwriting agreement regarding a loan agreement with a local bank in Japan to borrow approximately $10.0public offering of $175.0 million (the loan was denominated in Japanese Yen). The loan had a termaggregate principal amount of 5 years and a fixed interest rate of 0.8%. Approximately $6.0 million of the loan was collateralized by a real estate mortgage on Teradyne K.K.’s building and land in Kumamoto, Japan and approximately $4.0 million was unsecured. Teradyne, Inc. guaranteed payment of the loan obligation. The loan was amortized over the term of the loan with semiannual principal payments of approximately $1.0 million on September 30 and March 30 each year. The final principal and interest payments were made in March 2014.
Convertible Senior Notes
In April 2009, Teradyne issued 4.50% convertible senior notes due March 15, 2014 (the “Notes”) at. On April 1, 2009, the underwriters exercised their option to purchase an additional $15.0 million aggregate principal amount of $190 million andthe Notes for a conversion price of $5.4750 or 182.65 shares of Teradyne’s common stock per $1,000total aggregate principal amount of Notes.$190.0 million. The Notes bore interest at a rate of 4.50% per annum, payable semiannually in arrears on March 15 and September 15 of each year, beginning on September 15, 2009. The Notes had a maturity date of March 15, 2014. Substantially all of the Notes were converted prior to March 15, 2014 and were “net share settled,” meaning that the holders received, for each $1,000 in principal amount of Notes, $1,000 in cash and approximately 131.95 shares of Teradyne common stock (calculated by taking 182.65 shares, being the fixed number specified in the Notes purchase agreement, less 50.7 shares). The 50.7 shares were determined, as specified in the Notes purchase agreement, by dividing the $1,000 principal amount by the $19.74 average trading price of Teradyne’s common stock over the 25 day trading period from February 5, 2014 to March 12, 2014.
Teradyne satisfied the Notes “net share settlement” by paying the aggregate principal amount of $190 million in cash and issuing 25.1 million shares of common stock. On March 13, 2014, Teradyne exercised its call option agreement entered into with Goldman, Sachs & Co. (the “hedge counterparty”) at the time of issuance of the Notes and received 25.1 million shares of Teradyne’s common stock, which wereTeradyne retired.
From June 17, 2014 to September 17, 2014, the hedge counterparty exercised its warrant agreement entered into with Teradyne at the time of issuance of the Notes. The warrants were net share settled. In the three and nine months ended September 28, 2014, Teradyne issued 19.3 million and 21.2 million shares of its common stock respectively, for warrants exercised at a weighted average strike price of $7.6348 and $7.6351, respectively.per share.
The tables below represent the components of Teradyne’s convertible senior notes:
September 28, 2014 | December 31, 2013 | |||||||
(in thousands) | ||||||||
Debt principal | $ | — | $ | 189,998 | ||||
Unamortized debt discount | — | 4,290 | ||||||
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Net carrying amount of the convertible debt | $ | — | $ | 185,708 | ||||
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The interest expense on Teradyne’s convertible senior notes for the three and ninesix months ended September 28,July 5, 2015 and June 29, 2014 and September 29, 2013 was as follows:
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
September 28, 2014 | September 29, 2013 | September 28, 2014 | September 29, 2013 | |||||||||||||
(in thousands) | ||||||||||||||||
Contractual interest expense | $ | — | $ | 2,114 | $ | 1,757 | $ | 6,388 | ||||||||
Amortization of the discount component and debt issue fees | — | 4,221 | 4,493 | 12,266 | ||||||||||||
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Total interest expense on the convertible debt | $ | — | $ | 6,335 | $ | 6,250 | $ | 18,654 | ||||||||
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For the Three Months Ended | For the Six Months Ended | |||||||||||||||
July 5, 2015 | June 29, 2014 | July 5, 2015 | June 29, 2014 | |||||||||||||
(in thousands) | ||||||||||||||||
Contractual interest expense on the coupon | $ | — | $ | — | $ | — | $ | 1,757 | ||||||||
Amortization of the discount component and debt issuance fees recognized as interest expense | — | — | — | 4,493 | ||||||||||||
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Total interest expense on the convertible debt | $ | — | $ | — | $ | — | $ | 6,250 | ||||||||
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F.
G. Prepayments
Prepayments consist of the following and are included in prepayments on the balance sheet:
September 28, 2014 | December 31, 2013 | July 5, 2015 | December 31, 2014 | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
Contract manufacturer prepayments | $ | 68,126 | $ | 115,388 | $ | 55,674 | $ | 65,972 | ||||||||
Prepaid maintenance and other services | 6,794 | 6,538 | 6,920 | 7,343 | ||||||||||||
Prepaid taxes | 3,413 | 3,281 | 5,124 | 11,462 | ||||||||||||
Other prepayments | 10,399 | 11,167 | 12,531 | 11,042 | ||||||||||||
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Total prepayments | $ | 88,732 | $ | 136,374 | $ | 80,249 | $ | 95,819 | ||||||||
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G.H. Deferred Revenue and Customer Advances
Deferred revenue and customer advances consist of the following and are included in short and long-term deferred revenue and customer advances on the balance sheet:
September 28, 2014 | December 31, 2013 | |||||||
(in thousands) | ||||||||
Extended warranty | $ | 43,497 | $ | 34,909 | ||||
Equipment maintenance and training | 27,703 | 22,455 | ||||||
Customer advances | 5,041 | 4,825 | ||||||
Undelivered elements | 7,185 | 6,971 | ||||||
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Total deferred revenue and customer advances | $ | 83,426 | $ | 69,160 | ||||
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July 5, 2015 | December 31, 2014 | |||||||
(in thousands) | ||||||||
Extended warranty | $ | 43,299 | $ | 43,300 | ||||
Product maintenance and training | 36,836 | 30,500 | ||||||
Customer advances | 8,159 | 8,875 | ||||||
Undelivered elements and other | 14,407 | 8,857 | ||||||
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Total deferred revenue and customer advances | $ | 102,701 | $ | 91,532 | ||||
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H.I. Product Warranty
Teradyne generally provides a one-year warranty on its products, commencing upon installation, acceptance or shipment. A provision is recorded upon revenue recognition to cost of revenues for estimated warranty expense based on historical experience. Related costs are charged to the warranty accrual as incurred. The warranty balance below is included in other accrued liabilities on the balance sheet.
For the Three Months Ended | For the Nine Months Ended | For the Three Months Ended | For the Six Months Ended | |||||||||||||||||||||||||||||
September 28, 2014 | September 29, 2013 | September 28, 2014 | September 29, 2013 | July 5, 2015 | June 29, 2014 | July 5, 2015 | June 29, 2014 | |||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||
Balance at beginning of period | $ | 9,073 | $ | 7,351 | $ | 6,660 | $ | 9,786 | $ | 7,423 | $ | 6,615 | $ | 8,942 | $ | 6,660 | ||||||||||||||||
Acquisition | 372 | — | 372 | — | ||||||||||||||||||||||||||||
Accruals for warranties issued during the period | 4,419 | 3,674 | 12,675 | 8,781 | 3,926 | 5,399 | 6,287 | 8,257 | ||||||||||||||||||||||||
Adjustments related to pre-existing warranties | (559 | ) | (524 | ) | (1,000 | ) | (2,323 | ) | (797 | ) | (302 | ) | (1,828 | ) | (442 | ) | ||||||||||||||||
Settlements made during the period | (2,982 | ) | (2,470 | ) | (8,384 | ) | (8,213 | ) | (2,696 | ) | (2,639 | ) | (5,545 | ) | (5,402 | ) | ||||||||||||||||
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Balance at end of period | $ | 9,951 | $ | 8,031 | $ | 9,951 | $ | 8,031 | $ | 8,228 | $ | 9,073 | $ | 8,228 | $ | 9,073 | ||||||||||||||||
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When Teradyne receives revenue for extended warranty beyond one year, it is deferred and recognized on a straight-line basis over the contract period. Related costs are expensed as incurred. The extended warranty balance below is included in short and long-term deferred revenue and customer advances on the balance sheet.
For the Three Months Ended | For the Nine Months Ended | For the Three Months Ended | For the Six Months Ended | |||||||||||||||||||||||||||||
September 28, 2014 | September 29, 2013 | September 28, 2014 | September 29, 2013 | July 5, 2015 | June 29, 2014 | July 5, 2015 | June 29, 2014 | |||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||
Balance at beginning of period | $ | 40,052 | $ | 34,854 | $ | 34,909 | $ | 26,987 | $ | 40,704 | $ | 33,949 | $ | 43,300 | $ | 34,909 | ||||||||||||||||
Acquisition | 699 | — | 699 | — | ||||||||||||||||||||||||||||
Deferral of new extended warranty revenue | 9,896 | 5,586 | 24,218 | 17,791 | 8,172 | 11,960 | 12,376 | 14,321 | ||||||||||||||||||||||||
Recognition of extended warranty deferred revenue | (6,451 | ) | (4,120 | ) | (15,630 | ) | (8,458 | ) | (6,276 | ) | (5,857 | ) | (13,076 | ) | (9,178 | ) | ||||||||||||||||
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Balance at end of period | $ | 43,497 | $ | 36,320 | $ | 43,497 | $ | 36,320 | $ | 43,299 | $ | 40,052 | $ | 43,299 | $ | 40,052 | ||||||||||||||||
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I.J. Stock-Based Compensation
In January 2014, Teradyne granted 0.1 million ofgrants performance-based restricted stock units (“PRSUs”) to its executive officers with a performance metric based on relative total shareholder return (“TSR”). Teradyne’s three-year TSR performance will be measured against the Philadelphia Semiconductor Index, which consists of thirty companies in the semiconductor device and capital equipment industries. The final number of TSR PRSUs that vest will vary based upon the level of performance achieved from 200% of the target shares to 0% of the target shares. AllThe TSR PRSUs will vest upon the three-year anniversary of the January 24, 2014 grant date. NoBeginning with PRSUs granted in January 2014, if the recipient’s employment ends prior to the determination of the performance percentage due to (1) permanent disability or death or (2) retirement or termination other than for cause, after attaining both at least age sixty and at least ten years of service, then all or a portion of the recipient’s PRSUs (based on the actual performance percentage achieved on the determination date) will vest on the date the performance percentage is determined. Except as set forth in the preceding sentence, no TSR PRSUs will vest if the executive officer is no longer an employee at the end of the three-year period.
The TSR PRSUs are valued using a Monte Carlo simulation model. The number of units expected to be earned, based upon the achievement of the TSR market condition, is factored into the grant date Monte Carlo valuation. Compensation expense is recognized on a straight-line basis over the three-year service period. Compensation expense is recognized regardless of the eventual number of units that are earned based upon the market condition, provided the executive officer remains an employee at the end of the three-year period. Compensation expense is reversed if at any time during the three-year service period the executive officer is notno longer an employee, atsubject to the end ofretirement and termination eligibility provisions noted above.
During the three-year service period. During
the ninesix months ended September 28,July 5, 2015 and June 29, 2014, Teradyne granted 0.2 million and 0.1 million, respectively, TSR performance-based restricted stock unit awardsPRSUs with an estimateda grant date fair value of $18.21 and $22.06, per award.respectively. The fair value was estimated using the Monte Carlo simulation model with the following assumptions:
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For the Six Months Ended | ||||||||
July 5, 2015 | June 29, 2014 | |||||||
Risk-free interest rate | 0.77 | % | 0.75 | % | ||||
Teradyne volatility-historical | 28.2 | % | 36.1 | % | ||||
Philadelphia Semiconductor Index volatility-historical | 19.7 | % | 24.6 | % | ||||
Dividend yield | 1.33 | % | 1.25 | % |
Expected volatility was based on the historical volatility of Teradyne’s stock and the Philadelphia Semiconductor Index over the most recent three-yearthree year period. The risk-free interest rate was determined using the
U.S. Treasury yield curve in effect at the time of grant. Dividend yield was based upon an estimated annual dividend amount of $0.24 per share divided by Teradyne’s January 24, 2014 stock price on the grant date of $19.16.$18.10 for 2015 grants and $19.16 for 2014 grants.
During the ninesix months ended September 28, 2014,July 5, 2015, Teradyne granted 1.71.5 million of service-based restricted stock unit awards to employees at a weighted average grant date fair value of $19.09$17.26 and 0.1 million of service-based stock options to executive officers at a weighted average grant date fair value of $5.49.$4.43.
During the ninesix months ended SeptemberJune 29, 2013,2014, Teradyne granted 1.91.6 million of service-based restricted stock unit awards to employees at a weighted average grant date fair value of $16.60$18.12 and 0.20.1 million of service-based stock options to executive officers at a weighted average grant date fair value of $6.09.$5.49.
Restricted stock unit awards granted to employees vest in equal annual installments over four years. Stock options vest in equal annual installments over four years and have a term of seven years from the date of grant.
