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 October 4, 2015July 3, 2016
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 of RegulationRegulation 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 November 6, 2015August 5, 2016 was 205,517,339202,330,816 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 | ||||||
5 | ||||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 32 | ||||
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 |
Item 1: | Financial Statements |
TERADYNE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
October 4, 2015 | December 31, 2014 | |||||||
(in thousands, except per share amount) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 294,217 | $ | 294,256 | ||||
Marketable securities | 525,381 | 533,787 | ||||||
Accounts receivable, less allowance for doubtful accounts of $2,418 and $2,491 at October 4, 2015 and December 31, 2014, respectively | 245,233 | 151,034 | ||||||
Inventories, net: | ||||||||
Parts | 85,713 | 70,821 | ||||||
Assemblies in process | 15,885 | 10,347 | ||||||
Finished goods | 26,834 | 23,961 | ||||||
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128,432 | 105,129 | |||||||
Deferred tax assets | 58,480 | 57,239 | ||||||
Prepayments | 80,779 | 95,819 | ||||||
Other current assets | 4,135 | 6,582 | ||||||
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| |||||
Total current assets | 1,336,657 | 1,243,846 | ||||||
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| |||||
Property, plant and equipment, net | 275,089 | 329,038 | ||||||
Marketable securities | 257,560 | 470,789 | ||||||
Deferred tax assets | 6,909 | 7,494 | ||||||
Other assets | 13,096 | 10,419 | ||||||
Retirement plans assets | 13,933 | 12,896 | ||||||
Intangible assets, net | 260,294 | 190,600 | ||||||
Goodwill | 498,346 | 273,438 | ||||||
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| |||||
Total assets | $ | 2,661,884 | $ | 2,538,520 | ||||
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LIABILITIES | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 81,642 | $ | 47,763 | ||||
Accrued employees’ compensation and withholdings | 98,252 | 100,994 | ||||||
Deferred revenue and customer advances | 74,318 | 71,603 | ||||||
Other accrued liabilities | 83,823 | 50,247 | ||||||
Contingent consideration | 14,447 | 895 | ||||||
Accrued income taxes | 43,259 | 20,049 | ||||||
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| |||||
Total current liabilities | 395,741 | 291,551 | ||||||
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| |||||
Long-term deferred revenue and customer advances | 29,490 | 19,929 | ||||||
Retirement plans liabilities | 107,102 | 108,460 | ||||||
Deferred tax liabilities | 35,494 | 23,315 | ||||||
Long-term other accrued liabilities | 28,304 | 13,830 | ||||||
Long-term contingent consideration | 20,148 | 2,455 | ||||||
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| |||||
Total liabilities | 616,279 | 459,540 | ||||||
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| |||||
Commitments and contingencies (See Note P) | ||||||||
SHAREHOLDERS’ EQUITY | ||||||||
Common stock, $0.125 par value, 1,000,000 shares authorized; 207,240 shares and 216,613 shares issued and outstanding at October 4, 2015 and December 31, 2014, respectively | 25,904 | 27,077 | ||||||
Additional paid-in capital | 1,471,641 | 1,437,135 | ||||||
Accumulated other comprehensive income | 67 | 4,689 | ||||||
Retained earnings | 547,993 | 610,079 | ||||||
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| |||||
Total shareholders’ equity | 2,045,605 | 2,078,980 | ||||||
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| |||||
Total liabilities and shareholders’ equity | $ | 2,661,884 | $ | 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 Nine Months Ended | |||||||||||||||
October 4, 2015 | September 28, 2014 | October 4, 2015 | September 28, 2014 | |||||||||||||
(in thousands, except per share amount) | ||||||||||||||||
Revenues: | ||||||||||||||||
Products | $ | 386,488 | $ | 402,987 | $ | 1,096,056 | $ | 1,110,861 | ||||||||
Services | 79,506 | 75,023 | 225,077 | 213,726 | ||||||||||||
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| |||||||||
Total revenues | 465,994 | 478,010 | 1,321,133 | 1,324,587 | ||||||||||||
Cost of revenues: | ||||||||||||||||
Cost of products | 170,963 | 182,591 | 471,450 | 509,450 | ||||||||||||
Cost of services | 36,405 | 34,298 | 100,067 | 96,556 | ||||||||||||
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| |||||||||
Total cost of revenues (exclusive of acquired intangible assets amortization shown separately below) | 207,368 | 216,889 | 571,517 | 606,006 | ||||||||||||
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| |||||||||
Gross profit | 258,626 | 261,121 | 749,616 | 718,581 | ||||||||||||
Operating expenses: | ||||||||||||||||
Engineering and development | 74,027 | 71,953 | 221,309 | 212,452 | ||||||||||||
Selling and administrative | 77,481 | 73,064 | 226,595 | 228,556 | ||||||||||||
Acquired intangible assets amortization | 20,053 | 18,271 | 49,119 | 54,813 | ||||||||||||
Restructuring and other | 261 | (405 | ) | (124 | ) | 167 | ||||||||||
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| |||||||||
Total operating expenses | 171,822 | 162,883 | 496,899 | 495,988 | ||||||||||||
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| |||||||||
Income from operations | 86,804 | 98,238 | 252,717 | 222,593 | ||||||||||||
Non-operating (income) expense: | ||||||||||||||||
Interest income | (1,708 | ) | (1,922 | ) | (5,198 | ) | (4,224 | ) | ||||||||
Interest expense | 508 | 144 | 1,114 | 6,720 | ||||||||||||
Other (income) expense, net | 596 | (654 | ) | (5,180 | ) | (92 | ) | |||||||||
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| |||||||||
Income before income taxes | 87,408 | 100,670 | 261,981 | 220,189 | ||||||||||||
Income tax provision | 15,955 | 17,721 | 54,863 | 35,106 | ||||||||||||
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Net income | $ | 71,453 | $ | 82,949 | $ | 207,118 | $ | 185,083 | ||||||||
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Net income per common share: | ||||||||||||||||
Basic | $ | 0.34 | $ | 0.40 | $ | 0.97 | $ | 0.93 | ||||||||
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Diluted | $ | 0.34 | $ | 0.38 | $ | 0.96 | $ | 0.83 | ||||||||
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Weighted average common shares—basic | 210,032 | 207,381 | 213,688 | 198,367 | ||||||||||||
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Weighted average common shares—diluted | 211,736 | 218,333 | 215,348 | 223,795 | ||||||||||||
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Cash dividend declared per common share | $ | 0.06 | $ | 0.06 | $ | 0.18 | $ | 0.12 | ||||||||
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July 3, 2016 | December 31, 2015 | |||||||
(in thousands, except per share amount) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 381,095 | $ | 264,705 | ||||
Marketable securities | 442,154 | 477,696 | ||||||
Accounts receivable, less allowance for doubtful accounts of $2,384 and $2,407 at July 3, 2016 and December 31, 2015, respectively | 349,547 | 211,293 | ||||||
Inventories, net: | ||||||||
Parts | 57,745 | 73,117 | ||||||
Assemblies in process | 32,536 | 32,825 | ||||||
Finished goods | 38,997 | 47,646 | ||||||
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| |||||
129,278 | 153,588 | |||||||
Deferred tax assets | — | 54,973 | ||||||
Prepayments | 103,131 | 91,519 | ||||||
Other current assets | 7,681 | 6,194 | ||||||
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| |||||
Total current assets | 1,412,886 | 1,259,968 | ||||||
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| |||||
Property, plant and equipment, net | 264,555 | 273,414 | ||||||
Marketable securities | 282,545 | 265,928 | ||||||
Deferred tax assets | 72,708 | 7,404 | ||||||
Other assets | 13,074 | 13,080 | ||||||
Retirement plans assets | 2,811 | 636 | ||||||
Intangible assets, net | 122,069 | 239,831 | ||||||
Goodwill | 237,210 | 488,413 | ||||||
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| |||||
Total assets | $ | 2,407,858 | $ | 2,548,674 | ||||
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LIABILITIES | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 103,090 | $ | 92,358 | ||||
Accrued employees’ compensation and withholdings | 89,167 | 113,994 | ||||||
Deferred revenue and customer advances | 190,920 | 85,527 | ||||||
Other accrued liabilities | 47,150 | 43,727 | ||||||
Contingent consideration | 1,050 | 15,500 | ||||||
Accrued income taxes | 23,972 | 21,751 | ||||||
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| |||||
Total current liabilities | 455,349 | 372,857 | ||||||
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| |||||
Long-term deferred revenue and customer advances | 26,927 | 25,745 | ||||||
Retirement plans liabilities | 106,618 | 103,531 | ||||||
Deferred tax liabilities | 16,110 | 26,663 | ||||||
Long-term other accrued liabilities | 33,411 | 32,156 | ||||||
Long-term contingent consideration | 23,864 | 21,936 | ||||||
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| |||||
Total liabilities | 662,279 | 582,888 | ||||||
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Commitments and contingencies (See Note P) | ||||||||
SHAREHOLDERS’ EQUITY | ||||||||
Common stock, $0.125 par value, 1,000,000 shares authorized; 202,841 and 203,641 shares issued and outstanding at July 3, 2016 and December 31, 2015, respectively | 25,355 | 25,455 | ||||||
Additional paid-in capital | 1,505,863 | 1,480,647 | ||||||
Accumulated other comprehensive income (loss) | 2,293 | (8,144 | ) | |||||
Retained earnings | 212,068 | 467,828 | ||||||
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| |||||
Total shareholders’ equity | 1,745,579 | 1,965,786 | ||||||
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| |||||
Total liabilities and shareholders’ equity | $ | 2,407,858 | $ | 2,548,674 | ||||
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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, 2014,2015, are an integral part of the condensed
consolidated financial statements.
TERADYNE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMEOPERATIONS
(Unaudited)
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
October 4, 2015 | September 28, 2014 | October 4, 2015 | September 28, 2014 | |||||||||||||
(in thousands) | ||||||||||||||||
Net income | $ | 71,453 | $ | 82,949 | $ | 207,118 | $ | 185,083 | ||||||||
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Other comprehensive income (loss), net of tax: | ||||||||||||||||
Foreign currency translation adjustment, net of tax of $0 | 3,267 | — | (3,000 | ) | — | |||||||||||
Available-for-sale marketable securities: | ||||||||||||||||
Unrealized gains (losses) on marketable securities arising during period, net of tax of $48, $(139), $(896), $1,103 | 283 | (138 | ) | (593 | ) | 2,166 | ||||||||||
Less: Reclassification adjustment for gains included in net income, net of tax of $(126), $(348), $(335), $(591) | (247 | ) | (638 | ) | (808 | ) | (1,086 | ) | ||||||||
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36 | (776 | ) | (1,401 | ) | 1,080 | |||||||||||
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), $(127), $(127) | (74 | ) | (74 | ) | (221 | ) | (221 | ) | ||||||||
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Other comprehensive income (loss) | 3,229 | (850 | ) | (4,622 | ) | 859 | ||||||||||
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Comprehensive income | $ | 74,682 | $ | 82,099 | $ | 202,496 | $ | 185,942 | ||||||||
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For the Three Months Ended | For the Six Months Ended | |||||||||||||||
July 3, 2016 | July 5, 2015 | July 3, 2016 | July 5, 2015 | |||||||||||||
(in thousands, except per share amount) | ||||||||||||||||
Revenues: | ||||||||||||||||
Products | $ | 456,832 | $ | 437,243 | $ | 814,972 | $ | 709,568 | ||||||||
Services | 74,960 | 75,496 | 147,815 | 145,572 | ||||||||||||
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Total revenues | 531,792 | 512,739 | 962,787 | 855,140 | ||||||||||||
Cost of revenues: | ||||||||||||||||
Cost of products | 215,795 | 181,491 | 383,350 | 300,487 | ||||||||||||
Cost of services | 33,127 | 32,680 | 66,234 | 63,662 | ||||||||||||
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Total cost of revenues (exclusive of acquired intangible assets amortization shown separately below) | 248,922 | 214,171 | 449,584 | 364,149 | ||||||||||||
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Gross profit | 282,870 | 298,568 | 513,203 | 490,991 | ||||||||||||
Operating expenses: | ||||||||||||||||
Engineering and development | 76,109 | 75,832 | 149,573 | 147,282 | ||||||||||||
Selling and administrative | 81,425 | 77,073 | 160,599 | 149,114 | ||||||||||||
Acquired intangible assets amortization | 16,244 | 15,258 | 36,238 | 29,066 | ||||||||||||
Acquired intangible assets impairment | 83,339 | — | 83,339 | — | ||||||||||||
Goodwill impairment | 254,946 | — | 254,946 | — | ||||||||||||
Restructuring and other | 2,608 | (385 | ) | 4,195 | (385 | ) | ||||||||||
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Total operating expenses | 514,671 | 167,778 | 688,890 | 325,077 | ||||||||||||
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(Loss) income from operations | (231,801 | ) | 130,790 | (175,687 | ) | 165,914 | ||||||||||
Non-operating (income) expense: | ||||||||||||||||
Interest income | (1,666 | ) | (1,674 | ) | (3,308 | ) | (3,490 | ) | ||||||||
Interest expense | 691 | 444 | 1,401 | 606 | ||||||||||||
Other (income) expense, net | (9 | ) | (116 | ) | (155 | ) | (5,776 | ) | ||||||||
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(Loss) income before income taxes | (230,817 | ) | 132,136 | (173,625 | ) | 174,574 | ||||||||||
Income tax (benefit) provision | (7,271 | ) | 29,257 | (65 | ) | 38,908 | ||||||||||
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Net (loss) income | $ | (223,546 | ) | $ | 102,879 | $ | (173,560 | ) | $ | 135,666 | ||||||
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Net (loss) income per common share: | ||||||||||||||||
Basic | $ | (1.10 | ) | $ | 0.48 | $ | (0.85 | ) | $ | 0.63 | ||||||
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Diluted | $ | (1.10 | ) | $ | 0.48 | $ | (0.85 | ) | $ | 0.62 | ||||||
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Weighted average common shares—basic | 203,018 | 213,845 | 203,645 | 215,516 | ||||||||||||
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Weighted average common shares—diluted | 203,018 | 215,496 | 203,645 | 217,154 | ||||||||||||
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Cash dividend declared per common share | $ | 0.06 | $ | 0.06 | $ | 0.12 | $ | 0.12 | ||||||||
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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, 2014,2015, are an integral part of the condensed
consolidated financial statements.