The fair value of stock options was estimated using the Black-Scholes option-pricing model with the following assumptions:
For the Nine Months Ended | For the Six Months Ended | |||||||||||||||
September 28, 2014 | September 29, 2013 | July 5, 2015 | June 29, 2014 | |||||||||||||
Expected life (years) | 4.0 | 4.0 | 4.0 | 4.0 | ||||||||||||
Risk-free interest rate | 1.2 | % | 0.6 | % | 1.1 | % | 1.2 | % | ||||||||
Volatility-historical | 38.8 | % | 46.8 | % | 33.4 | % | 38.8 | % | ||||||||
Dividend yield | 1.25 | % | 0.0 | % | 1.33 | % | 1.25 | % |
Teradyne determined the stock options’ expected life based upon historical exercise data for executive officers, the age of the executive officers and the terms of the stock option grant. Volatility was determined using historical volatility for a period equal to the expected life. The risk-free interest rate was determined using the U.S. Treasury yield curve in effect at the time of grant. Dividend yield was based upon an estimated annual dividend amount of $0.24 per share divided by Teradyne’s January 24, 2014 stock price on the grant date, of $19.16.$18.10 for 2015 grants and $19.16 for 2014 grants.
Effective January 31, 2014, Michael Bradley retired as Chief Executive Officer of Teradyne. Mr. Bradley will continue to serve on Teradyne’s Board of Directors. On January 22, 2014, Teradyne entered into an agreement (the “Retirement Agreement”) with Mr. Bradley. Under the Retirement Agreement, Mr. Bradley’s unvested restricted stock units and stock options granted prior to his retirement date will continue to vest in accordance with their terms through January 31, 2017; and any vested options or options that vest during that period may be exercised for the remainder of the applicable option term. In the Retirement Agreement, Mr. Bradley agreed to be bound by non-competition and non-solicitation restrictions through January 31, 2017. Mr. Bradley continues to serve on Teradyne’s Board of Directors. In Januarythe three months ended March 30, 2014, Teradyne recorded a one-time charge to stock-based compensation expense of $6.6 million related to the Retirement Agreement.
J.K. Accumulated Other Comprehensive Income
Changes in accumulated other comprehensive income (loss), which is presented net of tax, consist of the following:
Unrealized Gains on Marketable Securities | Retirement Plans Prior Service Credit | Total | ||||||||||
(in thousands) | ||||||||||||
Balance at December 31, 2013, net of tax of $794, $(284) | $ | 1,381 | $ | 2,619 | $ | 4,000 | ||||||
Other comprehensive income before reclassifications, net of tax of $1,103, $0 | 2,166 | — | 2,166 | |||||||||
Amounts reclassified from accumulated other comprehensive income, net of tax of $(591), $(127) | (1,086 | ) | (221 | ) | (1,307 | ) | ||||||
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Net current period other comprehensive income | 1,080 | (221 | ) | 859 | ||||||||
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Balance at September 28, 2014, net of tax of $1,306, $(411) | $ | 2,461 | $ | 2,398 | $ | 4,859 | ||||||
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For the Six Months Ended July 5, 2015 | ||||||||||||||||
Foreign Currency Translation Adjustments | Unrealized Gains (Losses) on Marketable Securities | Retirement Plans Prior Service Credit | Total | |||||||||||||
(in thousands) | ||||||||||||||||
Balance at December 31, 2014, net of tax of $1,598, $(453) | $ | — | $ | 2,365 | $ | 2,324 | $ | 4,689 | ||||||||
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Other comprehensive loss before reclassifications, net of tax of $0, $(944) | (6,267 | ) | (876 | ) | — | (7,143 | ) | |||||||||
Amounts reclassified from accumulated other comprehensive income, net of tax of $(209), $(85) | — | (561 | ) | (147 | ) | (708 | ) | |||||||||
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Net current period other comprehensive loss, net of tax of $0, $(1,153), $(85) | (6,267 | ) | (1,437 | ) | (147 | ) | (7,851 | ) | ||||||||
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Balance at July 5, 2015, net of tax of $0, $445, $(538) | $ | (6,267 | ) | $ | 928 | $ | 2,177 | $ | (3,162 | ) | ||||||
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For the Six Months Ended June 29, 2014 | ||||||||||||
Unrealized Gains on Marketable Securities | Retirement Plans Prior Service Credit | Total | ||||||||||
(in thousands) | ||||||||||||
Balance at December 31, 2013, net of tax of $794, $(284) | $ | 1,381 | $ | 2,619 | $ | 4,000 | ||||||
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Other comprehensive income before reclassifications, net of tax of $1,242, $0 | 2,304 | — | 2,304 | |||||||||
Amounts reclassified from accumulated other comprehensive income, net of tax of $(243), $(85) | (448 | ) | (147 | ) | (595 | ) | ||||||
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Net current period other comprehensive income, net of tax of $999, $(85) | 1,856 | (147 | ) | 1,709 | ||||||||
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Balance at June 29, 2014, net of tax of $1,793, $(369) | $ | 3,237 | $ | 2,472 | $ | 5,709 | ||||||
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Reclassifications out of accumulated other comprehensive income to the statement of operations for the three and ninesix months ended September 28,July 5, 2015 and June 29, 2014, and September 29, 2013 were as follows:
Details about Accumulated Other Comprehensive Income Components | For the Three Months Ended | For the Nine Months Ended | Affected Line Item in the Statements of Operations | For the Three Months Ended | For the Six Months Ended | Affected Line Item in the Statements of Operations | ||||||||||||||||||||||||||||||||
September 28, 2014 | September 29, 2013 | September 28, 2014 | September 29, 2013 | July 5, 2015 | June 29, 2014 | July 5, 2015 | June 29, 2014 | |||||||||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||||||||
Available-for-sale marketable securities: | ||||||||||||||||||||||||||||||||||||||
Unrealized gains, net of tax of $348, $109, $591, $231 | $ | 638 | $ | 189 | $ | 1,086 | $ | 401 | Interest income | |||||||||||||||||||||||||||||
Unrealized gains, net of tax of $40, $141, $209, $243 | $ | 231 | $ | 272 | $ | 561 | $ | 448 | Interest income | |||||||||||||||||||||||||||||
Amortization of defined benefit pension and postretirement plans: | ||||||||||||||||||||||||||||||||||||||
Prior service benefit, net of tax of $42, $40, $127, $119 | 74 | 69 | 221 | 207 | (a) | |||||||||||||||||||||||||||||||||
Prior service benefit, net of tax of $42, $42, $85, $85 | 74 | 74 | 147 | 147 | (a) | |||||||||||||||||||||||||||||||||
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Total reclassifications | $ | 712 | $ | 258 | $ | 1,307 | $ | 608 | Net income | |||||||||||||||||||||||||||||
Total reclassifications, net of tax of $82, $183, $294, $328 | $ | 305 | $ | 346 | $ | 708 | $ | 595 | Net income | |||||||||||||||||||||||||||||
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(a) | The amortization of prior service benefit is included in the computation of net periodic pension cost and postretirement benefit; see Note |
K.L. Goodwill and Intangible Assets
The changes in the carrying amounts of goodwill by segment are as follows:
Wireless Test | Industrial Automation | System Test Group | Total | |||||||||||||
(in thousands) | ||||||||||||||||
Balance at December 31, 2014 | $ | 262,922 | $ | — | $ | 10,516 | $ | 273,438 | ||||||||
Goodwill acquired during period | — | 226,501 | — | 226,501 | ||||||||||||
Foreign currency translation adjustment | — | (4,505 | ) | — | (4,505 | ) | ||||||||||
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Balance at July 5, 2015 | $ | 262,922 | $ | 221,996 | $ | 10,516 | $ | 495,434 | ||||||||
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Amortizable intangible assets consist of the following and are included in intangible assets, net on the balance sheet:
September 28, 2014 | July 5, 2015 | |||||||||||||||||||||||||||||||
Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Weighted Average Useful Life | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Weighted Average Useful Life | |||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||
Developed technology | $ | 342,933 | $ | 212,949 | $ | 129,984 | 6.2 years | $ | 432,656 | $ | 244,514 | $ | 188,142 | 5.9 years | ||||||||||||||||||
Customer relationships | 141,005 | 90,244 | 50,761 | 8.0 years | 155,831 | 100,500 | 55,331 | 7.5 years | ||||||||||||||||||||||||
Trade names and trademarks | 30,034 | 13,302 | 16,732 | 9.1 years | ||||||||||||||||||||||||||||
Tradenames and trademarks | 51,668 | 16,275 | 35,393 | 5.3 years | ||||||||||||||||||||||||||||
Non-compete agreement | 320 | 60 | 260 | 4.0 years | ||||||||||||||||||||||||||||
Customer order backlog | 170 | 170 | — | 0.3 years | ||||||||||||||||||||||||||||
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Total intangible assets | $ | 513,972 | $ | 316,495 | $ | 197,477 | 6.9 years | $ | 640,645 | $ | 361,519 | $ | 279,126 | 6.6 years | ||||||||||||||||||
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December 31, 2013 | December 31, 2014 | |||||||||||||||||||||||||||||||
Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Weighted Average Useful Life | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Weighted Average Useful Life | |||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||
Developed technology | $ | 342,933 | $ | 174,563 | $ | 168,370 | 6.2 years | $ | 345,513 | $ | 224,059 | $ | 121,454 | 6.2 years | ||||||||||||||||||
Customer relationships | 141,497 | 76,963 | 64,534 | 8.0 years | 146,635 | 93,998 | 52,637 | 7.7 years | ||||||||||||||||||||||||
Trade names and trademarks | 30,034 | 10,647 | 19,387 | 9.1 years | ||||||||||||||||||||||||||||
Customer backlog | 1,000 | 1,000 | — | 0.4 years | ||||||||||||||||||||||||||||
Tradenames and trademarks | 30,414 | 14,205 | 16,209 | 9.0 years | ||||||||||||||||||||||||||||
Non-compete agreement | 320 | 20 | 300 | 4.0 years | ||||||||||||||||||||||||||||
Customer order backlog | 170 | 170 | — | 0.3 years | ||||||||||||||||||||||||||||
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Total intangible assets | $ | 515,464 | $ | 263,173 | $ | 252,291 | 6.9 years | $ | 523,052 | $ | 332,452 | $ | 190,600 | 6.8 years | ||||||||||||||||||
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Aggregate intangible asset amortization expense was $18.3$15.3 million and $54.8$29.1 million, respectively, for the three and ninesix months ended September 28, 2014July 5, 2015 and $18.1$18.3 million and $54.2$36.5 million, respectively, for the three and ninesix months ended SeptemberJune 29, 2013.2014. Estimated intangible asset amortization expense for each of the five succeeding fiscal years is as follows:
Year | Amortization Expense | Amortization Expense | ||||||
(in thousands) | (in thousands) | |||||||
2014 (remainder) | $ | 15,327 | ||||||
2015 | 53,391 | |||||||
2015 (remainder) | $ | 39,932 | ||||||
2016 | 53,391 | 79,863 | ||||||
2017 | 47,232 | 71,269 | ||||||
2018 | 22,691 | 44,440 | ||||||
2019 | 23,591 | |||||||
Thereafter | 5,445 | 20,031 |
L.M. Net Income per Common Share
The following table sets forth the computation of basic and diluted net income per common share:
For the Three Months Ended | For the Nine Months Ended | For the Three Months Ended | For the Six Months Ended | |||||||||||||||||||||||||||||
September 28, 2014 | September 29, 2013 | September 28, 2014 | September 29, 2013 | July 5, 2015 | June 29, 2014 | July 5, 2015 | June 29, 2014 | |||||||||||||||||||||||||
(in thousands, except per share amounts) | (in thousands, except per share amounts) | |||||||||||||||||||||||||||||||
Net income for basic and diluted net income per share | $ | 82,949 | $ | 69,459 | $ | 185,083 | $ | 142,604 | $ | 102,879 | $ | 101,205 | $ | 135,666 | $ | 102,134 | ||||||||||||||||
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Weighted average common shares-basic | 207,381 | 191,307 | 198,367 | 190,521 | 213,845 | 194,408 | 215,516 | 193,860 | ||||||||||||||||||||||||
Effect of dilutive potential common shares: | ||||||||||||||||||||||||||||||||
Incremental shares from assumed conversion of convertible notes (1) | — | 23,257 | 6,684 | 23,303 | — | — | — | 10,026 | ||||||||||||||||||||||||
Convertible note hedge warrant shares (2) | 8,885 | 18,678 | 16,744 | 18,742 | — | 20,406 | — | 20,674 | ||||||||||||||||||||||||
Restricted stock units | 1,167 | 1,102 | 975 | 1,000 | 978 | 705 | 940 | 878 | ||||||||||||||||||||||||
Stock options | 879 | 1,465 | 997 | 1,564 | 603 | 1,006 | 649 | 1,056 | ||||||||||||||||||||||||
Employee stock purchase rights | 21 | 19 | 28 | 35 | ||||||||||||||||||||||||||||
Employee stock purchase plan | 70 | 43 | 49 | 32 | ||||||||||||||||||||||||||||
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Dilutive potential common shares | 10,952 | 44,521 | 25,428 | 44,644 | 1,651 | 22,160 | 1,638 | 32,666 | ||||||||||||||||||||||||
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Weighted average common shares-diluted | 218,333 | 235,828 | 223,795 | 235,165 | 215,496 | 216,568 | 217,154 | 226,526 | ||||||||||||||||||||||||
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Net income per common share-basic | $ | 0.40 | $ | 0.36 | $ | 0.93 | $ | 0.75 | $ | 0.48 | $ | 0.52 | $ | 0.63 | $ | 0.53 | ||||||||||||||||
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Net income per common share-diluted | $ | 0.38 | $ | 0.29 | $ | 0.83 | $ | 0.61 | $ | 0.48 | $ | 0.47 | $ | 0.62 | $ | 0.45 | ||||||||||||||||
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(1) | Incremental shares from |
multiplied by |
(2) | Convertible note hedge warrant shares |
The computation of diluted net income per common share for the three and ninesix months ended September 28,July 5, 2015 excludes the effect of the potential exercise of stock options to purchase approximately 0.2 million shares because the effect would have been anti-dilutive.