TERADYNE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSCOMPREHENSIVE INCOME
(Unaudited)
For the Nine Months Ended | ||||||||
October 4, 2015 | September 28, 2014 | |||||||
(in thousands) | ||||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 207,118 | $ | 185,083 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation | 52,531 | 52,832 | ||||||
Amortization | 52,159 | 62,122 | ||||||
Stock-based compensation | 23,080 | 31,873 | ||||||
Provision for excess and obsolete inventory | 18,939 | 21,505 | ||||||
Non-cash charge for the sale of inventories revalued at the date of acquisition | 1,567 | — | ||||||
Tax benefit related to employee stock compensation awards | (3,213 | ) | (1,726 | ) | ||||
Contingent consideration adjustment | (2,600 | ) | (630 | ) | ||||
Gain from the sale of an equity investment | (5,406 | ) | — | |||||
Deferred taxes | (13,973 | ) | (8,747 | ) | ||||
Other | 2,523 | 2,110 | ||||||
Changes in operating assets and liabilities, net of business acquired: | ||||||||
Accounts receivable | (91,117 | ) | (163,670 | ) | ||||
Inventories | 33,376 | 38,267 | ||||||
Prepayments and other assets | 15,529 | 47,784 | ||||||
Accounts payable and other accrued expenses | 52,663 | 29,109 | ||||||
Deferred revenue and customer advances | 6,751 | 14,266 | ||||||
Retirement plans contributions | (2,998 | ) | (3,281 | ) | ||||
Accrued income taxes | 25,677 | 10,208 | ||||||
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Net cash provided by operating activities | 372,606 | 317,105 | ||||||
Cash flows from investing activities: | ||||||||
Purchases of property, plant and equipment | (66,727 | ) | (146,352 | ) | ||||
Acquisition of business, net of cash acquired | (282,741 | ) | — | |||||
Purchases of available-for-sale marketable securities | (957,606 | ) | (844,056 | ) | ||||
Proceeds from sales of available-for-sale marketable securities | 843,734 | 236,060 | ||||||
Proceeds from maturities of available-for-sale marketable securities | 330,363 | 495,565 | ||||||
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 | (126,473 | ) | (254,392 | ) | ||||
Cash flows from financing activities: | ||||||||
Issuance of common stock under employee stock purchase and stock option plans | 18,145 | 21,030 | ||||||
Tax benefit related to employee stock compensation awards | 3,213 | 1,726 | ||||||
Repurchase of common stock | (226,843 | ) | — | |||||
Dividend payments | (38,434 | ) | (24,428 | ) | ||||
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 | (246,172 | ) | (192,647 | ) | ||||
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Decrease in cash and cash equivalents | (39 | ) | (129,934 | ) | ||||
Cash and cash equivalents at beginning of period | 294,256 | 341,638 | ||||||
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Cash and cash equivalents at end of period | $ | 294,217 | $ | 211,704 | ||||
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For the Three Months Ended | For the Six Months Ended | |||||||||||||||
July 3, 2016 | July 5, 2015 | July 3, 2016 | July 5, 2015 | |||||||||||||
(in thousands) | ||||||||||||||||
Net (loss) income | $ | (223,546 | ) | $ | 102,879 | $ | (173,560 | ) | $ | 135,666 | ||||||
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Other comprehensive (loss) income, net of tax: | ||||||||||||||||
Foreign currency translation adjustments, net of tax of $0, $0, $0, $0 | (5,041 | ) | (6,267 | ) | 5,229 | (6,267 | ) | |||||||||
Available-for-sale marketable securities: | ||||||||||||||||
Unrealized gains (losses) on marketable securities arising during period, net of tax of $1,102, $(1,648), $2,354, $(944), respectively | 2,375 | (2,675 | ) | 5,446 | (876 | ) | ||||||||||
Less: Reclassification adjustment for gains included in net income, net of tax of $(13), $(40), $(2), $(209), respectively | (51 | ) | (231 | ) | (134 | ) | (561 | ) | ||||||||
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2,324 | (2,906 | ) | 5,312 | (1,437 | ) | |||||||||||
Defined benefit pension and post-retirement plans: | ||||||||||||||||
Amortization of prior service income included in net periodic pension and post-retirement cost/income, net of tax of $(47), $(42), $(93), $(85), respectively | (83 | ) | (74 | ) | (163 | ) | (147 | ) | ||||||||
Prior service income arising during period, net of tax of $34, $0, $34, $0, respectively | 59 | — | 59 | — | ||||||||||||
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(24 | ) | (74 | ) | (104 | ) | (147 | ) | |||||||||
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Other comprehensive (loss) income | (2,741 | ) | (9,247 | ) | 10,437 | (7,851 | ) | |||||||||
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Comprehensive (loss) income | $ | (226,287 | ) | $ | 93,632 | $ | (163,123 | ) | $ | 127,815 | ||||||
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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, 2014,2015, are an integral part of the condensed
consolidated financial statements.
TERADYNE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Six Months Ended | ||||||||
July 3, 2016 | July 5, 2015 | |||||||
(in thousands) | ||||||||
Cash flows from operating activities: | ||||||||
Net (loss) income | $ | (173,560 | ) | $ | 135,666 | |||
Adjustments to reconcile net (loss) income to net cash provided by operating activities: | ||||||||
Depreciation | 32,168 | 36,230 | ||||||
Amortization | 37,180 | 31,395 | ||||||
Stock-based compensation | 15,457 | 15,405 | ||||||
Provision for excess and obsolete inventory | 12,115 | 15,881 | ||||||
Goodwill impairment | 254,946 | — | ||||||
Intangible assets impairment | 83,339 | — | ||||||
Deferred taxes | (21,458 | ) | (10,371 | ) | ||||
Contingent consideration adjustment | 2,478 | (1,600 | ) | |||||
Impairment of fixed assets | 4,179 | — | ||||||
Property insurance recovery | (5,051 | ) | — | |||||
Retirement plans actuarial gains | (1,862 | ) | — | |||||
Gain from the sale of an equity investment | — | (5,406 | ) | |||||
Non-cash charge for the sale of inventories revalued at date of acquisition | — | 595 | ||||||
Tax benefit related to employee stock compensation awards | — | (892 | ) | |||||
Other | 576 | 1,154 | ||||||
Changes in operating assets and liabilities, net of business acquired: | ||||||||
Accounts receivable | (138,230 | ) | (142,493 | ) | ||||
Inventories | 30,222 | 23,500 | ||||||
Prepayments and other assets | (13,657 | ) | 14,054 | |||||
Accounts payable and other accrued expenses | (15,192 | ) | 53,392 | |||||
Deferred revenue and customer advances | 106,072 | 5,685 | ||||||
Retirement plans contributions | (2,298 | ) | (1,999 | ) | ||||
Income taxes | 6 | 23,261 | ||||||
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Net cash provided by operating activities | 207,430 | 193,457 | ||||||
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Cash flows from investing activities: | ||||||||
Purchases of property, plant and equipment | (46,593 | ) | (46,110 | ) | ||||
Purchases of available-for-sale marketable securities | (437,311 | ) | (590,250 | ) | ||||
Proceeds from sales of available-for-sale marketable securities | 334,798 | 631,400 | ||||||
Proceeds from maturities of available-for-sale marketable securities | 128,024 | 231,416 | ||||||
Proceeds from property insurance | 5,051 | — | ||||||
Acquisition of business, net of cash acquired | — | (282,332 | ) | |||||
Proceeds from the sale of an equity investment | — | 5,406 | ||||||
Proceeds from life insurance | — | 1,098 | ||||||
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Net cash used for investing activities | (16,031 | ) | (49,372 | ) | ||||
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Cash flows from financing activities: | ||||||||
Issuance of common stock under employee stock purchase and stock option plans | 17,896 | 17,878 | ||||||
Repurchase of common stock | (56,783 | ) | (128,316 | ) | ||||
Dividend payments | (24,425 | ) | (25,857 | ) | ||||
Payment of contingent consideration | (11,697 | ) | — | |||||
Tax benefit related to employee stock compensation awards | — | 892 | ||||||
Payment of revolving credit facility costs | — | (2,253 | ) | |||||
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Net cash used for financing activities | (75,009 | ) | (137,656 | ) | ||||
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Increase in cash and cash equivalents | 116,390 | 6,429 | ||||||
Cash and cash equivalents at beginning of period | 264,705 | 294,256 | ||||||
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Cash and cash equivalents at end of period | $ | 381,095 | $ | 300,685 | ||||
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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, 2015, are an integral part of the condensed
consolidated financial statements.
TERADYNE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A. The Company
Teradyne, Inc. (“Teradyne”) is a leading global supplier of automation equipment for test and industrial applications. Teradyne designs, develops, manufactures and sells automatic test systems used to test semiconductors, wireless products, data storage and complex electronics systems in the consumer electronics, wireless, automotive, industrial, computing, communications, and aerospace and defense industries. Teradyne’s industrial automation products include collaborative robots used by global manufacturing and light industrial customers to improve quality, increase manufacturing efficiency and decrease manufacturing costs. Teradyne’s automatic test equipment and industrial automation 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 presentationstatement of such interim financial statements. Certain prior year amounts were reclassified to conform to the current year presentation. The December 31, 20142015 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 27, 2015,29, 2016, for the year ended December 31, 2014.2015.
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 RecognitionC. Recently Issued Accounting Pronouncements
Teradyne recognizes revenue when there is persuasive evidence of an arrangement, title and risk of loss have passed, delivery has occurred orOn March 31, 2016, 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 upon shipment or at delivery destination point, even if Teradyne 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”) issued Accounting Standards Update (“ASU”) ASU 2016-09,“Compensation-Stock Compensation (Topic 718): Improvements to EmployeeShare-Based Payment Accounting.” This ASU changes how companies account for certain aspects of share-based payment awards to employees, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. This pronouncement is effective for annual periods beginning after December 15, 2016. Early adoption is permitted. Teradyne is currently evaluating the impact of this ASU on its financial position, results of operations and statement of cash flows.
In February 2016, the FASB issued ASU 2016-02,“Leases (Topic 842).” The guidance in this ASU supersedes the lease recognition requirements in Accounting Standards Codification (“ASC”) 605-20,Topic 840,“Separately Priced Extended Warranty and Product Maintenance Contracts” and ASC 605-25,“Revenue Recognition Multiple-Element Arrangements.Leases.” Service revenue is recognized overThe new standard establishes a right-of-use (“ROU”) model that requires a lessee to record an ROU asset and a lease liability on 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 currencybalance sheet for all non-U.S. subsidiaries isleases with terms longer than twelve months. Leases will be classified as either finance or operating, with classification affecting 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 endpattern 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
In September 2015, the FASB issued Accounting Standard Update (“ASU”) 2015-16,“Business Combinations (Topic 805)—Simplifying the Accounting for Measurement-Period Adjustments.” ASU 2015-16 requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement periodrecognition in the reporting period in which the adjustments are identified, including the cumulative effect of the change in provisional amount as if the accounting had been completed at the acquisition date. ASU 2015-16income statement. The new standard is effective for reportingannual periods beginning after December 15, 2018, including interim periods within those years, with early adoption permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. Teradyne is currently evaluating the impact of this ASU on its financial position and results of operations.
In January 2016, the FASB issued ASU 2016-01,“Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.”This ASU provides guidance for the recognition, measurement, presentation, and disclosure of financial instruments. The new pronouncement revises accounting related to equity investments and the presentation of certain fair value changes for financial liabilities measured at fair value. Among other things, it amends the presentation and disclosure requirements of equity securities that do not result in consolidation and are not accounted for under the equity method. Changes in the fair value of these equity securities will be recognized directly in net income. This pronouncement is effective for fiscal years and interim periods within those years beginning after December 15, 2017. Teradyne is currently evaluating the impact of this ASU on its financial position and results of operations.
In November 2015, the FASB issued ASU 2015-17,“Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes.” ASU 2015-17 simplifies the presentation of deferred income taxes by eliminating the separate classification of deferred income tax liabilities and assets into current and noncurrent amounts in the balance sheet. The amendments in the update require that all deferred tax liabilities and assets be classified as noncurrent in the balance sheet. This ASU is effective for annual periods beginning after December 15, 2016, and interim periods within those years and may be applied prospectively.either prospectively or retrospectively to all periods presented. Early adoption is permitted. Teradyne early adopted this ASU prospectively in the three months ended October 4, 2015. Adoptionfirst quarter of this ASU did not have a material impact on Teradyne’s financial position and results of operations.2016.
OnIn April 7, 2015, the FASB issued ASU 2015-03,“Simplifying the Presentation of Debt Issuance Costs,” which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability, consistent with the presentation for debt discount. ASU 2015-03 does not specifically address requirements for the presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements. On August 8, 2015, the FASB issued ASU 2015-15, “Interest—Imputation of Interest (Subtopic 835-30)” clarifying that debt issuance costs related to line-of-credit arrangements could be presented as an asset and amortized over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. For Teradyne adopted this ASU in the standard is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those years. Thisfirst quarter of 2016. Adoption of this ASU is expected todid not have noa material impact on Teradyne’s financial position and results of operations.
In May 2014, the FASB issued 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. In August 2015, FASB issued ASU 2015-14, which deferred the effective date of the new revenue standard by 1one year. For Teradyne, the standard will be effective in the first quarter of 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.efficiency and decrease manufacturing costs. Universal Robots is a separate operating and reportable segment, Industrial Automation.
The total purchase price of $317.7$315.4 million consisted of $283.9$283.8 million of cash paid and $33.8$31.6 million of contingent consideration, measured at fair value. The contingent consideration was valued using a Monte Carlo simulation based on the following key inputs: (1) forecasted revenue; (2) forecast for earnings before income taxes, depreciation and amortization (“EBITDA”); (3) revenue volatility; (4) EBITDA volatility; and (5) discount rate. The contingent consideration is payable upon the achievement of certain thresholds and targets for earnings before income taxes, depreciation and amortization (“EBITDA”)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 Based on Universal Robots’ calendar year 2015 EBITDA results, in the first quarter of 2016, Teradyne paid $15 million or 100% of the eligible EBITDA contingent consideration utilizedamount.
In the following assumptions: (1) probabilityfourth quarter of meeting each target; (2) expected timing of meeting each target;2015, Teradyne finalized the valuation 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 adjustedpurchase price allocation for the levelacquisition, which resulted in a $5.4 million decrease in goodwill as a result of difficulty to achieve anda $2.2 million decrease in the termfair value of the earn out payment. A significant portion of the risk in achieving the contingent consideration, was captureda $1.6 million increase in the probabilities assigned to meeting each target.intangible assets and a $1.6 million decrease in acquired liabilities.
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 $227.0$221.1 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. Teradyne expects to finalize the purchase price calculation in the fourth quarter of 2015.
The following table represents the preliminaryfinal allocation of the purchase price:
Purchase Price Allocation | Purchase Price Allocation | |||||||
(in thousands) | (in thousands) | |||||||
Goodwill | $ | 227,021 | $ | 221,128 | ||||
Intangible assets | 119,950 | 121,590 | ||||||
Tangible assets acquired and liabilities assumed: | ||||||||
Current assets | 10,853 | 10,853 | ||||||
Non-current assets | 3,415 | 3,415 | ||||||
Accounts payable and current liabilities | (11,973 | ) | (11,976 | ) | ||||
Long-term deferred tax liabilities | (25,736 | ) | (26,653 | ) | ||||
Long-term other liabilities | (5,844 | ) | (2,920 | ) | ||||
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Total purchase price | $317,686 | $ | 315,437 | |||||
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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 | ||||||
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Total intangible assets | $ | 119,950 | 5.6 | |||||
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For the three months ended October 4, 2015, Universal Robots contributed $16.1 million of revenues and had a $(4.8) million loss from operations before income taxes.
Fair Value | Estimated Useful Life | |||||||
(in thousands) | (in years) | |||||||
Developed technology | $ | 89,240 | 4.9 | |||||
Trademarks and tradenames | 22,920 | 10.0 | ||||||
Customer relationships | 9,430 | 2.0 | ||||||
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Total intangible assets | $ | 121,590 | 5.6 | |||||
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For the period from June 12, 2015 to October 4,July 5, 2015, Universal Robots contributed $19.8$3.7 million of revenues and had a $(6.5)$(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 Nine Months Ended | For the Three Months Ended | For the Six Months Ended | |||||||||||||||||
September 28, 2014 | October 4, 2015 | September 28, 2014 | July 5, 2015 | July 5, 2015 | ||||||||||||||||
Revenue | $ | 485,842 | $ | 1,339,181 | $ | 1,347,616 | $ | 520,217 | $ | 873,188 | ||||||||||
Net income | 76,112 | 197,745 | 162,474 | 99,719 | 126,644 | |||||||||||||||
Net income per common share: | ||||||||||||||||||||
Basic | $ | 0.37 | $ | 0.93 | $ | 0.82 | $ | 0.47 | $ | 0.54 | ||||||||||
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Diluted | $ | 0.35 | $ | 0.92 | $ | 0.73 | $ | 0.46 | $ | 0.58 | ||||||||||
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Pro forma results for the ninethree and six months ended October 4,July 5, 2015 were adjusted to exclude $1.6$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 and $1.0 million of acquisition related costs incurred in 2015.inventory.
Pro forma results for the nine month ended September 28, 2014, were adjusted to include $1.6 million of non-recurring expense related to the 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.
In the three and nine months ended October 4, 2015, the fair value of contingent consideration for the earn-out in connection with the acquisition of AIT was reduced by $1.0 million due to a decrease in the revenue probabilities in the periods of 2015 and 2016.
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 | ) | ||
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Total purchase price | $ | 21,243 | ||
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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 | ||||||
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Total intangible assets | $ | 9,080 | 4.8 | |||||
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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.
Marketable Securities
Teradyne accounts for its investments in debt and equity securities in accordance with the provisions of Accounting Standards Codification (“ASC”)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 October 4, 2015,July 3, 2016, 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 October 4, 2015.July 3, 2016. As defined in ASC 820-10, “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.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, and is considered a Level 2 input.input; or
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.
Teradyne’s available-for-sale fixed incomedebt and equity securities are classified as Level 1 and Level 2. ContingentAcquisition-related contingent consideration is classified as Level 3. Teradyne’s contingent consideration is valued using a Monte Carlo simulation model or a probability weighted discounted cash flow model. The vast majority of Level 2 securities are fixed income securities 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 lossesgains recorded in the ninethree and six months ended October 4, 2015July 3, 2016 were $0.2 million. There were no realized$0.3 million and $0.4 million, respectively. Realized losses recorded in the three and ninesix months ended September 28, 2014. Realized gains recorded in the three and nine months ended October 4, 2015July 3, 2016 were $0.4$0.2 million and $1.4$0.3 million, respectively. Realized gains recorded in the three and ninesix months ended September 28, 2014July 5, 2015 were $0.4 million and $1.0 million, respectively. Realized losses recorded in the three and $1.7six months ended July 5, 2015 were $0.1 million and $0.1 million, respectively. Realized gains are included in interest income and realized losses are included in interest expense. 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 ninethree and six months ended October 4,July 3, 2016 and July 5, 2015, and September 28, 2014, there were no transfers in or out of Level 1, Level 2 or Level 3 financial instruments.
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 October 4, 2015July 3, 2016 and December 31, 2014.2015.
October 4, 2015 | July 3, 2016 | |||||||||||||||||||||||||||||||
Quoted Prices in Active Markets for Identical Instruments (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | Quoted Prices in Active Markets for Identical Instruments (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||
Cash | $ | 159,858 | $ | — | $ | — | $ | 159,858 | $ | 196,155 | $ | — | $ | — | $ | 196,155 | ||||||||||||||||
Cash equivalents | 125,879 | 8,480 | — | 134,359 | 125,314 | 59,626 | — | 184,940 | ||||||||||||||||||||||||
Available-for-sale securities: | ||||||||||||||||||||||||||||||||
U.S. Treasury securities | — | 349,653 | — | 349,653 | — | 475,631 | — | 475,631 | ||||||||||||||||||||||||
Corporate debt securities | — | 143,598 | — | 143,598 | ||||||||||||||||||||||||||||
Commercial paper | — | 32,978 | — | 32,978 | ||||||||||||||||||||||||||||
Certificates of deposit and time deposits | — | 27,974 | — | 27,974 | ||||||||||||||||||||||||||||
U.S. government agency securities | — | 213,491 | — | 213,491 | — | 27,218 | — | 27,218 | ||||||||||||||||||||||||
Corporate debt securities | — | 114,807 | — | 114,807 | ||||||||||||||||||||||||||||
Certificates of deposit and time deposits | — | 45,677 | — | 45,677 | ||||||||||||||||||||||||||||
Commercial paper | — | 45,510 | — | 45,510 | ||||||||||||||||||||||||||||
Equity and debt mutual funds | 13,377 | — | — | 13,377 | 16,674 | — | — | 16,674 | ||||||||||||||||||||||||
Non-U.S. government securities | — | 426 | — | 426 | — | 626 | — | 626 | ||||||||||||||||||||||||
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Total | $ | 299,114 | $ | 778,044 | $ | — | $ | 1,077,158 | 338,143 | 767,651 | — | 1,105,794 | ||||||||||||||||||||
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Derivative assets | — | 109 | — | 109 | — | 5 | — | 5 | ||||||||||||||||||||||||
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Total | $ | 299,114 | $ | 778,153 | $ | — | $ | 1,077,267 | $ | 338,143 | $ | 767,656 | $ | — | $ | 1,105,799 | ||||||||||||||||
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Liabilities | ||||||||||||||||||||||||||||||||
Contingent consideration | $ | — | $ | — | $ | 34,595 | $ | 34,595 | $ | — | $ | — | $ | 24,914 | $ | 24,914 | ||||||||||||||||
Derivative liabilities | — | 97 | — | 97 | — | 93 | — | 93 | ||||||||||||||||||||||||
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Total | $ | — | $ | 97 | $ | 34,595 | $ | 34,692 | $ | — | $ | 93 | $ | 24,914 | $ | 25,007 | ||||||||||||||||
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Reported as follows:
(Level 1) | (Level 2) | (Level 3) | Total | (Level 1) | (Level 2) | (Level 3) | Total | |||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 285,737 | $ | 8,480 | $ | — | $ | 294,217 | $ | 321,469 | $ | 59,626 | $ | — | $ | 381,095 | ||||||||||||||||
Marketable securities | — | 525,381 | — | 525,381 | — | 442,154 | — | 442,154 | ||||||||||||||||||||||||
Long-term marketable securities | 13,377 | 244,183 | — | 257,560 | 16,674 | 265,871 | — | 282,545 | ||||||||||||||||||||||||
Prepayments | — | 109 | — | 109 | — | 5 | — | 5 | ||||||||||||||||||||||||
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$ | 299,114 | $ | 778,153 | $ | — | $ | 1,077,267 | $ | 338,143 | $ | 767,656 | $ | — | $ | 1,105,799 | |||||||||||||||||
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Liabilities | . | |||||||||||||||||||||||||||||||
Other current liabilities | $ | — | $ | 97 | $ | — | $ | 97 | ||||||||||||||||||||||||
Other accrued liabilities | $ | — | $ | 93 | $ | — | $ | 93 | ||||||||||||||||||||||||
Contingent consideration | — | — | 14,447 | 14,447 | — | — | 1,050 | 1,050 | ||||||||||||||||||||||||
Long-term contingent consideration | — | — | 20,148 | 20,148 | — | — | 23,864 | 23,864 | ||||||||||||||||||||||||
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$ | — | $ | 97 | $ | 34,595 | $ | 34,692 | $ | — | $ | 93 | $ | 24,914 | $ | 25,007 | |||||||||||||||||
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December 31, 2014 | December 31, 2015 | |||||||||||||||||||||||||||||||
Quoted Prices in Active Markets for Identical Instruments (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | Quoted Prices in Active Markets for Identical Instruments (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||
Cash | $ | 111,471 | $ | — | $ | — | $ | 111,471 | $ | 213,336 | $ | — | $ | — | $ | 213,336 | ||||||||||||||||
Cash equivalents | 160,218 | 22,567 | — | 182,785 | 49,241 | 2,128 | — | 51,369 | ||||||||||||||||||||||||
Available-for-sale securities: | ||||||||||||||||||||||||||||||||
Available for sale securities: | ||||||||||||||||||||||||||||||||
U.S. Treasury securities | — | 402,154 | — | 402,154 | — | 419,958 | — | 419,958 | ||||||||||||||||||||||||
Corporate debt securities | — | 161,634 | — | 161,634 | ||||||||||||||||||||||||||||
U.S. government agency securities | — | 258,502 | — | 258,502 | — | 83,952 | — | 83,952 | ||||||||||||||||||||||||
Corporate debt securities | — | 141,467 | — | 141,467 | ||||||||||||||||||||||||||||
Certificates of deposit and time deposits | — | 43,394 | — | 43,394 | ||||||||||||||||||||||||||||
Commercial paper | — | 140,638 | — | 140,638 | — | 20,308 | — | 20,308 | ||||||||||||||||||||||||
Certificates of deposit and time deposits | — | 49,036 | — | 49,036 | ||||||||||||||||||||||||||||
Equity and debt mutual funds | 12,333 | — | — | 12,333 | 13,954 | — | — | 13,954 | ||||||||||||||||||||||||
Non-U.S. government securities | — | 446 | — | 446 | — | 424 | — | 424 | ||||||||||||||||||||||||
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Total | $ | 284,022 | $ | 1,014,810 | $ | — | $ | 1,298,832 | $ | 276,531 | $ | 731,798 | $ | — | $ | 1,008,329 | ||||||||||||||||
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Derivative assets | — | 220 | — | 220 | — | 109 | — | 109 | ||||||||||||||||||||||||
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Total | $ | 284,022 | $ | 1,015,030 | $ | — | $ | 1,299,052 | $ | 276,531 | $ | 731,907 | $ | — | $ | 1,008,438 | ||||||||||||||||
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Liabilities | ||||||||||||||||||||||||||||||||
Contingent consideration | $ | — | $ | — | $ | 3,350 | $ | 3,350 | $ | — | $ | — | $ | 37,436 | $ | 37,436 | ||||||||||||||||
Derivative liabilities | — | 369 | — | 369 | — | 146 | — | 146 | ||||||||||||||||||||||||
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Total | $ | — | $ | 369 | $ | 3,350 | $ | 3,719 | $ | — | $ | 146 | $ | 37,436 | $ | 37,582 | ||||||||||||||||
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Reported as follows:
(Level 1) | (Level 2) | (Level 3) | Total | (Level 1) | (Level 2) | (Level 3) | Total | |||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 271,689 | $ | 22,567 | $ | — | $ | 294,256 | $ | 262,577 | $ | 2,128 | $ | — | $ | 264,705 | ||||||||||||||||
Marketable securities | — | 533,787 | — | 533,787 | — | 477,696 | — | 477,696 | ||||||||||||||||||||||||
Long-term marketable securities | 12,333 | 458,456 | — | 470,789 | 13,954 | 251,974 | — | 265,928 | ||||||||||||||||||||||||
Prepayments | — | 220 | — | 220 | — | 109 | — | 109 | ||||||||||||||||||||||||
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| |||||||||||||||||||||||||
$ | 284,022 | $ | 1,015,030 | $ | — | $ | 1,299,052 | $ | 276,531 | $ | 731,907 | $ | — | $ | 1,008,438 | |||||||||||||||||
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Liabilities | ||||||||||||||||||||||||||||||||
Other current liabilities | $ | — | $ | 369 | $ | — | 369 | |||||||||||||||||||||||||
Other accrued liabilities | $ | — | $ | 146 | $ | — | $ | 146 | ||||||||||||||||||||||||
Contingent consideration | — | — | 895 | 895 | — | — | 15,500 | 15,500 | ||||||||||||||||||||||||
Long-term contingent consideration | — | — | 2,455 | 2,455 | — | — | 21,936 | 21,936 | ||||||||||||||||||||||||
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$ | — | $ | 369 | $ | 3,350 | $ | 3,719 | $ | — | $ | 146 | $ | 37,436 | $ | 37,582 | |||||||||||||||||
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Changes in the fair value of Level 3 contingent consideration for the three and ninesix months ended October 4,July 3, 2016 and July 5, 2015 and September 28, 2014 were as follows:
For the Three Months Ended | For the Nine Months Ended | For the Three Months Ended | For the Six Months Ended | |||||||||||||||||||||||||||||
October 4, 2015 | September 28, 2014 | October 4, 2015 | September 28, 2014 | July 3, 2016 | July 5, 2015 | July 3, 2016 | July 5, 2015 | |||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||
Balance at beginning of period | $ | 35,595 | $ | 2,230 | $ | 3,350 | $ | 2,230 | $ | 23,609 | $ | 3,350 | $ | 37,436 | $ | 3,350 | ||||||||||||||||
Acquisition of Universal Robots | — | — | 33,845 | — | — | 33,845 | — | 33,845 | ||||||||||||||||||||||||
Fair value adjustment(a)(b) | (1,000 | ) | (630 | ) | (2,600 | ) | (630 | ) | ||||||||||||||||||||||||
Payments (a) | — | — | (15,000 | ) | — | |||||||||||||||||||||||||||
Fair value adjustment (b)(c)(d) | 1,305 | (1,600 | ) | 2,478 | (1,600 | ) | ||||||||||||||||||||||||||
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Balance at end of period | $ | 34,595 | $ | 1,600 | $ | 34,595 | $ | 1,600 | $ | 24,914 | $ | 35,595 | $ | 24,914 | $ | 35,595 | ||||||||||||||||
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(a) | In the six months ended July 3, 2016, based on Universal Robots’ calendar year 2015 EBITDA results, Teradyne paid $15 million or 100% of the eligible EBITDA contingent consideration amount. |
(b) | In the three and |
In the |
(d) | In the three and six months ended July 5, 2015, the fair value measurement of the contingent consideration for the earn-out in connection with the acquisition of ZTEC Instruments, Inc. (“ZTEC”) was reduced |
The following table provides quantitative information associated with the fair value measurement of Teradyne’s Level 3 financial instruments:
Liability | October 4, 2015 Fair Value | Valuation Technique | Unobservable Inputs | Weighted Average | July 3, 2016 Fair Value | Valuation Technique | Unobservable Inputs | Weighted Average | ||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||
Contingent consideration (Universal Robots) | $33,845 | Income approach- discounted cash flow | EBITDA earn-out for calendar year 2015 probability | 99 | % | td6,922 |
| Monte Carlo Simulation |
| Revenue for the period July 1, 2015—December 31, 2017 volatility | 15.6% | |||||||||||||
Discount rate | 6.0 | % | Discount Rate | 4.0% | ||||||||||||||||||||
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 | % | $6,942 | | Monte Carlo Simulation | | Revenue for the period July 1, 2015—December 31, 2018 volatility | 15.6% | ||||||||||||||||
Discount rate | 10.0 | % | Discount Rate | 4.0% | ||||||||||||||||||||
Contingent consideration (AIT) | $750 | Income approach- discounted cash flow | Revenue earn-out for calendar years 2015 and 2016 probability | 36 | % | td,050 |
| Income approach- discounted cash flow |
| Revenue for calendar year 2016 probability Discount Rate |
| 100% 4.0% |
| |||||||||||
Discount rate | 4.7 | % |
TheAs of July 3, 2016, the significant unobservable inputs used in the Monte Carlo simulation to fair value the Universal Robots fair value measurement of contingent consideration are the probabilities of successful achievement ofinclude forecasted revenue, thresholdsrevenue volatility 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.rate. Increases or decreases in the revenue and EBITDA probabilities and the period in which results will be achievedinputs would result in a higher or lower fair value measurement. The maximum amountpayment for each of contingent consideration in connection with the acquisition oftwo Universal Robots that could be paidrevenue earn-outs is $65$25.0 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 thresholdsthreshold and targets,target, 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 withpayment for the AIT acquisition end on December 31, 2015 and December 31, 2016.
In the three and nine months ended October 4, 2015, the fair value of contingent consideration for the earn-out in connection with the acquisition of AIT was reduced by $1.0 million due to a decrease in the revenue probabilities in the periods of 2015 and 2016.is $1.1 million.
The carrying amounts and fair values of Teradyne’s financial instruments at October 4, 2015July 3, 2016 and December 31, 20142015 were as follows:
October 4, 2015 | December 31, 2014 | July 3, 2016 | December 31, 2015 | |||||||||||||||||||||||||||||
Carrying Value | Fair Value | Carrying Value | Fair Value | Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 294,217 | $ | 294,217 | $ | 294,256 | $ | 294,256 | $ | 381,095 | $ | 381,095 | $ | 264,705 | $ | 264,705 | ||||||||||||||||
Marketable securities | 782,941 | 782,941 | 1,004,576 | 1,004,576 | 724,699 | 724,699 | 743,624 | 743,624 | ||||||||||||||||||||||||
Derivative assets | 109 | 109 | 220 | 220 | 5 | 5 | 109 | 109 | ||||||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||
Contingent consideration | 34,595 | 34,595 | 3,350 | 3,350 | 24,914 | 24,914 | 37,436 | 37,436 | ||||||||||||||||||||||||
Derivative liabilities | 97 | 97 | 369 | 369 | 93 | 93 | 146 | 146 |
The fair values of accounts receivable, net and accounts payable approximate the carrying value due to the short-term nature of these instruments.