The computation of diluted net income per common share for the three and six months ended June 29, 2014 excludes the effect of the potential exercise of stock options to purchase approximately 0.3 million shares because the effect would have been anti-dilutive.
The computation of diluted net income per common share forN. Restructuring and Other
Other
During the three and ninesix months ended September 29, 2013 excludesJuly 5, 2015, Teradyne recorded a $1.6 million gain from the effectdecrease in the fair value of the potential exerciseZTEC contingent consideration liability, partially offset by $1.0 million of stock optionsacquisition costs related to purchase approximately 0.4 million shares because the effect would have been anti-dilutive.
M. Restructuring and OtherUniversal Robots.
Restructuring
During the ninesix months ended September 28, 2014,July 5, 2015, Teradyne recorded $0.8$0.3 million of severance charges related to headcount reductions of approximately 304 people, primarily in WirelessSemiconductor Test. During the ninesix months ended SeptemberJune 29, 2013,2014, Teradyne recorded $1.5$0.6 million of severance charges related to headcount reductions of approximately 4028 people, of which $1.4 million wasprimarily in System Test and $0.4 million was in Semiconductor Test, and a $(0.4) million credit in Corporate for a change in the estimated exit costs related to a leased facility.Wireless Test.
Severance and Benefits | Facility Exit Costs | Total | ||||||||||
(in thousands) | ||||||||||||
Pre-2013 Activities | ||||||||||||
Balance at December 31, 2012 | $ | 243 | $ | 1,084 | $ | 1,327 | ||||||
Change in estimate | — | (553 | ) | (553 | ) | |||||||
Cash payments | (243 | ) | (531 | ) | (774 | ) | ||||||
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Balance at December 31, 2013 | $ | — | $ | — | $ | — | ||||||
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2013 Activities | ||||||||||||
Q3 2013 Activity: | ||||||||||||
Provision | $ | 1,337 | $ | — | $ | 1,337 | ||||||
Cash payments | (966 | ) | — | (966 | ) | |||||||
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Balance at December 31, 2013 | 371 | — | 371 | |||||||||
Cash payments | (161 | ) | — | (161 | ) | |||||||
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Balance at March 30, 2014 | 210 | — | 210 | |||||||||
Cash payments | — | — | — | |||||||||
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Balance at June 29, 2014 | 210 | — | 210 | |||||||||
Cash payments | — | — | — | |||||||||
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Balance at September 28, 2014 | $ | 210 | $ | — | $ | 210 | ||||||
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Q4 2013 Activity: | ||||||||||||
Provision | $ | 600 | $ | — | $ | 600 | ||||||
Cash payments | (486 | ) | — | (486 | ) | |||||||
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Balance at December 31, 2013 | 114 | — | 114 | |||||||||
Cash payments | (114 | ) | — | (114 | ) | |||||||
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Balance at March 30, 2014 | $ | — | $ | — | $ | — | ||||||
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Q2 2014 Activity: Provision Cash payments Balance at June 29, 2014 Cash payments Balance at September 28, 2014 Q3 2014 Activity: Provision Cash payments Balance at September 28, 2014 Balance at September 28, 2014 Severance
and
Benefits Facility
Exit
Costs Total (in thousands) 2014 Activities $ 572 $ — $ 572 (530 ) — (530 ) 42 — 42 (42 ) — (42 ) $ — $ — $ — $ 225 $ — $ 225 (225 ) — (225 ) $ — $ — $ — $ 210 $ — $ 210
The accrual balance for severance and benefits of $0.2 million is reflected in the accrued employees’ compensation and withholdings on the balance sheet and is expected to be paid by December 2014.
Other
During the three and nine months ended September 28, 2014, Teradyne recorded a $0.6 million fair value adjustment to decrease the ZTEC acquisition contingent consideration.
N.O. Retirement Plans
ASC 715, “Compensation—Retirement Benefits”, requires an employer with defined benefit plans or other postretirement benefit plans to recognize an asset or a liability on its balance sheet for the overfunded or underfunded status of the plans as defined by ASC 715.plans. The pension asset or liability represents a difference between the fair value of the pension plan’s assets and the projected benefit obligation.
On October 27, 2014, the U.S. Society of Actuaries released new mortality tables. Teradyne will use the new mortality tables along with other updated pension valuation assumptions (discount rate, asset rate of return, etc.) as part of its annual fourth quarter pension obligation remeasurement. The estimated actuarial loss as a result of the new mortality tables and current discount rates is approximately $50 million.
Defined Benefit Pension Plans
Teradyne has defined benefit pension plans covering a portion of domestic employees and employees of certain non-U.S. subsidiaries. Benefits under these plans are based on employees’ years of service and compensation. Teradyne’s funding policy is to make contributions to these plans in accordance with local laws and to the extent that such contributions are tax deductible. The assets of these plans consist primarily of fixed income and equity securities. In addition, Teradyne has an unfunded supplemental executive defined benefit plan in the United States to provide retirement benefits in excess of levels allowed by the Employment Retirement Income Security Act (“ERISA”) and the Internal Revenue Code (“IRC”), as well as unfunded foreign plans.
In the ninesix months ended September 28, 2014,July 5, 2015, Teradyne contributed $1.3$1.2 million to the U.S. supplemental executive defined benefit pension plan and $1.2$0.4 million to certain qualified plans for non-U.S. subsidiaries.
For the three and ninesix months ended September 28,July 5, 2015 and June 29, 2014, and September 29, 2013, Teradyne’s net periodic pension cost was comprised of the following:
For the Three Months Ended | ||||||||||||||||||||||||||||||||
For the Three Months Ended | For the Nine Months Ended | July 5, 2015 | June 29, 2014 | |||||||||||||||||||||||||||||
September 28, 2014 | September 29, 2013 | September 28, 2014 | September 29, 2013 | United States | Foreign | United States | Foreign | |||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||
Service cost | $ | 761 | $ | 871 | $ | 2,368 | $ | 2,557 | $ | 615 | $ | 263 | $ | 563 | $ | 248 | ||||||||||||||||
Interest cost | 3,650 | 3,350 | 11,102 | 10,001 | 3,289 | 385 | 3,223 | 509 | ||||||||||||||||||||||||
Expected return on plan assets | (3,335 | ) | (3,664 | ) | (10,060 | ) | (10,925 | ) | (3,634 | ) | (215 | ) | (3,125 | ) | (259 | ) | ||||||||||||||||
Amortization of unrecognized prior service cost | 34 | 41 | 101 | 123 | ||||||||||||||||||||||||||||
Actuarial loss (gain) | — | — | 362 | (1,123 | ) | |||||||||||||||||||||||||||
Amortization of prior service cost | 34 | — | 34 | — | ||||||||||||||||||||||||||||
Actuarial (gain) loss | (3 | ) | — | 362 | — | |||||||||||||||||||||||||||
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Total net periodic pension cost | $ | 1,110 | $ | 598 | $ | 3,873 | $ | 633 | $ | 301 | $ | 433 | $ | 1,057 | $ | 498 | ||||||||||||||||
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For the Six Months Ended | ||||||||||||||||
July 5, 2015 | June 29, 2014 | |||||||||||||||
United States | Foreign | United States | Foreign | |||||||||||||
(in thousands) | ||||||||||||||||
Service cost | $ | 1,231 | $ | 510 | $ | 1,109 | $ | 498 | ||||||||
Interest cost | 6,571 | 744 | 6,438 | 1,014 | ||||||||||||
Expected return on plan assets | (7,259 | ) | (410 | ) | (6,250 | ) | (475 | ) | ||||||||
Amortization of prior service cost | 67 | — | 67 | — | ||||||||||||
Actuarial (gain) loss | (3 | ) | — | 362 | — | |||||||||||
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Total net periodic pension cost | $ | 607 | $ | 844 | $ | 1,726 | $ | 1,037 | ||||||||
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Postretirement Benefit Plan
In addition to receiving pension benefits, U.S. Teradyne employees who meet early retirement eligibility requirements as of their termination dates may participate in Teradyne’s Welfare Plan, which includes death, and medical and dental benefits up to age 65. Death benefits provide a fixed sum to retirees’ survivors and are available to all retirees. Substantially all of Teradyne’s current U.S. employees could become eligible for these benefits, and the existing benefit obligation relates primarily to those employees.
For the three and ninesix months ended September 28,July 5, 2015 and June 29, 2014, and September 29, 2013, Teradyne’s net periodic postretirement benefit income was comprised of the following:
For the Three Months Ended | For the Nine Months Ended | For the Three Months Ended | For the Six Months Ended | |||||||||||||||||||||||||||||
September 28, 2014 | September 29, 2013 | September 28, 2014 | September 29, 2013 | July 5, 2015 | June 29, 2014 | July 5, 2015 | June 29, 2014 | |||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||
Service cost | $ | 15 | $ | 19 | $ | 44 | $ | 56 | $ | 12 | $ | 17 | $ | 24 | $ | 29 | ||||||||||||||||
Interest cost | 84 | 86 | 252 | 257 | 59 | 82 | 118 | 168 | ||||||||||||||||||||||||
Amortization of unrecognized prior service benefit | (150 | ) | (150 | ) | (449 | ) | (449 | ) | ||||||||||||||||||||||||
Amortization of prior service benefit | (150 | ) | (150 | ) | (299 | ) | (299 | ) | ||||||||||||||||||||||||
Actuarial gain | — | — | (247 | ) | (236 | ) | (19 | ) | (247 | ) | (19 | ) | (247 | ) | ||||||||||||||||||
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Total net periodic post-retirement benefit | $ | (51 | ) | $ | (45 | ) | $ | (400 | ) | $ | (372 | ) | $ | (98 | ) | $ | (298 | ) | $ | (176 | ) | $ | (349 | ) | ||||||||
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O.
P. Commitments and Contingencies
Purchase Commitments
As of September 28, 2014,July 5, 2015, Teradyne had entered into purchase commitments for certain components and materials. The purchase commitments covered by the agreements aggregate to approximately $155.2$230.3 million, of which $147.4$222.9 million is for less than one year.
Legal Claims
Teradyne is subject to various legal proceedings and claims which have arisen in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on Teradyne’s results of operations, financial condition or cash flows.
P.Q. Income Taxes
The effective tax rate for the three months ended September 28,July 5, 2015 and June 29, 2014 was 22.1% and September 29, 2013 was 18% and 21%16.6%, respectively. The decrease in the tax rate was primarily due to a more favorable geographic mix of income partially offset by an increase in reserves for uncertain tax positions.
The effective tax rate for the ninesix months ended September 28,July 5, 2015 and June 29, 2014 was 22.3% and September 29, 2013 was 16% and 14%14.6%, respectively. The effective tax rates for these periods were lower than the expected federal statutory rate of 35% primarily because of the favorable effect of statutory rates applicable to income earned outside the United States. The tax rate for the six months ended July 5, 2015 was increased by additions to the uncertain tax positions for transfer pricing included in the projected annual effective tax rate partially offset by $1.7 million of discrete tax benefits composed of $0.7 million from disqualifying dispositions of incentive stock options and employee stock purchase plan shares and $1.0 million from other discrete tax benefits. The rate for the six months ended June 29, 2014 was also reduced by $2.9 million of discrete tax benefits composed of $1.2 million from disqualifying dispositions of incentive stock options and employee stock purchase plan shares and $1.7 million of other discrete tax benefits.
On a quarterly basis, Teradyne evaluates the realizability of the deferred tax assets by jurisdiction and assesses the need for a valuation allowance. At July 5, 2015, Teradyne believes that it will ultimately realize the deferred tax assets recorded on the condensed consolidated balance sheet. However, should Teradyne believe that it is more likely than not that the deferred tax assets would not be realized, the tax provision would increase in the tax rateperiod in which Teradyne determined that the realizability was primarily due tonot likely. Teradyne considers the probability of future taxable income tax expense forand historical profitability, among other factors, in assessing the nine months ended September 29, 2013 being reduced for a discrete tax benefit from the January 2013 reinstatementrealizability of the U.S. research and development credit for fiscal year 2012 and an increase in reserves for uncertaindeferred tax positions in fiscal year 2014, partially offset by a more favorable geographic mix of income in fiscal year 2014.
The effective tax rate for each of these periods is lower than the 35% U.S. statutory federal tax rate primarily due to the geographic mix of income and profits earned by Teradyne’s international subsidiaries being taxed at rates lower than the U.S. statutory rate.assets.
As of September 28,July 5, 2015 and December 31, 2014, Teradyne had $31.6$33.3 million of reserves for uncertain tax positions. As of December 31, 2013, Teradyne had $21.2and $30.4 million, respectively, of reserves for uncertain tax positions. The $10.4$2.9 million net increase in reserves for uncertain tax positions relates primarily relates to the allocation of income among jurisdictions. transfer pricing exposures.
As of September 28, 2014,July 5, 2015, Teradyne anticipatesanticipated the liability for uncertain tax positions could decrease by approximately $2.8$0.5 million over the next twelve months, primarily as a result of the expiration of statutes of limitations and clarification ofsettlements with tax laws.authorities. The potential decrease is primarily related to equity compensation.transfer pricing exposures.
Teradyne recognizes interest and penalties related to income tax matters in income tax expense. As of July 5, 2015 and December 31, 2014, $0.5 million and $0.6 million respectively of interest and penalties were included in the reserve for uncertain tax positions.
Teradyne qualifies for a tax holiday in Singapore by fulfilling the requirements of an agreement with the Singapore Economic Development Board under which certain headcount and spending requirements must be met. The tax savings due to the tax holiday for the ninesix months ended September 28, 2014 were $12.3July 5, 2015 was $6.2 million or $0.05$0.03 per diluted share. The tax savings due to the tax holiday for the six months ended June 29, 2014 was $6.1 million or $0.03 per diluted share. The tax holiday is currently expected to expire on December 31, 2015. Teradyne is in discussion with the Singapore Economic Development Board with respect to extension of the tax holiday for periods after December 31, 2015.
Q.
R. Segment Information
Teradyne has threefour operating segments (Semiconductor Test, Wireless Test, System Test and System Test)Industrial Automation), which are its reportable segments. The Semiconductor Test segment includes operations related to the design, manufacturing and marketing of semiconductor test products and services. The Wireless Test segment includes operations related to the design, manufacturing and marketing of wireless test products and services. The System Test segment includes operations related to the design, manufacturing and marketing of products and services for military/defense/aerospace instrumentation test, storage test and circuit-board test. The Industrial Automation segment includes operations related to the design, manufacturing and marketing of collaborative robots. Each operating segment has a segment manager who is directly accountable to and maintains regular contact with Teradyne’s chief operating decision maker (Teradyne’s chief executive officer) to discuss operating activities, financial results, forecasts, and plans for the segment.
Teradyne evaluates performance based on several factors, of which the primary financial measure is business segment income before income taxes. The accounting policies of the business segments in effect are the same as those described in Note B: “Accounting Policies” in Teradyne’s Annual Report on Form 10-K for the year ended December 31, 2013. 2014, unless updated in this form 10-Q, where applicable.
Segment information for the three and six months ended July 5, 2015 and June 29, 2014 is as follows:
Semiconductor Test | Wireless Test | System Test | Corporate and Eliminations | Consolidated | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Three months ended September 28, 2014: | ||||||||||||||||||||
Net revenues | $ | 380,083 | $ | 54,838 | $ | 43,089 | $ | — | $ | 478,010 | ||||||||||
Income before income taxes(1)(2) | 91,900 | 2,379 | 5,779 | 612 | 100,670 | |||||||||||||||
Three months ended September 29, 2013: | ||||||||||||||||||||
Net revenues | $ | 304,131 | $ | 93,132 | $ | 36,113 | $ | — | $ | 433,376 | ||||||||||
Income (loss) before income taxes(1)(2) | 68,932 | 27,575 | (2,462 | ) | (6,493 | ) | 87,552 | |||||||||||||
Nine months ended September 28, 2014: | ||||||||||||||||||||
Net revenues | $ | 1,063,254 | $ | 144,747 | $ | 116,586 | $ | — | $ | 1,324,587 | ||||||||||
Income (loss) before income taxes(1)(2) | 233,770 | (8,477 | ) | 5,512 | (10,616 | ) | 220,189 | |||||||||||||
Nine months ended September 29, 2013: | ||||||||||||||||||||
Net revenues | $ | 808,068 | $ | 226,116 | $ | 108,448 | $ | — | $ | 1,142,632 | ||||||||||
Income (loss) before income taxes(1)(2) | 141,304 | 41,491 | (153 | ) | (16,159 | ) | 166,483 |
Semiconductor Test | Wireless Test | System Test | Industrial Automation | Corporate and Eliminations | Consolidated | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Three months ended July 5, 2015: | ||||||||||||||||||||||||
Revenues | $ | 400,315 | $ | 62,879 | $ | 45,822 | $ | 3,723 | $ | — | $ | 512,739 | ||||||||||||
Income (loss) before income taxes (1)(2) | 129,546 | 6,841 | (4,333 | ) | (1,700 | ) | 1,782 | 132,136 | ||||||||||||||||
Total assets (3) | 649,087 | 485,857 | 95,544 | 358,276 | 1,104,043 | 2,692,807 | ||||||||||||||||||
Three months ended June 29, 2014: | ||||||||||||||||||||||||
Revenues | $ | 421,434 | $ | 68,699 | $ | 35,434 | $ | — | $ | — | $ | 525,567 | ||||||||||||
Income (loss) before income taxes (1)(2) | 107,270 | 14,229 | (715 | ) | — | 608 | 121,392 | |||||||||||||||||
Total assets (3) | 747,492 | 638,012 | 71,644 | — | 1,173,515 | 2,630,663 | ||||||||||||||||||
Six months ended July 5, 2015: | ||||||||||||||||||||||||
Revenues | $ | 671,232 | $ | 96,927 | $ | 83,258 | $ | 3,723 | $ | — | $ | 855,140 | ||||||||||||
Income (loss) before income taxes (1)(2) | 172,671 | (3,600 | ) | (3,328 | ) | (1,700 | ) | 10,531 | 174,574 | |||||||||||||||
Total assets (3) | 649,087 | 485,857 | 95,544 | 358,276 | 1,104,043 | 2,692,807 | ||||||||||||||||||
Six months ended June 29, 2014: | ||||||||||||||||||||||||
Revenues | $ | 683,171 | $ | 89,909 | $ | 73,497 | $ | — | $ | — | $ | 846,577 | ||||||||||||
Income (loss) before income taxes (1)(2) | 141,870 | (10,856 | ) | (267 | ) | — | (11,228 | ) | 119,519 | |||||||||||||||
Total assets (3) | 747,492 | 638,012 | 71,644 | — | 1,173,515 | 2,630,663 |
(1) |
(2) | Included in the income (loss) before income taxes for each of the segments are charges related to inventory and |
(3) | Total business assets are directly attributable to each business. Corporate assets consist of cash and cash equivalents, marketable securities and certain other assets. |
Included in the Semiconductor Test segment are charges forin the following:following line items in the statements of operations:
For the Three Months Ended | For the Nine Months Ended | For the Three Months Ended | For the Six Months Ended | |||||||||||||||||||||||||||||
September 28, 2014 | September 29, 2013 | September 28, 2014 | September 29, 2013 | July 5, 2015 | June 29, 2014 | July 5, 2015 | June 29, 2014 | |||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||
Cost of revenues—provision for excess and obsolete inventory | $ | 4,404 | $ | 1,378 | $ | 14,322 | $ | 1,878 | ||||||||||||||||||||||||
Cost of revenues—inventory charge | $ | 6,409 | $ | 3,713 | $ | 6,940 | $ | 9,918 | ||||||||||||||||||||||||
Restructuring and other | — | 282 | — | 416 | 305 | — | 305 | — | ||||||||||||||||||||||||
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Total | $ | 4,404 | $ | 1,660 | $ | 14,322 | $ | 2,294 | $ | 6,714 | $ | 3,713 | $ | 7,245 | $ | 9,918 | ||||||||||||||||
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Included in the Wireless Test segment are charges forin the following:following line items in the statements of operations:
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
September 28, 2014 | September 29, 2013 | September 28, 2014 | September 29, 2013 | |||||||||||||
(in thousands) | ||||||||||||||||
Cost of revenues—provision for excess and obsolete inventory | $ | 1,267 | $ | 2,059 | $ | 5,239 | $ | 6,125 | ||||||||
Restructuring and other | — | — | 426 | 82 | ||||||||||||
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Total | $ | 1,267 | $ | 2,059 | $ | 5,665 | $ | 6,207 | ||||||||
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Cost of revenues—inventory charge Restructuring and other Total For the Three Months
Ended For the Six Months
Ended July 5,
2015 June 29,
2014 July 5,
2015 June 29,
2014 (in thousands) $ 330 $ 879 $ 1,176 $ 3,972 — 426 — 426 $ 330 $ 1,305 $ 1,176 $ 4,398
Included in the System Test segment are charges forin the following:following line items in the statements of operations:
For the Three Months Ended | For the Nine Months Ended | For the Three Months Ended | For the Six Months Ended | |||||||||||||||||||||||||||||
September 28, 2014 | September 29, 2013 | September 28, 2014 | September 29, 2013 | July 5, 2015 | June 29, 2014 | July 5, 2015 | June 29, 2014 | |||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||
Cost of revenues—provision for excess and obsolete inventory | $ | 763 | $ | 404 | $ | 1,944 | $ | 1,613 | ||||||||||||||||||||||||
Cost of revenues—inventory charge | $ | 7,702 | $ | 440 | $ | 7,765 | $ | 1,181 | ||||||||||||||||||||||||
Restructuring and other | 225 | 1,055 | 371 | 1,430 | — | 146 | — | 146 | ||||||||||||||||||||||||
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Total | $ | 988 | $ | 1,459 | $ | 2,315 | $ | 3,043 | $ | 7,702 | $ | 586 | $ | 7,765 | $ | 1,327 | ||||||||||||||||
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Included in the Industrial Automation segment are charges in the following line item in the statements of operations:
For the Three Months Ended | For the Six Months Ended | |||||||||||||||
July 5, 2015 | June 29, 2014 | July 5, 2015 | June 29, 2014 | |||||||||||||
(in thousands) | ||||||||||||||||
Cost of revenues—inventory step-up (1) | $ | 595 | $ | — | $ | 595 | $ | — | ||||||||
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Total | $ | 595 | $ | — | $ | 595 | $ | — | ||||||||
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Included in Corporate and Eliminations are charges and credits forin the following:following line items in the statements of operations:
For the Three Months Ended | For the Nine Months Ended | For the Three Months Ended | For the Six Months Ended | |||||||||||||||||||||||||||||
September 28, 2014 | September 29, 2013 | September 28, 2014 | September 29, 2013 | July 5, 2015 | June 29, 2014 | July 5, 2015 | June 29, 2014 | |||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||
Restructuring and other | $ | (630 | ) | $ | (448 | ) | $ | (630 | ) | $ | (448 | ) | ||||||||||||||||||||
Restructuring and other—ZTEC contingent consideration adjustment | $ | (1,600 | ) | $ | — | $ | (1,600 | ) | $ | — | ||||||||||||||||||||||
Other (income) expense, net—gain from the sale of an equity investment | (624 | ) | — | (5,406 | ) | — | ||||||||||||||||||||||||||
Restructuring and other—Universal Robots acquisition costs | 960 | — | 960 | — | ||||||||||||||||||||||||||||
Selling and administrative—stock-based compensation expense (2) | — | — | — | 6,598 | ||||||||||||||||||||||||||||
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Total | $ | (630 | ) | $ | (448 | ) | $ | (630 | ) | $ | (448 | ) | $ | (1,264 | ) | $ | — | $ | (6,046 | ) | $ | 6,598 | ||||||||||
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R.
(1) | Included in the cost of revenues for the three and six months ended July 5, 2015 is the cost for purchase accounting inventory step-up. |
(2) | Expense related to the January 2014 retirement of Teradyne’s former chief executive officer; see Note J: “Stock-Based Compensation”. |
S. Shareholders’ Equity
Stock Repurchase Program
In November 2010, Teradyne’sJanuary 2015, the Board of Directors authorized a stockTeradyne to repurchase program for up to $200 million. In the three and nine months ended September 28, 2014 and September 29, 2013,$500 million of common stock, $300 million of which Teradyne did notintends to repurchase any shares.in 2015. The cumulative repurchases under the new program as of September 28, 2014July 5, 2015 totaled 2.66.5 million shares of common stock for $31.2$128.3 million at an average price of $11.84.$19.74 per share.
Dividend
Holders of Teradyne’s common stock are entitled to receive dividends when they are declared by Teradyne’s Board of Directors.
In January 2015 and May 2015, Teradyne’s Board of Directors declared a quarterly cash dividend of $0.06 per share. Dividend payments for the three and six months ended July 5, 2015 were $12.8 million and $25.9 million, respectively.
In January 2014, Teradyne’s Board of Directors declared an initial quarterly cash dividend of $0.06 per share that was paid on June 2, 2014 to stockholders of record as of May 9, 2014. In August 2014, Teradyne’s Board of Directors declared a quarterly cash dividend of $0.06 per share that was paid on September 26, 2014 to stockholders of record as of September 5, 2014. Dividend payments for the three and ninesix months ended September 28,June 29, 2014 were $12.8 million$11.7 million.