The following tables summarize the composition of available-for-sale marketable securities at October 4, 2015July 3, 2016 and December 31, 2014:2015:
October 4, 2015 | July 3, 2016 | |||||||||||||||||||||||||||||||||||||||
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 | $ | 349,464 | $ | 385 | $ | (196 | ) | $ | 349,653 | $ | 19,260 | $ | 473,958 | $ | 1,684 | $ | (11 | ) | $ | 475,631 | $ | 118,777 | ||||||||||||||||||
Corporate debt securities | 140,995 | 3,060 | (457 | ) | 143,598 | 40,862 | ||||||||||||||||||||||||||||||||||
Commercial paper | 32,959 | 19 | — | 32,978 | — | |||||||||||||||||||||||||||||||||||
Certificates of deposit and time deposits | 27,958 | 16 | — | 27,974 | — | |||||||||||||||||||||||||||||||||||
U.S. government agency securities | 213,149 | 342 | — | 213,491 | — | 27,151 | 67 | — | 27,218 | 2,421 | ||||||||||||||||||||||||||||||
Corporate debt securities | 115,130 | 1,305 | (1,628 | ) | 114,807 | 48,369 | ||||||||||||||||||||||||||||||||||
Certificates of deposit and time deposits | 45,652 | 25 | — | 45,677 | 3,505 | |||||||||||||||||||||||||||||||||||
Commercial paper | 45,498 | 12 | — | 45,510 | — | |||||||||||||||||||||||||||||||||||
Equity and debt mutual funds | 12,291 | 1,183 | (97 | ) | 13,377 | 1,900 | 15,278 | 1,424 | (28 | ) | 16,674 | 937 | ||||||||||||||||||||||||||||
Non-U.S. government securities | 426 | — | — | 426 | — | 610 | 16 | — | 626 | — | ||||||||||||||||||||||||||||||
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$ | 781,610 | $ | 3,252 | $ | (1,921 | ) | $ | 782,941 | $ | 73,034 | $ | 718,909 | $ | 6,286 | $ | (496 | ) | $ | 724,699 | $ | 162,997 | |||||||||||||||||||
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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 | $ | 525,052 | $ | 335 | $ | (6 | ) | $ | 525,381 | $ | 27,172 | $ | 441,840 | $ | 336 | $ | (22 | ) | $ | 442,154 | $ | 89,416 | ||||||||||||||||||
Long-term marketable securities | 256,558 | 2,917 | (1,915 | ) | 257,560 | 45,862 | 277,069 | 5,950 | (474 | ) | 282,545 | 73,581 | ||||||||||||||||||||||||||||
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$ | 781,610 | $ | 3,252 | $ | (1,921 | ) | $ | 782,941 | $ | 73,034 | $ | 718,909 | $ | 6,286 | $ | (496 | ) | $ | 724,699 | $ | 162,997 | |||||||||||||||||||
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December 31, 2014 | December 31, 2015 | |||||||||||||||||||||||||||||||||||||||
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 | $ | 402,197 | $ | 362 | $ | (405 | ) | $ | 402,154 | $ | 317,771 | $ | 421,060 | $ | 65 | $ | (1,167 | ) | $ | 419,958 | $ | 379,434 | ||||||||||||||||||
Corporate debt securities | 163,297 | 902 | (2,565 | ) | 161,634 | 145,373 | ||||||||||||||||||||||||||||||||||
U.S. government agency securities | 258,452 | 135 | (85 | ) | 258,502 | 104,642 | 84,032 | 42 | (122 | ) | 83,952 | 55,120 | ||||||||||||||||||||||||||||
Corporate debt securities | 139,374 | 2,414 | (321 | ) | 141,467 | 96,998 | ||||||||||||||||||||||||||||||||||
Certificates of deposit and time deposits | 43,391 | 6 | (3 | ) | 43,394 | 10,527 | ||||||||||||||||||||||||||||||||||
Commercial paper | 140,616 | 26 | (4 | ) | 140,638 | 41,747 | 20,298 | 11 | (1 | ) | 20,308 | 8,646 | ||||||||||||||||||||||||||||
Certificates of deposit and time deposits | 49,048 | 11 | (23 | ) | 49,036 | 20,684 | ||||||||||||||||||||||||||||||||||
Equity and debt mutual funds | 10,492 | 1,870 | (29 | ) | 12,333 | 1,234 | 12,996 | 1,119 | (161 | ) | 13,954 | 2,560 | ||||||||||||||||||||||||||||
Non-U.S. government securities | 446 | — | — | 446 | — | 424 | — | — | 424 | — | ||||||||||||||||||||||||||||||
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$ | 1,000,625 | $ | 4,818 | $ | (867 | ) | $ | 1,004,576 | $ | 583,076 | $ | 745,498 | $ | 2,145 | $ | (4,019 | ) | $ | 743,624 | $ | 601,660 | |||||||||||||||||||
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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 | $ | 533,833 | $ | 99 | $ | (145 | ) | $ | 533,787 | $ | 240,234 | $ | 478,306 | $ | 38 | $ | (648 | ) | $ | 477,696 | $ | 374,785 | ||||||||||||||||||
Long-term marketable securities | 466,792 | 4,719 | (722 | ) | 470,789 | 342,842 | 267,192 | 2,107 | (3,371 | ) | 265,928 | 226,875 | ||||||||||||||||||||||||||||
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$ | 1,000,625 | $ | 4,818 | $ | (867 | ) | $ | 1,004,576 | $ | 583,076 | $ | 745,498 | $ | 2,145 | $ | (4,019 | ) | $ | 743,624 | $ | 601,660 | |||||||||||||||||||
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As of October 4, 2015, unrealized losses on marketable securities were $1.9 million andJuly 3, 2016, the fair market value of investments with unrealized losses was $73.0totaled $163.0 million. Of this value, $0.3$4.0 million had unrealized losses of $0.4 million for greater than one year and $72.7$159.0 million had unrealized losses of $0.1 million for less than one year.
As of December 31, 2014, unrealized losses on marketable securities were $0.9 million and2015, the fair market value of investments with unrealized losses was $583.1totaled $601.7 million. Of this value, $2.3$0.9 million had unrealized losses of $0.5 million for greater than one year and $580.8$600.8 million had unrealized losses of $3.6 million for 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 October 4, 2015July 3, 2016 and December 31, 2014,2015, were temporary.
The contractual maturities of investments held at October 4, 2015July 3, 2016 were as follows:
October 4, 2015 | July 3, 2016 | |||||||||||||||
Cost | Fair Market Value | Cost | Fair Market Value | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
Due within one year | $ | 525,052 | $ | 525,381 | $ | 441,840 | $ | 442,154 | ||||||||
Due after 1 year through 5 years | 199,957 | 200,305 | 218,350 | 218,769 | ||||||||||||
Due after 5 years through 10 years | 6,075 | 6,191 | 4,699 | 4,962 | ||||||||||||
Due after 10 years | 38,235 | 37,687 | 38,742 | 42,140 | ||||||||||||
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Total | $ | 769,319 | $ | 769,564 | $ | 703,631 | $ | 708,025 | ||||||||
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Contractual maturities of investments held at October 4, 2015July 3, 2016 exclude equity and debt mutual funds as they do not have contractual maturity 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 monetary assets and liabilities denominated in foreign currencies.
The notional amount of foreign currency forward contracts was $91.5$117.7 million and $73.0$114.1 million at October 4, 2015July 3, 2016 and December 31, 2014,2015, respectively. The fair value of the outstanding contracts was $0.0 million and a loss of $0.1 million and $0.0 million at October 4, 2015July 3, 2016 and December 31, 2014,2015, respectively.
InFor the three and ninesix months ended October 4, 2015,July 3, 2016, Teradyne recorded a net realized losslosses of $0.8$6.9 million and $2.7$10.2 million, respectively, related to foreign currency forward contracts hedging net monetary positions.
InFor the three months ended September 28, 2014,July 5, 2015, Teradyne recorded a net realized gain of $0.2 million related to foreign currency forward contracts hedging net monetary positions. In the nine months ended September 28, 2014, Teradyne recorded a net realized loss of $1.6 million related to foreign currency forward contracts hedging net monetary positions. Gains and losses onFor the six months ended July 5, 2015, Teradyne recorded a net realized loss of $1.9 million related to foreign currency forward contracts and foreign currency remeasurement gains and losses onhedging net monetary assets and liabilities are included in other (income) expense, net.positions.
The following table summarizes the fair value of derivative instruments at October 4, 2015July 3, 2016 and December 31, 2014:2015:
Balance Sheet Location | October 4, 2015 | December 31, 2014 | Balance Sheet Location | July 3, 2016 | December 31, 2015 | |||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||
Derivatives not designated as hedging instruments: | ||||||||||||||||||||||
Foreign exchange contracts assets | Prepayments | $ | 109 | $ | 220 | Prepayments | $ | 5 | $ | 109 | ||||||||||||
Foreign exchange contracts liabilities | Other current liabilities | (97 | ) | (369 | ) | Other current liabilities | (93 | ) | (146 | ) | ||||||||||||
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Total derivatives | $ | 12 | $ | (149 | ) | $ | (88 | ) | $ | (37 | ) | |||||||||||
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Teradyne’s foreign exchange contracts are subject to master netting agreements.
The following table summarizes the effect of derivative instruments recognized in the statement of operations during the three and ninesix months ended October 4, 2015July 3, 2016 and September 28, 2014. July 5, 2015.
Location of (Gains) Losses Recognized in Statement of Operations | For the Three Months Ended | For the Six Months Ended | ||||||||||||||||||
July 3, 2016 | July 5, 2015 | July 3, 2016 | July 5, 2015 | |||||||||||||||||
(in thousands) | ||||||||||||||||||||
Derivatives not designated as hedging instruments: | ||||||||||||||||||||
Foreign exchange contracts | Other (income) expense, net | $ | 6,901 | $ | (1,547 | ) | $ | 10,199 | $ | 1,878 | ||||||||||
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Total Derivatives | $ | 6,901 | $ | (1,547 | ) | $ | 10,199 | $ | 1,878 | |||||||||||
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The table above does not reflect the corresponding gains and losses from the remeasurement of monetary assets and liabilities denominated in foreign currencies.currencies recorded in other (income) expense, net. For the three and ninesix months ended October 4,July 3, 2016, net gains from the remeasurement of monetary assets and liabilities denominated in foreign currencies were $6.9 million and $10.4 million, respectively. For the three months ended July 5, 2015, net losses from the remeasurement of monetary assets and liabilities denominated in foreign currencies were $2.1 million. For the six months ended July 5, 2015, net gains from the remeasurement of monetary assets and liabilities denominated in foreign currencies were $0.1 million and $2.3 million, respectively. For the three months ended September 28, 2014, net losses from the remeasurement of monetary
assets and liabilities denominated in foreign currencies were $0.4$2.2 million. For the nine months ended September 28, 2014, net gains from the remeasurement of monetary assets and liabilities denominated in foreign currencies were $0.9 million.
Location of (Gains) Losses Statement of Operations | For the Three Months Ended | For the Nine Months Ended | ||||||||||||||||
October 4, 2015 | September 28, 2014 | October 4, 2015 | September 28, 2014 | |||||||||||||||
(in thousands) | ||||||||||||||||||
Derivatives not designated as hedging instruments: | ||||||||||||||||||
Foreign exchange contracts | Other (income) expense, net | $ | 677 | $ | 237 | $ | 2,555 | $ | (1,632 | ) | ||||||||
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Total Derivatives | $ | 677 | $ | 237 | $ | 2,555 | $ | (1,632 | ) | |||||||||
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See Note F: “Debt” regarding derivatives related to the convertible senior notes.
F. Debt
Revolving 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 up to $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$150 million.
Proceeds from the Credit Facility may be used for general corporate purposes and working capital. Teradyne incurred $2.3 million in costs related to the revolving credit facility. These costs are being amortized over the five yearfive-year term of the revolving credit facility and are included in interest expense in the statement of operations. As of November 13, 2015,August 12, 2016, 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 October 4, 2015,August 12, 2016, Teradyne was 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 entered into an underwriting agreement regarding a public offering of $175.0 million aggregate principal amount of 4.50% convertible senior notes due March 15, 2014 (the “Notes”). On April 1, 2009, the underwriters exercised their option to purchase an additional $15.0 million aggregate principal amount of the Notes for a total aggregate principal amount of $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 Teradyne 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 2014, Teradyne issued 21.2 million shares of its common stock for warrants exercised at a weighted average strike price of $7.6348 per share.
The interest expense on Teradyne’s convertible senior notes for the nine months ended October 4, 2015 and September 28, 2014 was as follows:
For the Nine Months Ended | ||||||||
October 4, 2015 | September 28, 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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G. Prepayments
Prepayments consist of the following and are included in prepayments on the balance sheet:
October 4, 2015 | December 31, 2014 | July 3, 2016 | December 31, 2015 | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
Contract manufacturer prepayments | $ | 55,624 | $ | 65,972 | $ | 77,009 | $ | 66,283 | ||||||||
Prepaid maintenance and other services | 6,642 | 7,343 | 7,623 | 8,481 | ||||||||||||
Prepaid taxes | 6,585 | 11,462 | 5,119 | 3,781 | ||||||||||||
Other prepayments | 11,928 | 11,042 | 13,380 | 12,974 | ||||||||||||
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Total prepayments | $ | 80,779 | $ | 95,819 | $ | 103,131 | $ | 91,519 | ||||||||
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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:
October 4, 2015 | December 31, 2014 | |||||||
(in thousands) | ||||||||
Extended warranty | $ | 47,489 | $ | 43,300 | ||||
Product maintenance and training | 37,976 | 30,500 | ||||||
Customer advances | 6,133 | 8,875 | ||||||
Undelivered elements and other | 12,210 | 8,857 | ||||||
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Total deferred revenue and customer advances | $ | 103,808 | $ | 91,532 | ||||
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Extended warranty Product maintenance and training Customer advances Undelivered elements and other Total deferred revenue and customer advances July 3,
2016 December 31,
2015 (in thousands) $ 47,723 $ 46,499 38,030 30,616 3,486 17,456 128,608 16,701 $ 217,847 $ 111,272
I. Product Warranty
Teradyne generally provides a one-year warranty on its products, commencing upon installation, acceptance, delivery 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 | |||||||||||||||||||||||||||||
October 4, 2015 | September 28, 2014 | October 4, 2015 | September 28, 2014 | July 3, 2016 | July 5, 2015 | July 3, 2016 | July 5, 2015 | |||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||
Balance at beginning of period | $ | 8,228 | $ | 9,073 | $ | 8,942 | $ | 6,660 | $ | 7,496 | $ | 7,423 | $ | 6,925 | $ | 8,942 | ||||||||||||||||
Acquisition | — | — | 372 | — | — | 372 | — | 372 | ||||||||||||||||||||||||
Accruals for warranties issued during the period | 3,261 | 4,419 | 9,548 | 12,675 | 4,888 | 3,926 | 8,378 | 6,287 | ||||||||||||||||||||||||
Adjustments related to pre-existing warranties | (1,211 | ) | (559 | ) | (3,039 | ) | (1,000 | ) | (420 | ) | (797 | ) | (177 | ) | (1,828 | ) | ||||||||||||||||
Settlements made during the period | (2,370 | ) | (2,982 | ) | (7,915 | ) | (8,384 | ) | (3,180 | ) | (2,696 | ) | (6,342 | ) | (5,545 | ) | ||||||||||||||||
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Balance at end of period | $ | 7,908 | $ | 9,951 | $ | 7,908 | $ | 9,951 | $ | 8,784 | $ | 8,228 | $ | 8,784 | $ | 8,228 | ||||||||||||||||
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When Teradyne receives revenue for extended warrantywarranties 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 | |||||||||||||||||||||||||||||
October 4, 2015 | September 28, 2014 | October 4, 2015 | September 28, 2014 | July 3, 2016 | July 5, 2015 | July 3, 2016 | July 5, 2015 | |||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||
Balance at beginning of period | $ | 43,299 | $ | 40,052 | $ | 43,300 | $ | 34,909 | $ | 46,115 | $ | 40,704 | $ | 46,499 | $ | 43,300 | ||||||||||||||||
Acquisition | — | — | 699 | — | — | 699 | — | 699 | ||||||||||||||||||||||||
Deferral of new extended warranty revenue | 10,442 | 9,896 | 22,818 | 24,218 | 8,898 | 8,172 | 15,725 | 12,376 | ||||||||||||||||||||||||
Recognition of extended warranty deferred revenue | (6,252 | ) | (6,451 | ) | (19,328 | ) | (15,630 | ) | (7,290 | ) | (6,276 | ) | (14,501 | ) | (13,076 | ) | ||||||||||||||||
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Balance at end of period | $ | 47,489 | $ | 43,497 | $ | 47,489 | $ | 43,497 | $ | 47,723 | $ | 43,299 | $ | 47,723 | $ | 43,299 | ||||||||||||||||
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J. Stock-Based Compensation
Under Teradyne’s stock compensation plans, Teradyne grants stock options, restricted stock units and performance-based restricted stock units, and employees are eligible to purchase Teradyne’s common stock through its Employee Stock Purchase Plan (“ESPP”).
Teradyne grants performance-based restricted stock units (“PRSUs”) to its executive officers with a performance metric based on relative total shareholder return (“TSR”). For TSR grants issued in 2014 and 2015, Teradyne’s three-year TSR performance is measured against the Philadelphia Semiconductor Index. For TSR grants issued in January 2016, 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.New York Stock Exchange (“NYSE”) Composite Index. 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. The TSR PRSUs will vest upon the three-year anniversary of the grant date. 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 no longer an employee, subject to the retirement and termination eligibility provisions noted below.
In January 2016, Teradyne granted PRSUs to its executive officers with a performance metric based on three-year cumulative non-GAAP profit before interest and tax (“PBIT”). Non-GAAP PBIT is a financial measure equal to GAAP income from operations less restructuring and other, net; amortization of acquired intangible assets; acquisition and divestiture related charges or credits; pension actuarial gains and losses; and other non-recurring gains and charges. The final number of PBIT PRSUs that vest will vary based upon the level of performance achieved from 200% to 0% of the target shares. The PBIT PRSUs will vest upon the three-year anniversary of the grant date. Compensation expense is recognized on a straight-line basis over the three-year service period. Compensation expense is recognized based on the number of units that are earned based upon the three-year Teradyne PBIT as a percent of Teradyne’s revenue, provided the executive officer remains an employee at the end of the three-year period subject to the retirement and termination eligibility provisions noted below.
Beginning 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 no longer an employee, subject to the retirement and termination eligibility provisions noted above.
During the ninesix months ended October 4,July 3, 2016 and July 5, 2015, and September 28, 2014, Teradyne granted 0.20.1 million and 0.10.2 million TSR PRSUs, respectively, with a grant date fair value of $18.21$20.29 and $22.06,$18.21, respectively. The fair value was estimated using the Monte Carlo simulation model with the following assumptions:
For the Nine Months Ended | For the Six Months Ended | |||||||||||||||
October 4, 2015 | September 28, 2014 | July 3, 2016 | July 5, 2015 | |||||||||||||
Risk-free interest rate | 0.77 | % | 0.75 | % | 0.97 | % | 0.77 | % | ||||||||
Teradyne volatility-historical | 28.2 | % | 36.1 | % | 27.0 | % | 28.2 | % | ||||||||
NYSE Composite Index volatility-historical | 13.1 | % | — | |||||||||||||
Philadelphia Semiconductor Index volatility-historical | 19.7 | % | 24.6 | % | — | 19.7 | % | |||||||||
Dividend yield | 1.33 | % | 1.25 | % | 1.24 | % | 1.33 | % |
Expected volatility was based on the historical volatility of Teradyne’s stock and the NYSE Composite Index for the 2016 grant and Philadelphia Semiconductor Index for the 2015 grant, over the most recent three 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 stock price on the grant date of $19.43 for the 2016 grant and $18.10 for the 2015 grants and $19.16 for 2014 grants.grant.
During the ninesix months ended October 4, 2015,July 3, 2016, Teradyne granted 1.50.1 million PBIT PRSUs with a grant date fair value of $18.71.
During the six months ended July 3, 2016, Teradyne granted 1.2 million of service-based restricted stock unit awards to employees at a weighted average grant date fair value of $17.27$18.49, 0.1 million of service-based restricted stock unit awards to non-employee directors at a weighted average grant date fair value of $18.71 and 0.1 million of service-based stock options to executive officers at a weighted average grant date fair value of $5.30.
During the six months ended July 5, 2015, Teradyne granted 1.4 million of service-based restricted stock unit awards to employees at a weighted average grant date fair value of $17.15, 0.1 million of service-based restricted stock unit awards to non-employee directors at a weighted average grant date fair value of $20.21 and 0.1 million of service-based stock options to executive officers at a weighted average grant date fair value of $4.43.
During the nine months ended September 28, 2014, Teradyne granted 1.7 million of service-based restricted stock unit awards to employees at a weighted average grant date fair value of $19.09 and 0.1 million of service-based stock options to executive officers at a weighted average grant date fair value of $5.49.
Restricted stock unit awards granted to employees vest in equal annual installments over four years. Restricted stock unit awards granted to non-employee directors vest after a one year period, with 100% of the award vesting on the first anniversary of the grant date. 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 | |||||||||||||||
October 4, 2015 | September 28, 2014 | July 3, 2016 | July 5, 2015 | |||||||||||||
Expected life (years) | 4.0 | 4.0 | 5.0 | 4.0 | ||||||||||||
Risk-free interest rate | 1.1 | % | 1.2 | % | 1.4 | % | 1.1 | % | ||||||||
Volatility-historical | 33.4 | % | 38.8 | % | 32.9 | % | 33.4 | % | ||||||||
Dividend yield | 1.33 | % | 1.25 | % | 1.24 | % | 1.33 | % |
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 stock price on the grant date, of $19.43 for the 2016 grant and $18.10 for the 2015 grants and $19.16 for 2014 grants.grant.
Effective January 31, 2014, Michael Bradley retired as Chief Executive Officer of Teradyne. 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 the 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.
K. Accumulated Other Comprehensive Income
Changes in accumulated other comprehensive income, (loss), which is presented net of tax, consist of the following:
For the Nine Months Ended October 4, 2015 | ||||||||||||||||
Foreign Currency Translation Adjustment | 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, $(896) | (3,000 | ) | (593 | ) | — | (3,593 | ) | |||||||||
Amounts reclassified from accumulated other comprehensive income, net of tax of $(335), $(127) | — | (808 | ) | (221 | ) | (1,029 | ) | |||||||||
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Net current period other comprehensive loss, net of tax of $0, $(1,231), $(127) | (3,000 | ) | (1,401 | ) | (221 | ) | (4,622 | ) | ||||||||
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Balance at October 4, 2015, net of tax of $0, $367, $(580) | $ | (3,000 | ) | $ | 964 | $ | 2,103 | $ | 67 | |||||||
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For the Six Months Ended July 3, 2016 | ||||||||||||||||
Foreign Currency Translation Adjustment | Unrealized Gains (Losses) on Marketable Securities | Retirement Plans Prior Service Credit | Total | |||||||||||||
(in thousands) | ||||||||||||||||
Balance at December 31, 2015, net of tax of $0, $(459), $(622) | $ | (8,759 | ) | $ | (1,414 | ) | $ | 2,029 | $ | (8,144 | ) | |||||
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| |||||||||
Other comprehensive income before reclassifications, net of tax of $0, $2,354 | 5,229 | 5,446 | — | 10,675 | ||||||||||||
Amounts reclassified from accumulated other comprehensive income (loss), net of tax of $(2), $(59) | — | (134 | ) | (104 | ) | (238 | ) | |||||||||
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Net current period other comprehensive income (loss), net of tax of $0, $2,352, $(59) | 5,229 | 5,312 | (104 | ) | 10,437 | |||||||||||
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| |||||||||
Balance at July 3, 2016, net of tax of $0, $1,893, $(681) | $ | (3,530 | ) | $ | 3,898 | $ | 1,925 | $ | 2,293 | |||||||
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For the Nine Months Ended September 28, 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 $1,103, $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 (loss), net of tax of $512, $(127) | 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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Reclassifications out of accumulated other comprehensive income to the statement of operations for the three and ninesix months ended October 4,July 3, 2016 and July 5, 2015 and September 28, 2014, 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 | |||||||||||||||
October 4, 2015 | September 28, 2014 | October 4, 2015 | September 28, 2014 | |||||||||||||||
(in thousands) | ||||||||||||||||||
Available-for-sale marketable securities: | ||||||||||||||||||
Unrealized gains, net of tax of $126, $348, $335, $591 | $ | 247 | $ | 638 | $ | 808 | $ | 1,086 | Interest income | |||||||||
Amortization of defined benefit pension and postretirement plans: | ||||||||||||||||||
Prior service benefit, net of tax of $42, $42, $127, $127 | 74 | 74 | 221 | 221 | (a) | |||||||||||||
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Total reclassifications, net of tax of $168, $390, $462, $718 | $ | 321 | $ | 712 | $ | 1,029 | $ | 1,307 | Net income | |||||||||
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Details about Accumulated Other Comprehensive Income Components | For the Three Months Ended | For the Six Months Ended | Affected Line Item in the Statements of Operations | |||||||||||||||||
July 3, 2016 | July 5, 2015 | July 3, 2016 | July 5, 2015 | |||||||||||||||||
(in thousands) | ||||||||||||||||||||
Available-for-sale marketable securities: | ||||||||||||||||||||
Unrealized gains, net of tax of $13, $40, $2, $209 | $ | 51 | $ | 231 | $ | 134 | $ | 561 | Interest income | |||||||||||
Defined benefit pension and postretirement plans: | ||||||||||||||||||||
Amortization of prior service income, net of tax of $47, $42, $93, $85 | 83 | 74 | 163 | 147 | (a) | |||||||||||||||
Prior service income arising during period, net of tax of $(34), $0, $(34), $0 | (59 | ) | — | (59 | ) | — | ||||||||||||||
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24 | 74 | 104 | 147 | |||||||||||||||||
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Total reclassifications, net of tax of $26, $82, $61, $294 | $ | 75 | $ | 305 | $ | 238 | $ | 708 | Net income | |||||||||||
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(a) | The amortization of prior service |
L. Goodwill and Intangible Assets
Goodwill
Teradyne performs its annual goodwill impairment test as required under the provisions of ASC 350-10,“Intangibles—Goodwill and Other” on December 31 of each fiscal year unless interim indicators of impairment exist. Goodwill is considered impaired when the net book value of a reporting unit exceeds its estimated fair value.
In the second quarter of 2016, the Wireless Test reporting unit (which is Teradyne’s Wireless Test operating and reportable segment) reduced headcount by 11% as a result of a sharp decline in projected demand attributable to an estimated smaller future wireless test market. The decrease in projected demand was due to lower forecasted buying from Teradyne’s largest Wireless Test segment customer (who has contributed between 51% and 73% of annual Wireless Test sales since the LitePoint acquisition in 2011) as a result of the customer’s numerous operational efficiencies; slower smartphone growth rates; and a slowdown of new wireless technology adoption. Teradyne considered the headcount reduction and sharp decline in projected demand to be a triggering event for an interim goodwill impairment test.
Teradyne used the income and market approaches to determine the fair value of the Wireless Test reporting unit for step 1 of the goodwill impairment test. With respect to the income approach, Teradyne used the discounted cash flow method, which included seven year future cash flow projections and an estimated terminal value. The cash flow projections were prepared using Teradyne’s forecast, which was based upon underlying estimates of the total market size, and Teradyne’s market share in the wireless test market developed using Teradyne and independent third party data. The estimated terminal value was calculated using the Gordon Growth model. The market approach used a revenue multiple to develop an estimate of fair value. The revenue multiple was estimated using enterprise value as a ratio of next twelve months revenue for comparable companies. Teradyne equally weighted the income and market approaches to determine the fair value of the Wireless Test reporting unit. The carrying amount of the Wireless Test reporting unit exceeded its fair value; therefore, the second step of the goodwill impairment test was performed to calculate implied goodwill and to measure the amount of the impairment loss.
Teradyne allocated the fair value of the Wireless Test reporting unit to all of its assets and liabilities (including unrecognized intangible assets). The net book value of raw materials inventory was estimated as an approximation of current replacement costs. The fair value of finished goods inventory was estimated at the present value of selling price less direct selling costs and profit on the selling effort. The selling price used in the inventory fair values was based upon the product gross margins included in Teradyne’s forecast. The fair value of the deferred revenue liability was estimated by assessing the costs required to service the obligation plus a reasonable profit margin. The fair value for personal property assets, which consisted of furniture and fixtures, machinery and equipment, computer equipment, software and leasehold improvements, was estimated using the replacement cost approach, which approximated carrying value. The fair value of intangible assets was estimated using the income approach and, in particular, developed technology and trademarks/trade names were valued using the relief-from-royalty method and customer relationships and customer backlog were valued using the discounted cash flow method. Royalty rates were estimated using rates applicable to wireless testing equipment and other similar technologies. Based upon this allocation, Teradyne determined that goodwill is valued at $8.0 million and recorded an impairment loss of $255 million in the second quarter of 2016.
The changes in the carrying amount of goodwill by reportable segments for the ninesix months ended October 4, 2015,July 3, 2016, were as follows:
Wireless Test | Industrial Automation | System Test | Semiconductor Test | Total | Wireless Test | Industrial Automation | System Test | Semiconductor Test | Total | |||||||||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2014: | ||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2015: | ||||||||||||||||||||||||||||||||||||||||
Goodwill | $ | 361,819 | $ | — | $ | 158,699 | $ | 260,540 | $ | 781,058 | $ | 361,819 | $ | 214,975 | $ | 158,699 | $ | 260,540 | $ | 996,033 | ||||||||||||||||||||
Accumulated impairment losses | (98,897 | ) | — | (148,183 | ) | (260,540 | ) | (507,620 | ) | (98,897 | ) | — | (148,183 | ) | (260,540 | ) | (507,620 | ) | ||||||||||||||||||||||
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262,922 | — | 10,516 | — | 273,438 | 262,922 | 214,975 | 10,516 | — | 488,413 | |||||||||||||||||||||||||||||||
Universal Robots acquisition | — | 226,501 | — | — | 226,501 | |||||||||||||||||||||||||||||||||||
Universal Robots adjustment | — | 520 | — | — | 520 | |||||||||||||||||||||||||||||||||||
Foreign currency translation adjustment | — | (2,113 | ) | — | — | (2,113 | ) | — | 3,743 | — | — | 3,743 | ||||||||||||||||||||||||||||
Goodwill impairment loss | (254,946 | ) | — | — | — | (254,946 | ) | |||||||||||||||||||||||||||||||||
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Balance at October 4, 2015: | ||||||||||||||||||||||||||||||||||||||||
Balance at July 3, 2016: | ||||||||||||||||||||||||||||||||||||||||
Goodwill | 361,819 | 224,908 | 158,699 | 260,540 | 1,005,966 | 361,819 | 218,718 | 158,699 | 260,540 | 999,776 | ||||||||||||||||||||||||||||||
Accumulated impairment losses | (98,897 | ) | — | (148,183 | ) | (260,540 | ) | (507,620 | ) | (353,843 | ) | — | (148,183 | ) | (260,540 | ) | (762,566 | ) | ||||||||||||||||||||||
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$ | 262,922 | $ | 224,908 | $ | 10,516 | $ | — | $ | 498,346 | $ | 7,976 | $ | 218,718 | $ | 10,516 | $ | — | $ | 237,210 | |||||||||||||||||||||
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Intangible Assets
Teradyne reviews long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of these assets are no longer appropriate. As a result of the Wireless Test segment goodwill impairment review in the second quarter of 2016, Teradyne performed an impairment test of the Wireless Test segment’s intangible and long-lived assets. The impairment test is based on a comparison of the estimated undiscounted cash flows to the carrying value of the asset group. If undiscounted cash flows for the asset group are less than the carrying amount, the asset group is written down to its estimated fair value based on a discounted cash flow analysis. The cash flow estimates used to determine the impairment contain management’s best estimates using appropriate assumptions and projections at that time. The fair value of intangible assets was estimated using the income approach and, in particular, developed technology and trademarks/trade names were valued using the relief-from-royalty method and customer relationships were valued using the discounted cash flow method. Royalty rates were estimated using rates applicable to wireless testing equipment and other similar technologies. As a result of the analysis, Teradyne recorded an $83 million impairment charge in the second quarter of 2016 in acquired intangible assets impairment on the statement of operations.
Amortizable intangible assets consist of the following and are included in intangible assets, net on the balance sheet:
October 4, 2015 | July 3, 2016 | |||||||||||||||||||||||||||||||||||
Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Weighted Average Useful Life | Gross Carrying Amount (1) | Accumulated Amortization (1)(2) | Foreign Currency Translation Adjustment | Net Carrying Amount | Weighted Average Useful Life | ||||||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||||||
Developed technology | $ | 381,071 | $ | 206,256 | $ | 174,815 | 6.0 years | $ | 333,421 | $ | 259,364 | (1,138 | ) | $ | 72,919 | 6.0 years | ||||||||||||||||||||
Customer relationships | 110,464 | 59,395 | 51,069 | 7.9 years | 110,602 | 89,674 | (119 | ) | 20,809 | 7.9 years | ||||||||||||||||||||||||||
Tradenames and trademarks | 51,588 | 17,418 | 34,170 | 9.5 years | 53,034 | 24,581 | (292 | ) | 28,161 | 9.5 years | ||||||||||||||||||||||||||
Non-compete agreement | 320 | 80 | 240 | 4.0 years | 320 | 140 | — | 180 | 4.0 years | |||||||||||||||||||||||||||
Customer order backlog | 170 | 170 | — | 0.3 years | ||||||||||||||||||||||||||||||||
Customer backlog | 170 | 170 | — | — | 0.3 years | |||||||||||||||||||||||||||||||
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Total intangible assets | $ | 543,613 | $ | 283,319 | $ | 260,294 | 6.7 years | $ | 497,547 | $ | 373,929 | (1,549 | ) | $ | 122,069 | 6.8 years | ||||||||||||||||||||
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(1) | In 2016, $48 million of amortizable intangible assets became fully amortized and have been eliminated from the gross carrying amount and accumulated amortization. |
(2) | Includes an $83 million impairment of Wireless Test amortizable intangible assets. |
Developed technology Customer relationships Tradenames and trademarks Non-compete agreement Customer order backlog Total intangible assets December 31, 2014 Gross
Carrying
Amount Accumulated
Amortization Net
Carrying
Amount Weighted
Average
Useful Life (in thousands) $ 345,513 $ 224,059 $ 121,454 6.2 years 146,635 93,998 52,637 7.7 years 30,414 14,205 16,209 9.0 years 320 20 300 4.0 years 170 170 — 0.3 years $ 523,052 $ 332,452 $ 190,600 6.8 years
During the nine months ended October 4, 2015, Teradyne wrote off $98.2 million of fully amortized intangible assets.