While Teradyne declared a quarterly cash dividend and $24.4 million, respectively. Payment of futureauthorized a share repurchase program, it may reduce or eliminate the cash dividend or share repurchase program in the future. Future cash dividends will rest withinand stock repurchases are subject to the discretion of Teradyne’s Board of Directors andwhich will depend,consider, among other things, upon Teradyne’s earnings, capital requirements and financial condition.
S. Subsequent Events
On October 31, 2014, Teradyne completed the acquisition of substantially all the assets of Avionics Interface Technologies, LLC (“AIT”) located in Omaha, Nebraska, for approximately $18.9 million and up to $2.1 million payable upon achievement of certain revenue and gross margin targets through December 31, 2016. The fair value of assets and liabilities acquired has not been disclosed because Teradyne has not completed the valuation. AIT is a leading provider of equipment for testing state-of-the-art data buses. The acquisition complements Teradyne’s Mil/Aero line of bus test instrumentation for commercial and defense avionics systems. AIT will be included in Teradyne’s System Test segment.
Item 2: | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Statements in this Quarterly Report on Form 10-Q which are not historical facts, so called “forward looking statements,” are made pursuant to the safe harbor provisions of Section 21E of the Securities Exchange Act of 1934, as amended. Investors are cautioned that all forward looking statements involve risks and uncertainties, including those detailed in our filings with the Securities and Exchange Commission. See also Part II, Item 1A of this Quarterly Report on Form 10-Q and Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013.2014. Readers are cautioned not to place undue reliance on these forward-looking statements which reflect management’s analysis only as of the date hereof. We assume no obligation to update these forward-looking statements to reflect actual results or changes in factors or assumptions affecting forward-looking statements, except as may be required by law.
Overview
We are a leading global supplier of automatic test equipment.equipment and collaborative robots. We design, develop, manufacture and sell automatic test systems and solutions used to test semiconductors, wireless products, hard disk drives and circuit boards in the consumer electronics, wireless, automotive, industrial, computing, communications, and aerospace and defense industries. Our automatic test equipment and collaborative robots products and services include:
We have a broad customer base which includes integrated device manufacturers (“IDMs”), outsourced semiconductor assembly and test providers (“OSATs”), wafer foundries, fabless companies that design, but contract with others for the manufacture of integrated circuits (“ICs”), developers of wireless devices and consumer electronics, manufacturers of circuit boards, automotive suppliers, wireless product manufacturers, storage device manufacturers, aerospace and military contractors.contractors, and distributors that sell collaborative robots.
In October 2013,On June 11, 2015, we acquired ZTEC Instruments Inc.Universal Robots A/S (“ZTEC”Universal Robots”), a for approximately $284 million of cash plus up to an additional $65 million of cash if certain performance targets are met extending through 2018. Universal Robots is the leading supplier of modular wireless test instruments.collaborative robots which are low-cost, easy-to-deploy and simple-to-program robots that work side by side with production workers to improve quality and increase manufacturing efficiency. Universal Robots is a separate operating and reportable segment, Industrial Automation. The acquisition of ZTEC expandsUniversal Robots provides a growth engine to our business and complements our existing System Test and Wireless Test segment into the design verification test of wireless components and chipsets.segments.
In October 2014, we acquired substantially all the assets of Avionics Interface Technologies, LLC (“AIT”), a leading providersupplier of equipment for testing state-of-the-art data communication buses. The acquisition of AIT complements our Mil/Aero business unit’sDefense/Aerospace line of bus test instrumentation so that we can provide complete test solutions for today’s commercial and defense avionics systems. AIT is included in our System Test segment.
We willbelieve our recent acquisitions have enhanced our opportunities for growth. We intend to continue to invest in our business, togrow market share in our markets and expand further expand our addressable markets while tightly managing our costs.
The sales of our products and services are dependent, to a large degree, on customers who are subject to cyclical trends in the demand for their products. These cyclical periods have had, and will continue to have, a significant effect on our business becausesince our customers often delay or accelerate purchases in reaction to changes in their businesses and to demand fluctuations in the semiconductor and electronics industries. Historically, these demand fluctuations have resulted in significant variations in our results of operations. The sharp swings in the semiconductor and electronics industries in recent years have generally affected the semiconductor and electronics test equipment and services industries more significantly than the overall capital equipment sector.
In the fourth quarter of 2014, we performed our annual goodwill impairment test and recorded a goodwill impairment charge of $98.9 million in our Wireless Test segment as a result of decreased projected demand attributable to an estimated smaller future wireless test market due to reuse of wireless test equipment, price competition and different testing techniques. Further reductions in the size of the wireless test market may occur, which may result in additional goodwill impairment charges, increased risk of excess and obsolete inventories, asset write-offs and restructuring charges.
Critical Accounting Policies and Estimates
We have identified the policies which are critical to understanding our business and our results of operations. ThereExcept for below, there have been no significant changes during the ninesix months ended September 28, 2014July 5, 2015 to the items disclosed as our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013.2014.
Revenue Recognition
We recognize revenues when there is persuasive evidence of an arrangement, title and risk of loss have passed, delivery has occurred or the services have been rendered, the sales price is fixed or determinable and collection of the related receivable is reasonably assured. Title and risk of loss generally pass to our customers upon shipment or at delivery destination point. In circumstances where either title or risk of loss pass upon destination, acceptance or cash payment, we defer revenue recognition until such events occur except when title transfer is tied to cash payment outside the United States. Outside the United States, we recognize revenue even if we retain a form of title to products delivered to customers, provided the sole purpose is to enable us to recover the products in the event of customer payment default and the arrangement does not prohibit the customer’s use or resale of the product in the ordinary course of business.
Our equipment has non-software and embedded software components that function together to deliver the equipment’s essential functionality. Revenue is recognized upon shipment or at delivery destination point, provided that customer acceptance criteria can be demonstrated prior to shipment. Certain contracts require us to perform tests of the product to ensure that performance meets the published product specifications or customer requested specifications, which are generally conducted prior to shipment. Where the criteria cannot be demonstrated prior to shipment, revenue is deferred until customer acceptance has been received. We also defer the portion of the sales price that is not due until acceptance, which represents deferred profit.
For multiple element arrangements, we allocate revenue to all deliverables based on their relative selling prices. In such circumstances, a hierarchy is used to determine the selling price for allocating revenue to deliverables as follows: (i) vendor-specific objective evidence of selling price (“VSOE”), (ii) third-party evidence of selling price (“TPE”), and (iii) best estimate of the selling price (“BESP”). For a delivered item to be considered a separate unit, the delivered item must have value to the customer on a standalone basis and the delivery or performance of the undelivered item must be considered probable and substantially in our control.
Our post-shipment obligations include installation, training services, one-year standard warranties, and extended warranties. Installation does not alter the product capabilities, does not require specialized skills or
tools and can be performed by the customers or other vendors. Installation is typically provided within five days of product shipment and is completed within one to two days thereafter. Training services are optional and do not affect the customers’ ability to use the product. We defer revenue for the selling price of installation and training. Extended warranties constitute warranty obligations beyond one year and we defer revenue in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 605-20,“Separately Priced Extended Warranty and Product Maintenance Contracts” and ASC 605-25, “Revenue Recognition Multiple-Element Arrangements.” Service revenue is recognized over the contractual period or as services are performed.
Our products are generally subject to warranty and the related costs of the warranty are provided for in cost of revenues when product revenue is recognized. We classify shipping and handling costs in cost of revenues.
We do not provide our customers with contractual rights of return for any of our products.
Translation of Non-U.S. Currencies
The functional currency for all non-U.S. subsidiaries is the U.S. dollar, except for the Industrial Automation segment for which the local currency is its functional currency. All foreign currency denominated monetary assets and liabilities are re-measured on a monthly basis into the functional currency using exchange rates in effect at the end of the period. All foreign currency denominated non-monetary assets and liabilities are re-measured into the functional currency using historical exchange rates. Net foreign exchange gains and losses resulting from re-measurement are included in other (income) expense, net. For Industrial Automation, assets and liabilities are translated into U.S. dollars using exchange rates in effect at the end of the period. Revenue and expense amounts are translated using an average of exchange rates in effect during the period. Translation adjustments are recorded within accumulated other comprehensive income (loss).
SELECTED RELATIONSHIPS WITHIN THE CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
For the Three Months Ended | For the Nine Months Ended | For the Three Months Ended | For the Six Months Ended | |||||||||||||||||||||||||||||
September 28, 2014 | September 29, 2013 | September 28, 2014 | September 29, 2013 | July 5, 2015 | June 29, 2014 | July 5, 2015 | June 29, 2014 | |||||||||||||||||||||||||
Percentage of total net revenues: | ||||||||||||||||||||||||||||||||
Net revenues: | ||||||||||||||||||||||||||||||||
Percentage of revenues: | ||||||||||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||||||
Products | 84 | % | 84 | % | 84 | % | 83 | % | 85 | % | 86 | % | 83 | % | 84 | % | ||||||||||||||||
Services | 16 | 16 | 16 | 17 | 15 | 14 | 17 | 16 | ||||||||||||||||||||||||
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Total net revenues | 100 | 100 | 100 | 100 | ||||||||||||||||||||||||||||
Total revenues | 100 | 100 | 100 | 100 | ||||||||||||||||||||||||||||
Cost of revenues: | ||||||||||||||||||||||||||||||||
Cost of products | 38 | 35 | 38 | 35 | 35 | 39 | 35 | 39 | ||||||||||||||||||||||||
Cost of services | 7 | 7 | 7 | 8 | 6 | 6 | 7 | 7 | ||||||||||||||||||||||||
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Total cost of revenues (exclusive of acquired intangible assets amortization shown separately below) | 45 | 41 | 46 | 43 | 42 | 45 | 43 | 46 | ||||||||||||||||||||||||
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Gross profit | 55 | 59 | 54 | 57 | 58 | 55 | 57 | 54 | ||||||||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||||||||||
Engineering and development | 15 | 16 | 16 | 17 | 15 | 14 | 17 | 17 | ||||||||||||||||||||||||
Selling and administrative | 15 | 17 | 17 | 18 | 15 | 15 | 17 | 18 | ||||||||||||||||||||||||
Acquired intangible assets amortization | 4 | 4 | 4 | 5 | 3 | 3 | 3 | 4 | ||||||||||||||||||||||||
Restructuring and other | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
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Total operating expenses | 34 | 37 | 37 | 41 | 33 | 32 | 38 | 39 | ||||||||||||||||||||||||
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Income from operations | 21 | 22 | 17 | 16 | 26 | 23 | 19 | 15 | ||||||||||||||||||||||||
Non-operating (income) expenses | ||||||||||||||||||||||||||||||||
Interest income | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Interest expense and other (income) expense | — | 2 | 1 | 2 | ||||||||||||||||||||||||||||
Interest expense | — | — | — | 1 | ||||||||||||||||||||||||||||
Other (income) expense, net | — | — | (1 | ) | — | |||||||||||||||||||||||||||
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Income before income taxes | 21 | 20 | 17 | 15 | 26 | 23 | 20 | 14 | ||||||||||||||||||||||||
Income tax provision | 4 | 4 | 3 | 2 | 6 | 4 | 5 | 2 | ||||||||||||||||||||||||
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Net income | 17 | % | 16 | % | 14 | % | 12 | % | 20 | % | 19 | % | 16 | % | 12 | % | ||||||||||||||||
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Results of Operations
ThirdSecond Quarter 20142015 Compared to ThirdSecond Quarter 20132014
Book to Bill Ratio
Book to bill ratio is calculated as net bookings divided by net sales. Book to bill ratio by reportable segment was as follows:
For the Three Months Ended | For the Three Months Ended | |||||||||||||||
September 28, 2014 | September 29, 2013 | July 5, 2015 | June 29, 2014 | |||||||||||||
Semiconductor Test | 0.5 | 0.7 | 1.0 | 1.3 | ||||||||||||
Wireless Test | 0.8 | 0.4 | 1.3 | 0.8 | ||||||||||||
System Test | 0.6 | 0.7 | 1.0 | 1.1 | ||||||||||||
Industrial Automation | 1.4 | — | ||||||||||||||
Total Company | 0.6 | 0.6 | 1.0 | 1.2 |
Revenues
Net revenuesRevenues by our four reportable segmentsegments were as follows:
For the Three Months Ended | Dollar Change | For the Three Months Ended | Dollar Change | |||||||||||||||||||||
September 28, 2014 | September 29, 2013 | July 5, 2015 | June 29, 2014 | |||||||||||||||||||||
(in millions) | (in millions) | |||||||||||||||||||||||
Semiconductor Test | $ | 380.1 | $ | 304.2 | $ | 75.9 | $ | 400.3 | $ | 421.5 | $ | (21.2 | ) | |||||||||||
Wireless Test | 54.8 | 93.1 | (38.3 | ) | 62.9 | 68.7 | (5.8 | ) | ||||||||||||||||
System Test | 43.1 | 36.1 | 7.0 | 45.8 | 35.4 | 10.4 | ||||||||||||||||||
Industrial Automation | 3.7 | — | 3.7 | |||||||||||||||||||||
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$ | 478.0 | $ | 433.4 | $ | 44.6 | $ | 512.7 | $ | 525.6 | $ | (12.9 | ) | ||||||||||||
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The increasedecrease in Semiconductor Test revenues of $75.9$21.2 million, or 25%5%, was primarily due to higher system-on-a-chip (“SOC”)lower memory test product volume driven by application processors and an increase in service revenue.sales. The decrease in Wireless Test revenue of $38.3$5.8 million, or 41%8%, was primarily due todriven by lower connectivity and cellular product volume.test system sales. The increase in System Test revenue of $7.0$10.4 million, or 19%29%, was primarily due to higher product volumesales in Production Board Test and Storage Test systems.of 3.5” hard disk drive testers for cloud storage.
Our revenuesRevenues by regioncountry as a percentage of total net revenues were as follows:follows (1):
For the Three Months Ended | For the Three Months Ended | |||||||||||||||
September 28, 2014 | September 29, 2013 | July 5, 2015 | June 29, 2014 | |||||||||||||
Taiwan | 27 | % | 25 | % | 26 | % | 30 | % | ||||||||
China | 18 | 19 | ||||||||||||||
United States | 18 | 11 | 12 | 11 | ||||||||||||
China | 18 | 27 | ||||||||||||||
Singapore | 8 | 6 | ||||||||||||||
Japan | 8 | 2 | ||||||||||||||
Philippines | 7 | 4 | ||||||||||||||
Europe | 6 | 5 | ||||||||||||||
Korea | 8 | 9 | 5 | 13 | ||||||||||||
Europe | 7 | 4 | ||||||||||||||
Singapore | 5 | 7 | ||||||||||||||
Malaysia | 5 | 6 | 5 | 5 | ||||||||||||
Philippines | 5 | 4 | ||||||||||||||
Japan | 4 | 4 | ||||||||||||||
Thailand | 2 | 2 | 4 | 4 | ||||||||||||
Rest of World | 1 | 1 | 1 | 1 | ||||||||||||
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(1) | Revenues attributable to a country are based on location of customer site. |
Gross Profit
Our gross profit was as follows:
For the Three Months Ended | Dollar/Point Change | |||||||||||
September 28, 2014 | September 29, 2013 | |||||||||||
(in millions) | ||||||||||||
Gross profit | $ | 261.1 | $ | 254.3 | $ | 6.8 | ||||||
Percent of total revenue | 54.6 | % | 58.7 | % | (4.1 | ) |
For the Three Months Ended | Dollar/Point Change | |||||||||||
July 5, 2015 | June 29, 2014 | |||||||||||
(in millions) | ||||||||||||
Gross Profit | $ | 298.6 | $ | 290.4 | $ | 8.2 | ||||||
Percent of Total Revenues | 58.2 | % | 55.3 | % | 2.9 |
Gross profit as a percent of revenue decreasedincreased by 4.1 percentage2.9 points due primarilyas a result of a 4.3 point increase related to product mix and sales of previously leased testers in SOC Semiconductor Test, partially offset by a 1.4 point decrease due to higher excess and lower Wirelessobsolete inventory provisions in Storage Test sales.and Semiconductor Test.
We assess the carrying value of our inventory on a quarterly basis by estimating future demand and comparing that demand against on-hand and on-order inventory positions. Forecasted revenue information is obtained from the sales and marketing groups and incorporates factors such as backlog and future revenue demand. This quarterly process identifies obsolete and excess inventory. Obsolete inventory, which represents items for which there is no demand, is fully reserved. Excess inventory, which represents inventory items that are not expected to be consumed during the next twelve quarters, is written-down to estimated net realizable value.
During the three months ended September 28,July 5, 2015, we recorded an inventory provision of $14.4 million included in cost of revenues primarily due to $7.7 million related to a downward revision to previously forecasted demand levels for our 2.5” hard disk drive testers in Storage Test and $6.0 million related to product transition in Semiconductor Test. Of the $14.4 million of total excess and obsolete provisions, $7.7 million was related to System Test, $6.4 million was related to Semiconductor Test, and $0.3 million was related to Wireless Test.
During the three months ended June 29, 2014, we recorded an inventory provision of $6.4$5.0 million included in cost of revenues primarily due to downward revisions to previously forecasted demand levels. Of the $6.4$5.0 million of total excess and obsolete provisions, $4.4$3.7 million was related to Semiconductor Test, $1.3$0.9 million was related to Wireless Test, and $0.7$0.4 million was related to System Test.
During the three months ended SeptemberJuly 5, 2015 and June 29, 2013, we recorded an inventory provision of $3.8 million included in cost of revenues, due to the following factors:
During the three months ended September 28, 2014, and September 29, 2013, we scrapped $11.1$0.8 million and $13.9$2.3 million of inventory, respectively. During the three months ended September 28,July 5, 2015 and June 29, 2014, and September 29, 2013, we sold $6.2$2.6 million and $4.1$2.1 million respectively, of previously written-down inventory.or written-off inventory, respectively. As of September 28, 2014,July 5, 2015, we had inventory related reserves for inventory which had been written-down or written-off totaling $116.1$122.8 million. We have no pre-determined timeline to scrap the remaining inventory.
Engineering and Development
Engineering and development expenses were as follows:
For the Three Months Ended | Dollar Change | |||||||||||
September 28, 2014 | September 29, 2013 | |||||||||||
(in millions) | ||||||||||||
Engineering and development | $ | 72.0 | $ | 68.9 | $ | 3.1 | ||||||
Percent of total revenue | 15.1 | % | 15.9 | % |
For the Three Months Ended | Dollar Change | |||||||||||
July 5, 2015 | June 29, 2014 | |||||||||||
(in millions) | ||||||||||||
Engineering and Development | $ | 75.8 | $ | 73.4 | $ | 2.4 | ||||||
Percent of Total Revenues | 14.8 | % | 14.0 | % |
The increase of $3.1$2.4 million in engineering and development expenses was due primarily to increased spending in Semiconductor Test.System Test and higher variable compensation.
Selling and Administrative
Selling and administrative expenses were as follows:
For the Three Months Ended | Dollar Change | |||||||||||
September 28, 2014 | September 29, 2013 | |||||||||||
(in millions) | ||||||||||||
Selling and administrative | $ | 73.1 | $ | 72.9 | $ | 0.2 | ||||||
Percent of total revenue | 15.3 | % | 16.8 | % |
For the Three Months Ended | Dollar Change | |||||||||||
July 5, 2015 | June 29, 2014 | |||||||||||
(in millions) | ||||||||||||
Selling and Administrative | $ | 77.1 | $ | 77.5 | $ | (0.4 | ) | |||||
Percent of Total Revenues | 15.0 | % | 14.7 | % |
The increasedecrease of $0.2$0.4 million in selling and administrative expenses was due primarily to increased sales and marketinglower spending in Semiconductor Test.Test partially offset by higher variable compensation.
Restructuring and Other
Other
During the three months ended July 5, 2015, we recorded a $1.6 million gain from the decrease in the fair value of the ZTEC contingent consideration, partially offset by $1.0 million of acquisition costs related to Universal Robots.
Restructuring
During the three months ended September 28, 2014,July 5, 2015, we recorded $0.2$0.3 million of severance charges related to headcount reductions of 24 people, primarily in SystemSemiconductor Test.
During the three months ended SeptemberJune 29, 2013,2014, we recorded $1.3$0.6 million of severance charges related to headcount reductions of approximately 4028 people, of which $1.0 million wasprimarily in System Test and $0.3 million was in Semiconductor Test, and a $(0.4) million credit related to a change in the estimated exit costs related to a leased facility, in Corporate.
Other
During the three months ended September 28, 2014, we recorded a $0.6 million fair value adjustment to decrease the ZTEC acquisition contingent consideration.Wireless Test.
Income Taxes
The effective tax rate for the three months ended September 28,July 5, 2015 and June 29, 2014 was 22.1% and September 29, 2013 was 18% and 21%16.6%, respectively. The decreaseincrease in the effective tax rate wasis primarily dueattributable to a more favorable geographic mix ofprojected increase in income partially offset bysubject to tax in the United States as compared to lower rate, in foreign jurisdictions and an increase in reserves for uncertain tax positions.
The effective tax ratepositions for each of these periods is lower than the 35% U.S. statutory federal tax rate primarily due to the geographic mix of income and profits earned by our international subsidiaries being taxed at rates lower than the U.S. statutory rate.transfer pricing.
NineSix Months of 2015 Compared to Six Months of 2014 Compared to Nine Months of 2013
Revenues
Net revenuesRevenues by our four reportable segmentsegments were as follows:
For the Nine Months Ended | Dollar Change | For the Six Months Ended | ||||||||||||||||||||||
September 28, 2014 | September 29, 2013 | July 5, 2015 | June 29, 2014 | Dollar Change | ||||||||||||||||||||
(in millions) | (in millions) | |||||||||||||||||||||||
Semiconductor Test | $ | 1,063.3 | $ | 808.1 | $ | 255.2 | $ | 671.2 | $ | 683.2 | $ | (12.0 | ) | |||||||||||
Wireless Test | 144.7 | 226.1 | (81.4 | ) | 96.9 | 89.9 | 7.0 | |||||||||||||||||
System Test | 116.6 | 108.4 | 8.2 | 83.3 | 73.5 | 9.8 | ||||||||||||||||||
Industrial Automation | 3.7 | — | 3.7 | |||||||||||||||||||||
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$ | 1,324.6 | $ | 1,142.6 | $ | 182.0 | $ | 855.1 | $ | 846.6 | $ | 8.5 | |||||||||||||
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The increasedecrease in Semiconductor Test revenues of $255.2$12.0 million, or 32%2%, was primarily due to lower SOC product volume, driven by the application processors and microcontrollers markets. The increase in Wireless Test revenue of $7.0 million, or 8%, was primarily due to higher SOC product volume, driven by application processors and microcontrollers. The decrease in Wireless Test revenue of $81.4 million or 36% was primarily due to lower cellular and connectivitytest product volume. The increase in System Test revenue of $8.2$9.8 million, or 8%13%, was primarily due to higher product volumesales in Production Board Test and Storage Test systems, partially offset by lower Mil/Aero product sales.due to 3.5” hard disk drive testers for cloud storage.
Our revenues by region as a percentage of total net revenues were as follows:
For the Nine Months Ended | For the Six Months Ended | |||||||||||||||
September 28, 2014 | September 29, 2013 | July 5, 2015 | June 29, 2014 | |||||||||||||
Taiwan | 28 | % | 21 | % | 28 | % | 29 | % | ||||||||
China | 18 | 25 | 16 | 17 | ||||||||||||
United States | 14 | 13 | 13 | 12 | ||||||||||||
Korea | 10 | 9 | 8 | 10 | ||||||||||||
Japan | 8 | 4 | ||||||||||||||
Singapore | 7 | 9 | 7 | 8 | ||||||||||||
Europe | 6 | 6 | 6 | 6 | ||||||||||||
Malaysia | 5 | 6 | 5 | 5 | ||||||||||||
Japan | 4 | 5 | ||||||||||||||
Philippines | 4 | 3 | 5 | 4 | ||||||||||||
Thailand | 3 | 2 | 3 | 4 | ||||||||||||
Rest of World | 1 | 1 | 1 | 1 | ||||||||||||
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100 | % | 100 | % | 100 | % | 100 | % | |||||||||
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Gross Profit
Our gross profit was as follows:
For the Nine Months Ended | Dollar/Point Change | |||||||||||
September 28, 2014 | September 29, 2013 | |||||||||||
(in millions) | ||||||||||||
Gross profit | $ | 718.6 | $ | 648.9 | $ | 69.7 | ||||||
Percent of total revenues | 54.2 | % | 56.8 | % | (2.6 | ) |
For the Six Months Ended | Dollar/Point Change | |||||||||||
July 5, 2014 | June 29, 2014 | |||||||||||
(in millions) | ||||||||||||
Gross Profit | $ | 491.0 | $ | 457.5 | $ | 33.5 | ||||||
Percent of Total Revenue | 57.4 | % | 54.0 | % | 3.4 |
Gross profit as a percent of revenue decreasedincreased by 2.6 percentage3.4 points primarily due primarily to a decreasean increase of 2.43.7 points related to product mix and sales of previously leased testers in SOC Semiconductor Test, and lower Wireless Test sales, a decrease of 0.7 point due to higher excess and obsolete inventory provisions, partially offset by higher sales volume.warranty costs.
We assess the carrying value of our inventory on a quarterly basis by estimating future demand and comparing that demand against on-hand and on-order inventory positions. Forecasted revenue information is obtained from the sales and marketing groups and incorporates factors such as backlog and future revenue demand. This quarterly process identifies obsolete and excess inventory. Obsolete inventory, which represents items for which there is no demand, is fully reserved. Excess inventory, which represents inventory items that are not expected to be consumed during the next twelve quarters, is written-down to estimated net realizable value.