December 31, 2015 | ||||||||||||||||||||
Gross Carrying Amount | Accumulated Amortization | Foreign Currency Translation Adjustment | Net Carrying Amount | Weighted Average Useful Life | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Developed technology | $ | 382,262 | $ | 220,346 | (2,444 | ) | $ | 159,472 | 6.0 years | |||||||||||
Customer relationships | 110,602 | 63,722 | (258 | ) | 46,622 | 7.9 years | ||||||||||||||
Tradenames and trademarks | 53,034 | 18,889 | (628 | ) | 33,517 | 9.5 years | ||||||||||||||
Non-compete agreement | 320 | 100 | — | 220 | 4.0 years | |||||||||||||||
Customer backlog | 170 | 170 | — | — | 0.3 years | |||||||||||||||
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Total intangible assets | $ | 546,388 | $ | 303,227 | (3,330 | ) | $ | 239,831 | 6.7 years | |||||||||||
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Aggregate intangible asset amortization expense was $20.1$16.2 million and $49.1$36.2 million, respectively, for the three and ninesix months ended October 4, 2015July 3, 2016 and $18.3$15.3 million and $54.8$29.1 million, respectively, for the three and ninesix months ended September 28, 2014.July 5, 2015. 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) | |||||||
2015 (remainder) | $ | 20,029 | ||||||
2016 | 80,117 | |||||||
2016 (remainder) | $ | 16,519 | ||||||
2017 | 71,498 | 30,410 | ||||||
2018 | 44,647 | 28,142 | ||||||
2019 | 23,785 | 24,244 | ||||||
2020 | 10,626 | |||||||
Thereafter | 20,218 | 12,128 |
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 | |||||||||||||||
October 4, 2015 | September 28, 2014 | October 4, 2015 | September 28, 2014 | |||||||||||||
(in thousands, except per share amounts) | ||||||||||||||||
Net income for basic and diluted net income per share | $ | 71,453 | $ | 82,949 | $ | 207,118 | $ | 185,083 | ||||||||
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Weighted average common shares-basic | 210,032 | 207,381 | 213,688 | 198,367 | ||||||||||||
Effect of dilutive potential common shares: | ||||||||||||||||
Incremental shares from assumed conversion of convertible notes (1) | — | — | — | 6,684 | ||||||||||||
Convertible note hedge warrant shares (2) | — | 8,885 | — | 16,744 | ||||||||||||
Restricted stock units | 1,103 | 1,167 | 994 | 975 | ||||||||||||
Stock options | 578 | 879 | 626 | 997 | ||||||||||||
Employee stock purchase plan | 23 | 21 | 40 | 28 | ||||||||||||
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Dilutive potential common shares | 1,704 | 10,952 | 1,660 | 25,428 | ||||||||||||
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Weighted average common shares-diluted | 211,736 | 218,333 | 215,348 | 223,795 | ||||||||||||
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Net income per common share-basic | $ | 0.34 | $ | 0.40 | $ | 0.97 | $ | 0.93 | ||||||||
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Net income per common share-diluted | $ | 0.34 | $ | 0.38 | $ | 0.96 | $ | 0.83 | ||||||||
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For the Three Months Ended | For the Six Months Ended | |||||||||||||||
July 3, 2016 | July 5, 2015 | July 3, 2016 | July 5, 2015 | |||||||||||||
(in thousands, except per share amounts) | ||||||||||||||||
Net (loss) income for basic and diluted net income per share | $ | (223,546 | ) | $ | 102,879 | $ | (173,560 | ) | $ | 135,666 | ||||||
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Weighted average common shares-basic | 203,018 | 213,845 | 203,645 | 215,516 | ||||||||||||
Effect of dilutive potential common shares: | ||||||||||||||||
Restricted stock units | — | 978 | — | 940 | ||||||||||||
Stock options | — | 603 | — | 649 | ||||||||||||
Employee stock purchase plan | — | 70 | — | 49 | ||||||||||||
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Dilutive potential common shares | — | 1,651 | — | 1,638 | ||||||||||||
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Weighted average common shares-diluted | 203,018 | 215,496 | 203,645 | 217,154 | ||||||||||||
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Net (loss) income per common share-basic | $ | (1.10 | ) | $ | 0.48 | $ | (0.85 | ) | $ | 0.63 | ||||||
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Net (loss) income per common share-diluted | $ | (1.10 | ) | $ | 0.48 | $ | (0.85 | ) | $ | 0.62 | ||||||
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The computation of diluted net income per common share for the three and ninesix months ended October 4,July 3, 2016 excludes the effect of the potential exercise of all outstanding stock options and restricted stock units because Teradyne had a net loss and inclusion would be anti-dilutive.
The computation of diluted net income per common share for the three and six months ended 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 nine months ended September 28, 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.
N. Restructuring and Other
Other
On April 16, 2016, an earthquake in Kumamoto, Japan damaged Teradyne’s main facility at that location. The Teradyne owned facility, which was used for engineering, production, and support operations, was damaged beyond repair and has no remaining utility to Teradyne. In the three and six months ended July 3, 2016, Teradyne wrote off the building’s carrying value of $4.2 million and also recorded $0.9 million of earthquake related expenses. Teradyne has $10 million of earthquake insurance with a deductible of approximately $2.5 million for the location. The $5.1 million of total charges were offset by $5.1 million of proceeds received in the second quarter of 2016 under the insurance policy. The charges and proceeds were recognized in restructuring and other in the statement of operations. Teradyne has temporarily transferred some operations to other facilities in Japan and elsewhere while its Kumamoto operations are restored. Teradyne is still in the process of assessing the total impact of the damage.
During the three months ended October 4,July 3, 2016, Teradyne recorded an expense of $1.3 million for the increase in the fair value of contingent consideration liability, of which $0.8 million was related to Universal Robots and $0.6 million was related to AIT.
During the six months ended July 3, 2016, Teradyne recorded an expense of $2.5 million for the increase in the fair value of contingent consideration liability, of which $1.9 million was related to Universal Robots and $0.6 million was related to AIT.
During the three and six months ended July 5, 2015, Teradyne recorded a $1.0$1.6 million gain from the decrease in the fair value of the AITZTEC contingent consideration liability, partially offset by $0.1$1.0 million of acquisition costs related to Universal Robots.
During the nine months ended October 4, 2015, Teradyne recorded a $2.6 million gain from the decrease in the fair value of contingent consideration liability, of which $1.6 million was related to the ZTEC acquisition and $1.0 million was related to the AIT acquisition, partially offset by $1.1 million of acquisition costs related to Universal Robots.
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.
Restructuring
During the three and nine months ended October 4, 2015,July 3, 2016, Teradyne recorded $1.1 million and $1.4 million, respectively, of severance charges related to headcount reductions of 18 and 22 people, respectively, primarily in System Test. During the nine months ended September 28, 2014, Teradyne recorded $0.8$1.3 million of severance charges related to headcount reductions of 3062 people, of which 47 people were in Wireless Test and 15 people were in Semiconductor Test.
During the six months ended July 3, 2016, Teradyne recorded $1.7 million of severance charges related to headcount reductions of 74 people, of which 47 people were in Wireless Test and 27 people were in Semiconductor Test.
During the three and six months ended July 5, 2015, Teradyne recorded $0.3 million of severance charges related to headcount reductions of 4 people, primarily in WirelessSemiconductor Test.
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. The pension asset or liability represents a difference between the fair value of the pension plan’s assets and the projected benefit obligation.
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 October 4, 2015,July 3, 2016, Teradyne contributed $1.9$1.3 million to the U.S. supplemental executive defined benefit pension plan and $0.6$0.7 million to certain qualified plans for non-U.S. subsidiaries.
For the three and ninesix months ended October 4,July 3, 2016 and July 5, 2015, and September 28, 2014, Teradyne’s net periodic pension (income) cost was comprised of the following:
For the Three Months Ended | For the Three Months Ended | |||||||||||||||||||||||||||||||
October 4, 2015 | September 28, 2014 | July 3, 2016 | July 5, 2015 | |||||||||||||||||||||||||||||
United States | Foreign | United States | Foreign | United States | Foreign | United States | Foreign | |||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||
Service cost | $ | 616 | $ | 259 | $ | 555 | $ | 206 | $ | 575 | $ | 199 | $ | 615 | $ | 263 | ||||||||||||||||
Interest cost | 3,285 | 357 | 3,219 | 431 | 3,401 | 199 | 3,289 | 385 | ||||||||||||||||||||||||
Expected return on plan assets | (3,629 | ) | (185 | ) | (3,126 | ) | (209 | ) | (3,472 | ) | (5 | ) | (3,634 | ) | (215 | ) | ||||||||||||||||
Amortization of prior service cost | 34 | — | 34 | — | 24 | — | 34 | — | ||||||||||||||||||||||||
Actuarial gain | (654 | ) | — | (3 | ) | — | ||||||||||||||||||||||||||
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Total net periodic pension cost | $ | 306 | $ | 431 | $ | 682 | $ | 428 | ||||||||||||||||||||||||
Total net periodic pension (income) cost | $ | (126 | ) | $ | 393 | $ | 301 | $ | 433 | |||||||||||||||||||||||
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For the Nine Months Ended | For the Six Months Ended | |||||||||||||||||||||||||||||||
October 4, 2015 | September 28, 2014 | July 3, 2016 | July 5, 2015 | |||||||||||||||||||||||||||||
United States | Foreign | United States | Foreign | United States | Foreign | United States | Foreign | |||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||
Service cost | $ | 1,847 | $ | 768 | $ | 1,663 | $ | 705 | $ | 1,151 | $ | 406 | $ | 1,231 | $ | 510 | ||||||||||||||||
Interest cost | 9,856 | 1,101 | 9,656 | 1,446 | 6,815 | 405 | 6,571 | 744 | ||||||||||||||||||||||||
Expected return on plan assets | (10,888 | ) | (595 | ) | (9,375 | ) | (685 | ) | (6,915 | ) | (11 | ) | (7,259 | ) | (410 | ) | ||||||||||||||||
Amortization of prior service cost | 101 | — | 101 | — | 48 | — | 67 | — | ||||||||||||||||||||||||
Actuarial (gain) loss | (3 | ) | — | 362 | — | |||||||||||||||||||||||||||
Actuarial gain | (1,848 | ) | — | (3 | ) | — | ||||||||||||||||||||||||||
Settlement | — | (238 | ) | — | — | |||||||||||||||||||||||||||
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Total net periodic pension cost | $ | 913 | $ | 1,274 | $ | 2,407 | $ | 1,466 | ||||||||||||||||||||||||
Total net periodic pension (income) cost | $ | (749 | ) | $ | 562 | $ | 607 | $ | 844 | |||||||||||||||||||||||
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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, 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 months and ninesix months ended October 4,July 3, 2016 and July 5, 2015, and September 28, 2014, 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 | |||||||||||||||||||||||||||||
October 4, 2015 | September 28, 2014 | October 4, 2015 | September 28, 2014 | July 3, 2016 | July 5, 2015 | July 3, 2016 | July 5, 2015 | |||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||
Service cost | $ | 12 | $ | 15 | $ | 36 | $ | 44 | $ | 9 | $ | 12 | $ | 19 | $ | 24 | ||||||||||||||||
Interest cost | 59 | 84 | 177 | 252 | 53 | 59 | 109 | 118 | ||||||||||||||||||||||||
Amortization of prior service benefit | (150 | ) | (150 | ) | (449 | ) | (449 | ) | ||||||||||||||||||||||||
Amortization of prior service income | (154 | ) | (150 | ) | (304 | ) | (299 | ) | ||||||||||||||||||||||||
Actuarial gain | — | — | (19 | ) | (247 | ) | (15 | ) | (19 | ) | (15 | ) | (19 | ) | ||||||||||||||||||
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Total net periodic post-retirement benefit | $ | (79 | ) | $ | (51 | ) | $ | (255 | ) | $ | (400 | ) | $ | (107 | ) | $ | (98 | ) | $ | (191 | ) | $ | (176 | ) | ||||||||
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P. Commitments and Contingencies
Purchase Commitments
As of October 4, 2015,July 3, 2016, Teradyne had entered into purchase commitments for certain components and materials. The purchase commitments covered by the agreements aggregate to approximately $219.6$201.1 million, of which $214.2$200.0 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.
Q. Income Taxes
The effective tax rate for the three months ended October 4,July 3, 2016 and July 5, 2015 was 3.2% and September 28, 2014 was 18.3% and 17.6%22.1%, respectively. The effective tax rate for the six months ended July 3, 2016 and July 5, 2015 was 0.0% and 22.3%, respectively.
The effective tax rates for these periods werethe three and six months ended July 3, 2016 differed from the expected federal statutory rate of 35% as a result of a non-deductible goodwill impairment charge, which reduced the benefit of the U.S. loss before income taxes, and increases in uncertain tax positions for transfer pricing, offset by the effect of lower thanstatutory rates applicable to income earned outside the U.S., the benefit of U.S. research and development tax credits, and discrete tax benefits.
Discrete tax benefits recorded in the three and six months ended July 3, 2016 amounted to $4.4 million and $6.9 million respectively. The $4.4 million of discrete tax benefits recorded in the three months ended July 3, 2016 was composed of $2.6 million of tax reserve releases resulting from the settlement of a U.S. tax audit and $2.2 million from non-taxable foreign exchange gains net of $0.4 million of expense from other discrete tax items. The $6.9 million of discrete tax benefits recorded in the six months ended July 3, 2016 was composed of $3.4 million from non-taxable foreign exchange gains, $2.6 million of tax reserve releases resulting from the settlement of a U.S. tax audit, and $0.9 million related to marketable securities.
The effective tax rates for three and six months ended July 5, 2015 differed from the expected federal statutory rate of 35% primarily because of the favorable effect of statutory rates applicable to income earned outside the United States.U.S. The tax rate for the threesix months ended October 4,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 $3.3$1.7 million of discrete tax benefits composed of $1.8 million of benefit attributable to a United States Tax Court opinion regarding intercompany cost sharing arrangements, $0.6 million of reductions in uncertain tax positions resulting from the expiration of statutes and $0.9 million from other discrete tax benefits.
The tax rate for the three months ended September 28, 2014 was increased by $5.6 million of discrete tax expense composed of $7.2 million of additions to the uncertain tax positions for transfer pricing net of $0.9 million of discrete tax benefits resulting from increases in credit carry forwards and $0.7 million from other discrete tax benefits.
The effective tax rate for the nine months ended October 4, 2015 and September 28, 2014 was 20.9% and 15.9%, 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 nine months ended October 4, 2015 was increased by additions to the uncertain tax positions for transfer pricing included in the projected annual effective tax rate, partially offset by $5.0 million of discrete tax benefits composed of $1.8 million of benefit attributable to a United States Tax Court opinion regarding intercompany cost sharing arrangements, $1.3 million of reductions in uncertain tax positions resulting from the expiration of statutes and the settlement of an audit, $0.9 million from disqualifying dispositions of incentive stock options and employee stock purchase plan shares and $1.0 million from other discrete tax benefits.
The tax rate for the nine months ended September 28, 2014 was increased by $2.6 million of discrete tax expense composed of $7.2 million of additions to the uncertain tax positions for transfer pricing net of $1.7 million of discrete tax benefits from disqualifying dispositions of incentive stock options and employee stock purchase plan shares, $0.9 million of discrete tax benefits resulting from increases in credit carry forwards and $2.0 million from 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. As of October 4, 2015,July 3, 2016, 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 notmore-likely-than-not that the deferred tax assets would not be realized, the tax provision would increase in the period in which Teradyne determined that the realizability was not likely. Teradyne considers the probability of future taxable income and historical profitability, among other factors, in assessing the realizability of the deferred tax assets.