During the ninesix months ended September 28,July 5, 2015, we recorded an inventory provision of $15.9 million included in cost of revenues primarily due to $7.7 million related to a downward revision to previously forecasted demand levels for our 2.5” hard disk drive testers in Storage Test and $6.0 million related to product transition in Semiconductor Test. Of the $15.9 million of total excess and obsolete provisions, $7.8 million was related to System Test, $6.9 million was related to Semiconductor Test, and $1.2 million was related to Wireless Test.
During the six months ended June 29, 2014, we recorded an inventory provision of $21.5$15.1 million included in cost of revenues with $6.2 million related to product transition in Semiconductor Test and $15.3$9.0 million due to downward revisions to previously forecasted demand levels.levels and $6.1 million related to product transition in Semiconductor Test. Of the $21.5$15.1 million of total excess and obsolete provisions, $14.3$9.9 million was related to Semiconductor Test, $5.2$4.0 million was related to Wireless Test, and $2.0$1.2 million was related to System Test.
During the nine months ended September 29, 2013, we recorded an inventory provision of $9.6 million included in cost of revenues, due to the following factors:
During the ninesix months ended September 28,July 5, 2015 and June 29, 2014, and September 29, 2013, we scrapped $14.3$1.4 million and $16.8$3.3 million of inventory, respectively. During the ninesix months ended September 28,July 5, 2015 and June 29, 2014, and September 29, 2013, we sold $9.8$4.5 million and $8.9$3.6 million, respectively, of previously written-down or written-off inventory. As of September 28, 2014,July 5, 2015 we had inventory related reserves for inventory which had been written-down or written-off totaling $116.1$122.8 million. We have no pre-determined timeline to scrap the remaining inventory.
Engineering and Development
Engineering and development expenses were as follows:
For the Nine Months Ended | Dollar Change | |||||||||||
September 28, 2014 | September 29, 2013 | |||||||||||
(in millions) | ||||||||||||
Engineering and development | $ | 212.5 | $ | 199.4 | $ | 13.1 | ||||||
Percent of total revenues | 16.0 | % | 17.5 | % |
For the Six Months Ended | Dollar Change | |||||||||||
July 5 2015 | June 29, 2014 | |||||||||||
(in millions) | ||||||||||||
Engineering and Development | $ | 147.3 | $ | 140.5 | $ | 6.8 | ||||||
Percent of Total Revenue | 17.2 | % | 16.6 | % |
The increase of $13.1$6.8 million in engineering and development expenses was due primarily to increased spending in Semiconductor Test and Wireless Test and higher variable compensation.
Selling and Administrative
Selling and administrative expenses were as follows:
For the Nine Months Ended | Dollar Change | |||||||||||
September 28, 2014 | September 29, 2013 | |||||||||||
(in millions) | ||||||||||||
Selling and administrative | $ | 228.6 | $ | 210.0 | $ | 18.6 | ||||||
Percent of total revenue | 17.3 | % | 18.4 | % |
For the Six Months Ended | Dollar Change | |||||||||||
July 5, 2015 | June 29, 2014 | |||||||||||
(in millions) | ||||||||||||
Selling and Administrative | $ | 149.1 | $ | 155.5 | $ | (6.4 | ) | |||||
Percent of Total Revenue | 17.4 | % | 18.4 | % |
The increasedecrease of $18.6$6.4 million in selling and administrative expenses was due primarily to a one-time $6.6 million stock-based compensation charge related to Michael Bradley’s (retired Chief Executive Officer) Retirement Agreement increased sales and marketing spending in Semiconductor Test and Wireless Test, andthe six months ended June 29, 2014, partially offset by higher variable compensation.
Restructuring and Other
Restructuring
During the nine months ended September 28, 2014, we recorded $0.8 million of severance charges related to headcount reductions of approximately 30 people, primarily in Wireless Test.
During the nine months ended September 29, 2013, Teradyne recorded $1.5 million of severance charges related to headcount reductions of approximately 40 people, of which $1.4 million was in System Test and $0.4 million was in Semiconductor Test, and a $(0.4) million credit in Corporate for a change in the estimated exit costs related to a leased facility.
Other
During the ninesix months ended September 28, 2014,July 5, 2015, we recorded a $0.6$1.6 million fair value adjustment to decrease the ZTEC acquisition contingent consideration.
Restructuring
During the six months ended July 5, 2015, we recorded $0.3 million of severance charges related to headcount reductions of 4 people, primarily in Semiconductor Test. During the six months ended June 29, 2014, we recorded $0.6 million of severance charges related to headcount reductions of 28 people, primarily in Wireless Test.
Income Taxes
The effective tax rate for the ninesix months ended September 28,July 5, 2015 and June 29, 2014 was 22.3% and September 29, 2013 was 16% and 14%14.6%, respectively. The increase in the effective tax rate wasis primarily dueattributable to a projected increase in income
subject to tax expense forin the nine months ended September 29, 2013 being reduced for a discrete tax benefit from the January 2013 reinstatement of the U.S. research and development credit for fiscal year 2012 andUnited States as compared to lower rates in foreign jurisdictions as well as an increase in reserves for uncertain tax positions in fiscal year 2014, partially offset by a more favorable geographic mix of income in fiscal year 2014.
for transfer pricing. The effective tax rate for eachthe six months ended July 5, 2015 was reduced by discrete tax benefits of these periods is lower than the 35% U.S. statutory federal$1.7 million composed of $0.7 million from disqualifying dispositions of incentive stock options and employee stock purchase plan shares and $1.0 million of other discrete tax benefits. The effective tax rate primarily due tofor the geographic mixsix months ended June 29, 2014 was reduced by discrete tax benefits of income$2.9 million composed of $1.2 million from disqualifying dispositions of incentive stock options and profits earned by our international subsidiaries being taxed at rates lower than the U.S. statutory rate.employee stock purchase plan shares and $1.7 million of other discrete tax benefits.
Contractual Obligations
The following table reflects our contractual obligations at September 28, 2014:as of July 5, 2015:
Payments Due by Period | ||||||||||||||||||||||||
Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | Other | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Purchase obligations | $ | 155,210 | $ | 147,373 | $ | 7,837 | $ | — | $ | — | $ | — | ||||||||||||
Retirement plan contributions | 92,557 | 4,640 | 7,781 | 9,993 | 70,143 | — | ||||||||||||||||||
Operating lease obligations | 53,514 | 12,806 | 18,523 | 8,175 | 14,010 | — | ||||||||||||||||||
Long-term other liabilities reflected on the Balance Sheet under GAAP(1) | 86,625 | — | 23,248 | — | — | 63,377 | ||||||||||||||||||
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Total | $ | 387,906 | $ | 164,819 | $ | 57,389 | $ | 18,168 | $ | 84,153 | $ | 63,377 | ||||||||||||
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Payments Due by Period | ||||||||||||||||||||||||
Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | Other | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Purchase Obligations | $ | 230,288 | $ | 222,882 | $ | 7,406 | $ | — | $ | — | $ | — | ||||||||||||
Retirement Plan Contributions | 111,651 | 4,145 | 8,260 | 8,885 | 90,361 | — | ||||||||||||||||||
Operating Lease Obligations | 62,441 | 15,326 | 20,191 | 12,368 | 14,556 | — | ||||||||||||||||||
Fair Value of Contingent Consideration | 35,595 | 15,092 | 15,410 | 5,093 | — | — | ||||||||||||||||||
Other Long-Term Liabilities Reflected on the Balance Sheet under GAAP (1) | 88,446 | — | 25,354 | — | — | 63,092 | ||||||||||||||||||
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Total | $ | 528,421 | $ | 257,445 | $ | 76,621 | $ | 26,346 | $ | 104,917 | $ | 63,092 | ||||||||||||
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(1) | Included in |
Liquidity and Capital Resources
Our cash, cash equivalents and marketable securities balances decreased by $18.3$270.2 million in the ninesix months ended September 28, 2014,July 5, 2015, to $1,181$1,029 million. Cash activity for
In the ninesix months ended September 28, 2014 and September 29, 2013 was as follows:
For the Nine Months Ended | ||||||||
September 28, 2014 | September 29, 2013 | |||||||
(in millions) | ||||||||
Cash provided by operating activities: | ||||||||
Net income, adjusted for non-cash items | $ | 344.4 | $ | 271.6 | ||||
Change in operating assets and liabilities | (27.3 | ) | (47.2 | ) | ||||
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Net cash provided by operating activities | 317.1 | 224.4 | ||||||
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Net cash used for investing activities | (254.4 | ) | (6.6 | ) | ||||
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Net cash (used for) provided by financing activities | (192.6 | ) | 16.1 | |||||
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(Decrease) increase in cash and cash equivalents | $ | (129.9 | ) | $ | 233.9 | |||
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In the nine months ended September 28, 2014,July 5, 2015, changes in operating assets and liabilities used cash of $27.3$24.6 million. This was due to a $77.6$104.9 million increase in operating assets and a $50.3an $80.3 million increase in operating liabilities.
The increase in operating assets was due to a $163.7$142.5 million increase in accounts receivable due to higher sales, partially offset by a $23.5 million decrease in inventories and a $14.1 million decrease in prepayments and other assets. The increase in daysoperating liabilities was due to a $40.6 million increase in other accrued liabilities, a $31.2 million increase in accounts payable due to higher sales, outstanding (“DSO”). DSOa $23.2 million increase in accrued income taxes, and a $5.7 million increase in customer advance payments and deferred revenue, partially offset by a $18.4 million decrease in accrued employee compensation due primarily to variable compensation and employee stock compensation awards’ payroll tax payments, and $2.0 million of retirement plan contributions.
Investing activities during the six months ended July 5, 2015 used cash of $49.4 million, due to $590.3 million used for purchases of marketable securities, $282.3 million used for the threeacquisition of Universal Robots, and $46.1 million used for purchases of property, plant and equipment, partially offset by proceeds from maturities and sales of marketable securities of $231.4 million and $631.4 million, respectively, proceeds from the sale of an equity investment of $5.4 million, and proceeds from life insurance of $1.1 million related to the cash surrender value from the cancellation of Teradyne owned life insurance policies. The decrease in purchases of property, plant and equipment of $45.3 million was primarily due to higher purchases of testers for customer leasing in the six months ended September 28,June 29, 2014.
Financing activities during the six months ended July 5, 2015 used cash of $137.7 million, due to $128.3 million used for repurchase of 6.5 million shares of common stock at an average price of $19.74 per share, $25.9 million used for dividend payments, and $2.3 million used for debt issuance costs related to our April, 2015 revolving credit facility, partially offset by $17.9 million from the issuance of common stock under employee stock purchase and stock option plans and $0.9 million from the tax benefit related to employee stock compensation awards.
In the six months ended June 29, 2014, changes in operating assets and liabilities used cash of $27.9 million. This was 61 days as compareddue to December 31, 2013 DSO of 50 days. a $97.7 million increase in operating assets and a $69.7 million increase in operating liabilities.
The increase in operating assets was due to a $143.1 million increase in accounts receivable wasdue to higher sales, partially offset by a $47.8$27.0 million decrease in prepayments and other assets and a $38.3an $18.5 million decrease in inventories due to higher sales. The increase in operating liabilities was due to a $52.2$39.3 million increase in accounts payable due to higher sales, a $37.9 million increase in other accrued liabilities, a $14.3$13.8 million increase in customer advance payments and deferred revenue and a $10.2$5.5 million increase in accrued income taxes, partially offset by a $16.2$20.1 million decrease in accrued employee compensation due primarily to variable compensation and employee stock awardcompensation awards’ payroll tax payments, a $4.3 million convertible note interest payment, $3.3and $2.4 million of retirement plan contributions and a $2.6 million decrease in accounts payable. Based on the new mortality tables released on October 27, 2014 and current discount rates, we estimate the funded status of our U.S. Qualified Pension Plan (the “Plan”) to be approximately 91%. During the fourth quarter of 2014, we plan to contribute approximately $30.0 million to the Plan to bring the Plan back to being fully funded.contributions.
Investing activities during the ninesix months ended September 28,June 29, 2014 used cash of $254.4$80.1 million, due to $844.1$523.3 million used for purchases of marketable securities and $146.4$91.4 million used for purchases of property, plant and equipment, partially offset by proceeds from maturities and sales of marketable securities that provided cash of $495.6$377.4 million and $236.1$152.8 million, respectively, and proceeds from life insurance of $4.4 million related to the cash surrender value from the cancellation of Teradyne owned life insurance policies on its retired chief executive officer. The increase in purchases of property, plant and equipment of $63.4 million compared to the nine months ended September 29, 2013 is primarily due to testers used for customer leases.
Financing activities during the ninesix months ended September 28,June 29, 2014 used cash of $192.6$190.3 million. $191.0 million of cash was used for payments on long-term debt related to the convertible note and the Japan loan and $24.4$11.7 million was used for dividend payments, partially offset by $21.0$10.6 million provided byfrom the issuance of common stock under employee stock purchase and stock option plans and $1.7 million from the tax benefit related to stock options and restricted stock units.
In the nine months ended September 29, 2013, changes in operating assets and liabilities used cash of $47.2 million. This was due to a $48.1 million increase in operating assets and a $0.9 million increase in operating liabilities.
The increase in operating assets was due to a $56.0 million increase in accounts receivable and a $26.3 million increase in other assets primarily due to an increase in prepayments, partially offset by a $34.2 million decrease in inventories. The increase in operating liabilities was due to an $9.4 million increase in accounts payable, a $13.8 million increase in accrued income taxes and a $9.9 million increase in other accrued liabilities, partially offset by a $19.2 million decrease in accrued employee compensation due primarily to variable compensation and employee stock award payroll tax payments, a $9.2 million decrease in customer advance payments and deferred revenue, and $3.6 million of retirement plan contributions.compensation awards.
Investing activities during the nine months ended September 29, 2013 used cash of $6.6 million, due to $658.6 million used for purchases of marketable securities and $82.9 million used for purchases of property, plant and equipment, partially offset by proceeds from maturities and sales of marketable securities that provided cash of $401.9 million and $333.0 million, respectively.
Financing activities during the nine months ended September 29, 2013 provided cash of $16.1 million, of which $16.8 million was from the issuance of common stock under employee stock purchase and stock option plans and $0.8 million from the tax benefit related to stock options and restricted stock units, partially offset by $1.1 million of cash used for the payments on long-term debt related to the Japan loan and $0.4 million of cash used for payments related to LitePoint acquisition contingent consideration.
Holders of our common stock are entitled to receive dividends if and when they are declared by our Board of Directors. In January 2014, our Board of Directors declared an initial quarterly cash dividend of $0.06 per share that was paid on June 2, 2014 to stockholders of record as of May 9, 2014. In Augustthe six months ended June 29, 2014, dividend payments were $11.7 million.
In January 2015 and May 2015, our Board of Directors declared a quarterly cash dividend of $0.06 per share that was paid on September 26, 2014 to stockholders of record as of Septembershare. In the six months ended July 5, 2014. Total2015, dividend payments were $25.9 million.
In January 2015, our Board of Directors authorized the repurchase of up to $500 million of common stock, $300 million of which we intend to repurchase in 2015. As of July 5, 2015, we repurchased 6.5 million shares of common stock at an average price of $19.74, for a total cost of $128.3 million.
While we declared a quarterly cash dividend and authorized a share repurchase program, we may reduce or eliminate the cash dividend or share repurchase program in the nine months ended September 28, 2014 were $24.4 million. Payment of futurefuture. Future cash dividends will rest withinand stock repurchases are subject to the discretion of our Board of Directors andwhich will depend,consider, among other things, upon our earnings, capital requirements and financial condition.
In 2014, we deployed approximately $75 million of capital into testers for customer leases bringing our total forecasted 2014 capital additions to $169 million.
We believe our cash, cash equivalents and marketable securities balance will be sufficient to pay our quarterly dividend, execute our authorized share repurchase program and meet our working capital and expenditure needs for at least the next twelve months. The amount of cash, cash equivalents and marketable securities in the U.S. and our operations in the U.S. provide sufficient liquidity to fund our business activities in the U.S. We have approximately $460$455 million of cash, cash equivalents and marketable securities outside the U.S. that if repatriated would incur additional taxes. Determination of the additional taxes that would be incurred
is not practicable due to uncertainty regarding the remittance structure, the mix of earnings and earnings and profit pools in the year of remittance, and overall complexity of the calculation. Inflation has not had a significant long-term impact on earnings.
Equity Compensation Plans
As discussed in Note O:N: “Stock Based Compensation” in our 20132014 Form 10-K, we have a 1996 Employee Stock Purchase Plan and a 2006 Equity and Cash Compensation Incentive Plan (the “2006 Equity Plan”).
The purpose of the 1996 Employee Stock Purchase Plan is to encourage stock ownership by all eligible employees of Teradyne. The purpose of the 2006 Equity Plan is to provide equity ownership and compensation opportunities in Teradyne to our employees, officers, directors, consultants and/or advisors. Both plans were approved by our shareholders.
Recently Issued Accounting Pronouncements
On July 18, 2013,April 7, 2015, the Financial Accounting Standards Board (“FASB”)FASB issued Accounting Standard Update (“ASU”)2013-11, ASU 2015-03,“Income Taxes (Topic 740):Simplifying the Presentation of an Unrecognized Tax Benefit WhenDebt Issuance Costs,” which requires debt issuance costs to be presented in the balance sheet as a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.”Under this ASU, unrecognized tax benefits willdirect deduction from the carrying value of the associated debt liability, consistent with the presentation for debt discount. The guidance in the new standard is limited to the presentation of debt issuance costs and does not affect the recognition and measurement of debt issuance costs. Therefore the amortization of such costs should continue to be netted against all available same-jurisdiction loss or other tax carryforwards that wouldcalculated using the interest method and be utilized, rather than only against carryforwards that are created by unrecognized tax benefits.reported as interest expense. The provisions of this ASU arestandard is effective for interim and annual periodsour financial statements issued for fiscal years beginning on or after December 15, 2013. Our implementation of this2015, and interim periods within those years. This ASU did notis expected to have a materialno impact on our financial position and results of operations.
In May 2014, the FASB issued ASUAccounting Standard Update (“ASU”) 2014-09,“Revenue from Contracts with Customers (Topic 606),” which will replace numerous requirements in U.S. GAAP, including industry-specific requirements, and provide companies with a single revenue recognition model for recognizing revenue from contracts with customers. The core principle of the new standard is that a company should recognize revenue to show the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled to in exchange for those goods or services. On April 1, 2015, the FASB proposed a deferral of the effective date of the new revenue standard by one year, until January 1, 2018. This deferral was approved on July 22, 2015. The new standard will be effective forin our first quarter of 2018. Early adoption is permitted but not before the original effective date (that is, annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. For Teradyne, the standard will be effective in the first quarter of 2017.2016). The two permitted transition methods under the new standard are the full retrospective method, in which case the standard would be applied to each prior reporting period presented, or the modified retrospective method, in which case the cumulative effect of applying the standard would be recognized at the date of initial application. We have not yet selected a transition method. We are currently evaluating the impact of this ASU on our financial position and results of operations.
Item 3: | Quantitative and Qualitative Disclosures about Market Risk |
For “Quantitative and Qualitative Disclosures about Market Risk” affecting Teradyne, see Part 2 Item 7a, “Quantitative and Qualitative Disclosures about Market Risks,” in our Annual Report on Form 10-K filed with the SEC on February 28, 2014.27, 2015. There were no material changes in our exposure to market risk from those set forth in our Annual Report for the fiscal year ended December 31, 2013.2014.
Item 4: | Controls and Procedures |
As of the end of the period covered by this report, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15(b) promulgated under the Exchange Act. Based upon that evaluation, our
Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective in ensuring that material information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, including ensuring that such material information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
During the period covered by this report, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.
PART II. OTHER INFORMATION
Item 1: | Legal Proceedings |
We are subject to various legal proceedings and claims which have arisen in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on our results of operations, financial condition or cash flows.
Item 1A: | Risk Factors |
YouIn addition to other information set forth in this Form 10-Q, you should carefully consider the factors discussed in Part I, “Item 1A: Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013,2014, which could materially affect our business, financial condition or future results. The risk factors described in our Annual Report on Form 10-K remain applicable to our business.
The risks described in our Annual Report on Form 10-K are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
We may incur indebtedness.
On April 27, 2015, we entered into a five-year, senior secured revolving credit facility of $350.0 million. Subject to customary conditions, we may seek to obtain from existing or new lenders incremental commitments under the credit facility in an aggregate principal amount not to exceed $150.0 million. We have not borrowed any funds under this credit facility. We could borrow funds under this credit facility at any time for general corporate purposes and working capital. Incurring indebtedness, among other things, could:
Restrictive covenants in the agreement governing our senior secured revolving credit facility may restrict our ability to pursue business strategies.
The agreement governing our senior secured revolving credit facility limits our ability, among other things, to: incur additional secured indebtedness; sell, transfer, license or dispose of assets; consolidate or merge; enter into transactions with our affiliates; and incur liens. In addition, our senior secured revolving credit facility contains financial and other restrictive covenants that limit our ability to engage in activities that may be in our long term best interest, such as, subject to permitted exceptions, making capital expenditures in excess of certain thresholds, making investments, loans and other advances, and prepaying any additional indebtedness while our indebtedness under our senior secured revolving credit facility is outstanding. Our failure to comply with financial and other restrictive covenants could result in an event of default, which if not cured or waived, could result in the lenders requiring immediate payment of all outstanding borrowings or foreclosing on collateral pledged to them to secure the indebtedness.
We may not fully realize the benefits of our acquisitions or strategic alliances.
In June 2015, we acquired Universal Robots. We may not be able to realize the benefit of acquiring Universal Robots or successfully grow Universal Robots’ business. We may continue to acquire additional
businesses, form strategic alliances or create joint ventures with third parties that we believe will complement or augment our existing businesses. We may not be able to realize the expected synergies and cost savings from the integration with our existing operations of other businesses or technologies that we may acquire. In addition, the integration process for our acquisitions may be complex, costly and time consuming and include unanticipated issues, expenses and liabilities. We may have difficulty in developing, manufacturing and marketing the products of a newly acquired company in a manner that enhances the performance of our combined businesses or product lines and allows us to realize value from expected synergies. Following an acquisition, we may not achieve the revenue or net income levels that justify the acquisition. Acquisitions may also result in one-time charges (such as acquisition-related expenses, write-offs or restructuring charges) or in the future, impairment of goodwill, that adversely affect our operating results. Additionally, we may fund acquisitions of new businesses, strategic alliances or joint ventures by utilizing our cash, incurring debt, issuing shares of our common stock, or by other means.
Item 2: | Unregistered Sales of Equity Securities and Use of Proceeds |
In November 2010, Teradyne’sJanuary 2015, our Board of Directors cancelled our 2010 stock repurchase program and authorized a new stock repurchase program for up to $200 million.$500 million of common stock, $300 million of which we intend to repurchase in 2015. The cumulative repurchases under the new program as of September 28, 2014July 5, 2015, totaled 2.66.5 million shares of common stock for $31.2$128.3 million at an average price of $11.84.$19.74.
The following table includes information with respect to repurchases we made of our common stock during the three months ended September 28, 2014July 5, 2015 (in thousands except per share price):
Period | (a) Total Number of Shares (or Units) Purchased | (b) Average Price Paid per Share (or Unit) | (c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs | (d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that may Yet Be Purchased Under the Plans or Programs | ||||||||||||
June 30, 2014 – July 27, 2014 | — | $ | — | — | $ | 168,825 | ||||||||||
July 28, 2014 – August 24, 2014 | — | $ | — | — | $ | 168,825 | ||||||||||
August 25, 2014 – September 28, 2014 | — | $ | — | — | $ | 168,825 | ||||||||||
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— | $ | — | — | $ | 168,825 | |||||||||||
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Period | (a) Total Number of Shares (or Units) Purchased | (b) Average Price Paid per Share (or Unit) | (c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs | (d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that may Yet Be Purchased Under the Plans or Programs | ||||||||||||||||||||
April 6, 2015 – May 3, 2015 | 1,380 | $ | 18.77 | 1,380 | $ | 427,461 | ||||||||||||||||||
May 4, 2015 – May 31, 2015 | 1,224 | $ | 20.25 | 1,218 | $ | 402,816 | ||||||||||||||||||
June 1, 2015 – July 5, 2015 | 1,504 | $ | 20.77 | 1,499 | $ | 371,685 | ||||||||||||||||||
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4,108 | (1) | $ | 19.94 | (1) | 4,096 | |||||||||||||||||||
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(1) | Includes 11,979 shares at an average price of $21.18, withheld from employees for the payment of taxes. |
We satisfy the U.S. federal and state minimum statutory withholding tax obligationobligations due upon the vesting and the conversion of restricted stock units into shares of our common stock, by automatically withholding from the shares being issued, a number of shares with an aggregate fair market value on the date of such vesting and conversion that would satisfy the minimum withholding amount due.
Item 4: | Mine Safety Disclosures |
Not Applicable
Item 6: | Exhibits |
Exhibit Number | Description | |
2.1 | Share Sale and Purchase Agreement by and among Teradyne Holdings Denmark ApS, Teradyne, Inc., and the shareholders of Universal Robots A/S, dated May 13, 2015 (filed herewith) | |
10.1 | ||
10.2 | ||
10.3 | 2006 Equity and Cash Compensation Incentive Plan, as amended, filed as Appendix A to Teradyne’s Notice and Proxy Statement on Schedule 14A filed April 2, 2015 | |
31.1 | Certification of Principal Executive Officer, pursuant to Rule 13a-14(a) of Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith) | |
31.2 | Certification of Principal Financial Officer, pursuant to Rule 13a-14(a) of Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith) | |
32.1 | Certification of Principal Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith) | |
32.2 | Certification of Principal Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith) | |
101.INS | XBRL Instance Document | |
101.SCH | XBRL Taxonomy Extension Schema Document | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
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 |
/S/ GREGORY R. BEECHER |
Gregory R. Beecher Vice President, Chief Financial Officer and Treasurer (Duly Authorized Officer and Principal Financial Officer) |
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