As of October 4, 2015July 3, 2016 and December 31, 2014,2015, Teradyne had $33.3$32.8 million and $30.4$33.7 million, respectively, of reserves for uncertain tax positions. The $2.9$0.9 million net increasedecrease in reserves for uncertain tax positions relates primarilyis composed of tax reserve releases resulting from the settlement of a U.S. tax audit, partially offset by additions related to transfer pricing exposures.
As of October 4, 2015,July 3, 2016, Teradyne anticipatedestimates that it is reasonably possible that the liability for uncertainbalance of unrecognized tax positions couldbenefits may decrease by approximately $0.1$3.6 million overin the next twelve months, primarily as a result of the expirationa lapse of statutes of limitations.limitation. The potentialestimated decrease is relatedcomposed primarily of reserves relating to transfer pricing exposures.pricing.
Teradyne recognizes interest and penalties related to income tax matters in income tax expense. As of October 4, 2015July 3, 2016 and December 31, 2014, $0.32015, $0.8 million and $0.6$0.5 million, respectively, of interest and penalties were included in the reserve for uncertain tax positions. For the six months ended July 3, 2016, an expense of $0.3 million was recorded for interest and penalties related to income tax items. For the six months ended July 5, 2015, an expense of $0.1 million was recorded for interest and penalties related to income tax items.
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 October 4, 2015July 3, 2016 was $9.9$30.7 million, or $0.05$0.15 per diluted share. The tax savings due to the tax holiday for the ninesix months ended September 28, 2014July 5, 2015 was $12.3$6.2 million, or $0.05$0.03 per diluted share. The tax holiday is currently expectedscheduled 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, 2015.2020.
R. Segment Information
Teradyne has four operating segments (Semiconductor Test, WirelessSystem Test, SystemWireless Test, and 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 defense/aerospace instrumentation test, storage test and circuit-board test. The Wireless Test segment includes operations related to the design, manufacturing and marketing of wireless test products and services. 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 described in Note B: “Accounting Policies” in Teradyne’s Annual Report on Form 10-K for the year ended December 31, 2014, unless updated in this form 10-Q, where applicable.2015.
Segment information for the three months and ninesix months ended October 4,July 3, 2016 and July 5, 2015 and September 28, 2014 is as follows:
Semiconductor Test | Wireless Test | System Test | Industrial Automation | Corporate and Eliminations | Consolidated | Semiconductor Test | System Test | Wireless Test | Industrial Automation | Corporate and Eliminations | Consolidated | |||||||||||||||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
Three months ended October 4, 2015: | ||||||||||||||||||||||||||||||||||||||||||||||||
Three months ended July 3, 2016: | ||||||||||||||||||||||||||||||||||||||||||||||||
Revenues | $ | 325,516 | $ | 55,359 | $ | 69,062 | $ | 16,057 | $ | — | $ | 465,994 | $ | 435,323 | $ | 48,940 | $ | 22,427 | $ | 25,102 | $ | — | $ | 531,792 | ||||||||||||||||||||||||
Income (loss) before income taxes (1)(2) | 73,957 | 2,997 | 13,751 | (4,847 | ) | 1,550 | 87,408 | 121,163 | 8,992 | (356,505 | ) | (4,501 | ) | 34 | (230,817 | ) | ||||||||||||||||||||||||||||||||
Total assets (3) | 591,445 | 447,461 | 109,078 | 360,068 | 1,153,832 | 2,661,884 | 731,394 | 91,374 | 61,618 | 346,290 | 1,177,182 | 2,407,858 | ||||||||||||||||||||||||||||||||||||
Three months ended September 28, 2014: | ||||||||||||||||||||||||||||||||||||||||||||||||
Revenues | $ | 380,083 | $ | 54,838 | $ | 43,089 | $ | — | $ | — | $ | 478,010 | ||||||||||||||||||||||||||||||||||||
Income before income taxes (1)(2) | 91,900 | 2,379 | 5,779 | — | 612 | 100,670 | ||||||||||||||||||||||||||||||||||||||||||
Total assets (3) | 748,499 | 614,911 | 83,769 | — | 1,247,828 | 2,695,007 | ||||||||||||||||||||||||||||||||||||||||||
Nine months ended October 4, 2015: | ||||||||||||||||||||||||||||||||||||||||||||||||
Three months ended July 5, 2015: | ||||||||||||||||||||||||||||||||||||||||||||||||
Revenues | $ | 996,748 | $ | 152,285 | $ | 152,320 | $ | 19,780 | $ | — | $ | 1,321,133 | $ | 400,315 | $ | 45,822 | $ | 62,879 | $ | 3,723 | $ | — | $ | 512,739 | ||||||||||||||||||||||||
Income (loss) before income taxes (1)(2) | 246,627 | (603 | ) | 10,423 | (6,547 | ) | 12,081 | 261,981 | 129,546 | (4,333 | ) | 6,841 | (1,700 | ) | 1,782 | 132,136 | ||||||||||||||||||||||||||||||||
Total assets (3) | 591,445 | 447,461 | 109,078 | 360,068 | 1,153,832 | 2,661,884 | 649,087 | 95,544 | 485,857 | 358,276 | 1,104,043 | 2,692,807 | ||||||||||||||||||||||||||||||||||||
Nine months ended September 28, 2014: | ||||||||||||||||||||||||||||||||||||||||||||||||
Six months ended July 3, 2016: | ||||||||||||||||||||||||||||||||||||||||||||||||
Revenues | $ | 1,063,254 | $ | 144,747 | $ | 116,586 | $ | — | $ | — | $ | 1,324,587 | $ | 775,588 | $ | 102,610 | $ | 42,741 | $ | 41,848 | $ | — | $ | 962,787 | ||||||||||||||||||||||||
Income (loss) before income taxes (1)(2) | 233,770 | (8,477 | ) | 5,512 | — | (10,616 | ) | 220,189 | 194,417 | 18,484 | (376,645 | ) | (11,669 | ) | 1,788 | (173,625 | ) | |||||||||||||||||||||||||||||||
Total assets (3) | 748,499 | 614,911 | 83,769 | — | 1,247,828 | 2,695,007 | 731,394 | 91,374 | 61,618 | 346,290 | 1,177,182 | 2,407,858 | ||||||||||||||||||||||||||||||||||||
Six months ended July 5, 2015: | ||||||||||||||||||||||||||||||||||||||||||||||||
Revenues | $ | 671,232 | $ | 83,258 | $ | 96,927 | $ | 3,723 | $ | — | $ | 855,140 | ||||||||||||||||||||||||||||||||||||
Income (loss) before income taxes (1)(2) | 172,671 | (3,328 | ) | (3,600 | ) | (1,700 | ) | 10,531 | 174,574 | |||||||||||||||||||||||||||||||||||||||
Total assets (3) | 649,087 | 95,544 | 485,857 | 358,276 | 1,104,043 | 2,692,807 |
(1) | Interest income, interest expense, and other (income) expense, net are included in Corporate and Eliminations. |
(2) | Included in the income (loss) before income taxes for each of the segments are charges related to inventory and other. |
(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 in the 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 | |||||||||||||||||||||||||||||
October 4, 2015 | September 28, 2014 | October 4, 2015 | September 28, 2014 | July 3, 2016 | July 5, 2015 | July 3, 2016 | July 5, 2015 | |||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||
Cost of revenues—inventory charge | $ | 1,697 | $ | 4,404 | $ | 8,637 | $ | 14,322 | $ | 2,234 | $ | 6,409 | $ | 5,919 | $ | 6,940 | ||||||||||||||||
Restructuring and other | 194 | — | 499 | — | 337 | 305 | 751 | 305 | ||||||||||||||||||||||||
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Total | $ | 1,891 | $ | 4,404 | $ | 9,136 | $ | 14,322 | $ | 2,571 | $ | 6,714 | $ | 6,670 | $ | 7,245 | ||||||||||||||||
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Included in the System Test segment are charges in the following line items in the statements of operations:
For the Three Months Ended | For the Six Months Ended | |||||||||||||||
July 3, 2016 | July 5, 2015 | July 3, 2016 | July 5, 2015 | |||||||||||||
(in thousands) | ||||||||||||||||
Cost of revenues—inventory charge | $ | 237 | $ | 7,702 | $ | 320 | $ | 7,765 |
Included in the Wireless Test segment are charges in the following line items in the statements of operations:
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
October 4, 2015 | September 28, 2014 | October 4, 2015 | September 28, 2014 | |||||||||||||
(in thousands) | ||||||||||||||||
Cost of revenues—inventory charge | $ | 901 | $ | 1,267 | $ | 2,077 | $ | 5,239 | ||||||||
Restructuring and other | — | — | — | 426 | ||||||||||||
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Total | $ | 901 | $ | 1,267 | $ | 2,077 | $ | 5,665 | ||||||||
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Included in the System Test segment are charges in the 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 | |||||||||||||||||||||||||||||
October 4, 2015 | September 28, 2014 | October 4, 2015 | September 28, 2014 | July 3, 2016 | July 5, 2015 | July 3, 2016 | July 5, 2015 | |||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||
Goodwill impairment | $ | 254,946 | $ | — | $ | 254,946 | $ | — | ||||||||||||||||||||||||
Acquired intangible assets impairment | 83,339 | — | 83,339 | — | ||||||||||||||||||||||||||||
Cost of revenues—inventory charge | $ | 460 | $ | 763 | $ | 8,225 | $ | 1,944 | 5,271 | 330 | 5,876 | 1,176 | ||||||||||||||||||||
Restructuring and other | 923 | 225 | 923 | 371 | 967 | — | 967 | — | ||||||||||||||||||||||||
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Total | $ | 1,383 | $ | 988 | $ | 9,148 | $ | 2,315 | $ | 344,523 | $ | 330 | $ | 345,128 | $ | 1,176 | ||||||||||||||||
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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 Nine Months Ended | |||||||||||||||
October 4, 2015 | September 28, 2014 | October 4, 2015 | September 28, 2014 | |||||||||||||
(in thousands) | ||||||||||||||||
Cost of revenues—inventory step-up (1) | $ | 972 | $ | — | $ | 1,567 | $ | — | ||||||||
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Total | $ | 972 | $ | — | $ | 1,567 | $ | — | ||||||||
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For the Three Months Ended | For the Six Months Ended | |||||||||||||||
July 3, 2016 | July 5, 2015 | July 3, 2016 | July 5, 2015 | |||||||||||||
(in thousands) | ||||||||||||||||
Cost of revenues—inventory step-up (1) | $ | — | $ | 595 | $ | — | $ | 595 |
(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. |
Included in Corporate and Eliminations are charges and credits in the following line items in the statements of operations:
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
October 4, 2015 | September 28, 2014 | October 4, 2015 | September 28, 2014 | |||||||||||||
(in thousands) | ||||||||||||||||
Restructuring and other—AIT contingent consideration adjustment | $ | (1,000 | ) | $ | — | $ | (1,000 | ) | $ | — | ||||||
Restructuring and other—Universal Robots acquisition costs | 144 | — | 1,104 | — | ||||||||||||
Restructuring and other—ZTEC contingent consideration adjustment | — | (630 | ) | (1,600 | ) | (630 | ) | |||||||||
Other (income) expense, net—gain from the sale of an equity investment | — | — | (5,406 | ) | — | |||||||||||
Selling and administrative—stock based compensation expense (2) | — | — | — | 6,598 | ||||||||||||
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Total | $ | (856 | ) | $ | (630 | ) | $ | (6,902 | ) | $ | 5,968 | |||||
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For the Three Months Ended | For the Six Months Ended | |||||||||||||||
July 3, 2016 | July 5, 2015 | July 3, 2016 | July 5, 2015 | |||||||||||||
(in thousands) | ||||||||||||||||
Restructuring and other—Impairment of fixed assets and expenses related to the Japan earthquake | $ | 5,051 | $ | — | $ | 5,051 | $ | — | ||||||||
Restructuring and other—Property insurance recovery and proceeds | (5,051 | ) | — | (5,051 | ) | — | ||||||||||
Restructuring and other—Universal Robots contingent consideration adjustment | 755 | — | 1,928 | — | ||||||||||||
Restructuring and other—AIT contingent consideration adjustment | 550 | — | 550 | — | ||||||||||||
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 | ||||||||||||
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Total | $ | 1,305 | $ | (1,264 | ) | $ | 2,478 | $ | (6,046 | ) | ||||||
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S. Shareholders’ Equity
Stock Repurchase Program
In January 2015, the Board of Directors authorized Teradyne to repurchase up to $500 million of common stock, of which $300 million of whichwas repurchased in 2015. In 2016, Teradyne intends to repurchase in 2015. The cumulativebetween $100 million and $200 million of common stock. During the six months ended July 3, 2016, Teradyne
repurchased 2.9 million shares of common stock at an average price per share of $19.29, for a total cost of $56.8 million. Cumulative repurchases as of October 4, 2015July 3, 2016 totaled 11.918.6 million shares of common stock for a total purchase price of $226.8$356.7 million at an average price per share of $19.09.$19.22. The total price includes commissions and is recorded as a reduction to retained earnings.
Dividend
Holders of Teradyne’s common stock are entitled to receive dividends when they are declared by Teradyne’s Board of Directors.
In January 2015,2016 and May 2016, 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 3, 2016 were $12.2 million and $24.4 million, respectively.
In January 2015 and AugustMay 2015, Teradyne’s Board of Directors declared a quarterly cash dividend of $0.06 per share. Dividend payments for the three and ninesix months ended October 4,July 5, 2015 were $12.6 million and $38.4 million, respectively.
In January 2014 and August 2014, Teradyne’s Board of Directors declared a quarterly cash dividend of $0.06 per share. Dividend payments for the three and nine months ended September 28, 2014 were $12.8 million and $24.4$25.9 million, respectively.
While Teradyne declared a quarterly cash dividend and authorized a share repurchase program, it may reduce or eliminate the cash dividend or share repurchase program in the future. Future cash dividends and stock repurchases are subject to the discretion of Teradyne’s Board of Directors which will consider, among other things, Teradyne’s earnings, capital requirements and financial condition.
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“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 lookingforward-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, 2014.2015. 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 lookingforward-looking statements to reflect actual results or changes in factors or assumptions affecting forward- lookingforward-looking statements, except as may be required by law.
Overview
We are a leading global supplier of automation equipment for test and industrial applications. We design, develop, manufacture and sell automatic test systems and solutions used to test semiconductors, wireless products, hard disk drivesdata storage and circuit boardscomplex electronics systems in the consumer electronics, wireless, automotive, industrial, computing, communications, and aerospace and defense industries. Our industrial automation products include collaborative robots used by global manufacturing and light industrial customers to improve quality, increase manufacturing efficiency and decrease manufacturing costs. Our automatic test equipment and industrial automation 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, and distributors that sell collaborative robots.
On June 11, 2015, we 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. Universal Robots is a separate operating and reportable segment, Industrial Automation. The acquisition of Universal Robots provides a growth engine to our business and complements our existing System Test and Wireless Test segments.
In October 2014, we acquired Avionics Interface Technologies, LLC (“AIT”), a supplier of equipment for testing state-of-the-art data communication buses. The acquisition of AIT complements our Defense/Aerospace line of bus test instrumentation for commercial and defense avionics systems. AIT is included in our System Test segment.
We believe our recent acquisitions have enhanced our opportunities for growth. We intend to continue to invest in our business, grow market share in our markets and expand further 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 sincebecause 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 recent years, this cyclical demand has become an even/odd year trend where demand has increased in even years and decreased in odd years due principally to demand swings in the fourth quartermobility market of 2014, we performedour Semiconductor Test business. In 2015, the even/odd year trend continued, but had less of an impact on our annual goodwill impairmentrevenue due to the sale in 2015 of testers that were previously leased to customers in 2014. We expect the even/odd year demand trend in the mobility market to most likely lessen in the future due to slower smart phone unit growth, along with rising device complexity and the reduced impact of parallel test in our Semiconductor Test business.
On April 16, 2016, an earthquake in Kumamoto, Japan damaged our main facility at that location. The facility, which was used for engineering, production, and support operations, sustained heavy damage. With respect to the location, we have $10 million of earthquake insurance with a deductible of approximately $2.5 million. To date, we received $5.1 million of the property insurance proceeds. The Kumamoto building was damaged beyond repair. As a result, we impaired the building and recorded a goodwill impairment charge of $98.9$4.2 million and a charge of $0.9 million for other earthquake related expenses. We have temporarily transferred some operations to other facilities in Japan and elsewhere while our Kumamoto operations are restored.
In the second quarter of 2016, the Wireless Test reporting unit (which is our Wireless Test segmentoperating and reportable segment) reduced headcount by 11% as a result of decreaseda sharp decline in projected demand attributable to an estimated smaller future wireless test marketmarket. The decrease in projected demand was due to reuselower forecasted buying from our largest Wireless Test segment customer (who has contributed between 51% and 73% of wireless test equipment, price competition and different testing techniques. Further reductionsannual Wireless Test sales since the LitePoint acquisition in the size2011) as a result of the customer’s numerous operational efficiencies; slower smartphone growth rates; and a slowdown of new wireless test market may occur, which may resulttechnology adoption. We considered the headcount reduction and sharp decline in additionalprojected demand to be a triggering event for an interim goodwill impairment charges, increased risktest. Following the interim goodwill impairment test, we recorded a goodwill impairment charge of excess$255 million, with approximately $8.0 million of goodwill remaining, and obsolete inventories, asset write-offs and restructuring charges.$83 million for the impairment of acquired intangible assets with approximately $5.8 million of intangible assets remaining.
Critical Accounting Policies and Estimates
We have identified the policies which are critical to understanding our business and our results of operations. Except for below, thereThere have been no significant changes during the ninethree and six months ended October 4, 2015July 3, 2016 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, 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 upon shipment or at delivery destination point, 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).2015.
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 | |||||||||||||||||||||||||||||
October 4, 2015 | September 28, 2014 | October 4, 2015 | September 28, 2014 | July 3, 2016 | July 5, 2015 | July 3, 2016 | July 5, 2015 | |||||||||||||||||||||||||
Percentage of revenues: | ||||||||||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||||||
Products | 83 | % | 84 | % | 83 | % | 84 | % | 86 | % | 85 | % | 85 | % | 83 | % | ||||||||||||||||
Services | 17 | 16 | 17 | 16 | 14 | 15 | 15 | 17 | ||||||||||||||||||||||||
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Total revenues | 100 | 100 | 100 | 100 | 100 | 100 | 100 | 100 | ||||||||||||||||||||||||
Cost of revenues: | ||||||||||||||||||||||||||||||||
Cost of products | 37 | 38 | 36 | 38 | 41 | 35 | 40 | 35 | ||||||||||||||||||||||||
Cost of services | 8 | 7 | 8 | 7 | 6 | 6 | 7 | 7 | ||||||||||||||||||||||||
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Total cost of revenues (exclusive of acquired intangible assets amortization shown separately below) | 45 | 45 | 43 | 46 | 47 | 42 | 47 | 43 | ||||||||||||||||||||||||
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Gross profit | 55 | 55 | 57 | 54 | 53 | 58 | 53 | 57 | ||||||||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||||||||||
Engineering and development | 16 | 15 | 17 | 16 | 14 | 15 | 16 | 17 | ||||||||||||||||||||||||
Selling and administrative | 17 | 15 | 17 | 17 | 15 | 15 | 17 | 17 | ||||||||||||||||||||||||
Acquired intangible assets amortization | 4 | 4 | 4 | 4 | 3 | 3 | 4 | 3 | ||||||||||||||||||||||||
Acquired intangible assets impairment | 16 | — | 9 | — | ||||||||||||||||||||||||||||
Goodwill impairment | 48 | — | 26 | — | ||||||||||||||||||||||||||||
Restructuring and other | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
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Total operating expenses | 37 | 34 | 38 | 37 | 97 | 33 | 72 | 38 | ||||||||||||||||||||||||
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Income from operations | 19 | 21 | 19 | 17 | ||||||||||||||||||||||||||||
(Loss) income from operations | (44 | ) | 26 | (18 | ) | 19 | ||||||||||||||||||||||||||
Non-operating (income) expenses | ||||||||||||||||||||||||||||||||
Interest income | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Interest expense | — | — | — | 1 | — | — | — | — | ||||||||||||||||||||||||
Other (income) expense, net | — | — | — | — | — | — | — | (1 | ) | |||||||||||||||||||||||
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Income before income taxes | 19 | 21 | 20 | 17 | ||||||||||||||||||||||||||||
Income tax provision | 3 | 4 | 4 | 3 | ||||||||||||||||||||||||||||
(Loss) income before income taxes | (43 | ) | 26 | (18 | ) | 20 | ||||||||||||||||||||||||||
Income tax (benefit) provision | (1 | ) | 6 | — | 5 | |||||||||||||||||||||||||||
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Net income | 15 | % | 17 | % | 16 | % | 14 | % | ||||||||||||||||||||||||
Net (loss) income | (42 | )% | 20 | % | (18 | )% | 16 | % | ||||||||||||||||||||||||
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Results of Operations
ThirdSecond Quarter 20152016 Compared to ThirdSecond Quarter 20142015
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 | |||||||||||||||
October 4, 2015 | September 28, 2014 | July 3, 2016 | July 5, 2015 | |||||||||||||
Semiconductor Test | 0.6 | 0.5 | 0.9 | 1.0 | ||||||||||||
System Test | 0.6 | 1.0 | ||||||||||||||
Wireless Test | 0.7 | 0.8 | 1.0 | 1.3 | ||||||||||||
System Test | 0.7 | 0.6 | ||||||||||||||
Industrial Automation | 1.0 | — | 1.0 | 1.4 | ||||||||||||
Total Company | 0.7 | 0.6 | 0.9 | 1.0 |
Revenues
Revenues by our four reportable segments were as follows:
For the Three Months Ended | Dollar Change | For the Three Months Ended | Dollar Change | |||||||||||||||||||||
October 4, 2015 | September 28, 2014 | July 3, 2016 | July 5, 2015 | |||||||||||||||||||||
(in millions) | (in millions) | |||||||||||||||||||||||
Semiconductor Test | $ | 325.5 | $ | 380.1 | $ | (54.6 | ) | $ | 435.3 | $ | 400.3 | $ | 35.0 | |||||||||||
System Test | 69.1 | 43.1 | 26.0 | 49.0 | 45.8 | 3.2 | ||||||||||||||||||
Industrial Automation | 25.1 | 3.7 | 21.4 | |||||||||||||||||||||
Wireless Test | 55.4 | 54.8 | 0.6 | 22.4 | 62.9 | (40.5 | ) | |||||||||||||||||
Industrial Automation | 16.1 | — | 16.1 | �� | ||||||||||||||||||||
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$ | 466.0 | $ | 478.0 | $ | (12.0 | ) | $ | 531.8 | $ | 512.7 | $ | 19.1 | ||||||||||||
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The decreaseincrease in Semiconductor Test revenues of $54.6$35.0 million, or 14.4%8.7%, was primarily due to lower system-on-a-chip (“SOC”)higher product volume driven byin the application processor and microcontroller markets.market. The increase in System Test revenue of $26.0$3.2 million, or 60%7.0%, was primarily due to higher sales in Storage Test of 3.5” hard disk drive testers for cloud storage. The increasedecrease in Wireless Test revenue of $0.6$40.5 million, or 1.1%64.4%, was primarily driven by higherlower demand for connectivity and cellular test system sales.systems primarily from our largest Wireless Test segment customer. As a result of significant customer concentration in our Wireless Test segment, quarterly revenue in that segment is subject to significant fluctuations based on our largest customer’s order levels. The acquisition of Universal Robots, which is our Industrial Automation segment, completed in June of 2015, added $16.1$25.1 million of revenue in the three months ended October 4, 2015.July 3, 2016.
Revenues by country as a percentage of total revenues were as follows (1):
For the Three Months Ended | For the Three Months Ended | |||||||||||||||
October 4, 2015 | September 28, 2014 | July 3, 2016 | July 5, 2015 | |||||||||||||
Taiwan | 31 | % | 31 | % | 48 | % | 26 | % | ||||||||
United States | 11 | 12 | ||||||||||||||
China | 15 | 18 | 8 | 18 | ||||||||||||
United States | 12 | 12 | ||||||||||||||
Philippines | 8 | 5 | ||||||||||||||
Korea | 6 | 5 | ||||||||||||||
Malaysia | 6 | 5 | ||||||||||||||
Europe | 7 | 7 | 5 | 6 | ||||||||||||
Korea | 6 | 10 | ||||||||||||||
Singapore | 6 | 5 | 5 | 8 | ||||||||||||
Japan | 6 | 4 | 4 | 8 | ||||||||||||
Philippines | 4 | 7 | ||||||||||||||
Thailand | 5 | 2 | 1 | 4 | ||||||||||||
Malaysia | 3 | 5 | ||||||||||||||
Rest of World | 1 | 1 | 2 | 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 | |||||||||||
October 4, 2015 | September 28, 2014 | |||||||||||
(in millions) | ||||||||||||
Gross Profit | $ | 258.6 | $ | 261.1 | $ | (2.5 | ) | |||||
Percent of Total Revenues | 55.5 | % | 54.6 | % | 0.9 |
Gross Profit Percent of Total Revenues For the Three Months
Ended Dollar/Point
Change July 3,
2016 July 5,
2015 (in millions) $ 282.9 $ 298.6 $ (15.7 ) 53.2 % 58.2 % (5.0 )
Gross profit as a percent of revenue increaseddecreased by 0.95.0 points, primarily as a result of an increase of 1.2 pointsa 6.9 point decrease related to lower variable compensationproduct mix and other spending,sales of previously leased testers in Semiconductor Test in 2015, partially offset by a decrease of 0.3 points related1.7 point increase due to lower salesexcess and obsolete inventory provisions in Storage Test 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 for our Semiconductor Test, System Test and Industrial Automation segments and the next four quarters for our Wireless Test segment, is written-down to estimated net realizable value.
During the three months ended October 4, 2015,July 3, 2016, we recorded an inventory provision of $3.1$7.7 million included in cost of revenues primarily due to downward revisions to previously forecasted demand levels. Of the $3.1$7.7 million of total excess and obsolete provisions, $1.7$5.3 million was related to Wireless Test, $2.2 million was related to Semiconductor Test, $0.9 million was related to Wireless Test, and $0.5$0.2 million was related to System Test.
During the three months ended September 28, 2014,July 5, 2015, we recorded an inventory provision of $6.4$14.4 million included in cost of revenues primarily due to $7.7 million related to a downward revisionsrevision to previously forecasted demand levels.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 $6.4$14.4 million of total excess and obsolete provisions, $4.4$7.7 million was related to System Test, $6.4 million was related to Semiconductor Test, $1.3and $0.3 million was related to Wireless Test, and $0.7 million was related to System Test.
During the three months ended October 4,July 3, 2016 and July 5, 2015, and September 28, 2014, we scrapped $3.6$1.5 million and $11.1$0.8 million of inventory, respectively. During the three months ended October 4,July 3, 2016 and July 5, 2015, and September 28, 2014, we sold $2.0$5.1 million and $6.2$2.6 million of previously written-down or written-off inventory, respectively. As of October 4, 2015,July 3, 2016, we had inventory related reserves for inventory which had been written-down or written-off totaling $121.1$125.1 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 | For the Three Months Ended | Dollar Change | |||||||||||||||||||||
October 4, 2015 | September 28, 2014 | July 3, 2016 | July 5, 2015 | |||||||||||||||||||||
(in millions) | (in millions) | |||||||||||||||||||||||
Engineering and Development | $ | 74.0 | $ | 72.0 | $ | 2.0 | $ | 76.1 | $ | 75.8 | $ | 0.3 | ||||||||||||
Percent of Total Revenues | 15.9 | % | 15.1 | % | 14.3 | % | 14.8 | % |
The increase of $2.0$0.3 million in engineering and development expenses was due primarily to increased spending in System Test and from the acquisition of Universal Robots.Robots completed in June 2015, partially offset by lower variable compensation.
Selling and Administrative
Selling and administrative expenses were as follows:
For the Three Months Ended | Dollar Change | |||||||||||
October 4, 2015 | September 28, 2014 | |||||||||||
(in millions) | ||||||||||||
Selling and Administrative | $ | 77.5 | $ | 73.1 | $ | 4.4 | ||||||
Percent of Total Revenues | 16.6 | % | 15.3 | % |
Selling and Administrative Percent of Total Revenues For the Three Months
Ended Dollar
Change July 3,
2016 July 5,
2015 (in millions) $ 81.4 $ 77.1 $ 4.3 15.3 % 15.0 %
The increase of $4.4$4.3 million in selling and administrative expenses was due primarily to additional costs as a result of the acquisition of Universal Robots in June 2015.2015, partially offset by lower variable compensation.
Acquired Intangible Assets Amortization
Acquired intangible assets amortization expense was as follows:
For the Three Months Ended | Dollar Change | |||||||||||
July 3, 2016 | July 5, 2015 | |||||||||||
(in millions) | ||||||||||||
Acquired Intangible Assets Amortization | $ | 16.2 | $ | 15.3 | $ | 0.9 | ||||||
Percent of Total Revenues | 3.1 | % | 3.0 | % |
Acquired intangible assets amortization expense increased due to the Universal Robots acquisition in June 2015, partially offset by lower amortization expense in the Wireless Test segment due to the impairment of intangible assets.
Goodwill Impairment
We assess goodwill for impairment at least annually, in the fourth quarter, as of December 31, or on an interim basis between annual tests when events or circumstances indicate that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying value. In the second quarter of 2016, the Wireless Test reporting unit (which is our Wireless Test operating and reportable segment) reduced headcount by 11% as a result of a sharp decline in projected demand attributable to an estimated smaller future wireless test market. The decrease in projected demand was due to lower forecasted buying from our largest Wireless Test segment customer (who has contributed between 51% and 73% of annual Wireless Test sales since the LitePoint acquisition in 2011) as a result of the customer’s numerous operational efficiencies; slower smartphone growth rates; and a slowdown of new wireless technology adoption. We considered the headcount reduction and sharp decline in projected demand to be a triggering event for an interim goodwill impairment test. Following the interim goodwill impairment test, we recorded a goodwill impairment charge of $255 million.
Acquired Intangible Assets Impairment
We review long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of these assets are no longer appropriate. As a result of the Wireless Test segment goodwill impairment review in the second quarter of 2016, we performed an impairment test of the Wireless Test segment’s intangible and long-lived assets based on a comparison of the estimated undiscounted cash flows to the carrying value of the assets. If undiscounted cash flows for the asset are less than the carrying amount, the asset is written down to its estimated fair value based on a discounted cash flow analysis. The cash flow estimates used to determine the impairment contain management’s best estimates using appropriate assumptions and projections at that time. As a result of the analysis, we recorded an $83.3 million impairment charge in the second quarter of 2016 in acquired intangible assets impairment on the statement of operations.
Restructuring and Other
Restructuring
During the three months ended October 4, 2015, we recorded $1.1 million of severance charges related to headcount reductions of 18 people, primarily in System Test. During the three months ended September 28, 2014, we recorded $0.2 million of severance charges related to headcount reductions of 2 people in System Test.
Other
During the three months ended October 4,July 3, 2016, we recorded $4.2 million for an impairment of fixed assets and $0.9 million of expenses related to an earthquake in Kumamoto, Japan and $1.3 million for the increase in the fair value of contingent consideration liability, of which $0.8 million was related to Universal Robots and $0.6 million was related to AIT, partially offset by $5.1 million of property insurance proceeds related to the Japan earthquake.
During the three months ended July 5, 2015, we recorded a $1.0$1.6 million gain from the decrease in the fair value of the AITZTEC contingent consideration, liability, partially offset by $0.1$1.0 million of acquisition costs related to Universal Robots.
Restructuring
During the three months ended September 28, 2014,July 3, 2016, we recorded a $0.6$1.3 million fair value adjustmentof severance charges related to headcount reductions of 62 people, of which 47 people were in Wireless Test and 15 people were in Semiconductor Test.
During the three months ended July 5, 2015, we recorded $0.3 million of severance charges related to headcount reductions of 4 people, primarily in Semiconductor Test.
Interest and Other
For the Three Months Ended | Dollar Change | |||||||||||
July 3, 2016 | July 5, 2015 | |||||||||||
(in millions) | ||||||||||||
Interest Income | $ | (1.7 | ) | $ | (1.7 | ) | $ | 0.0 | ||||
Interest Expense | 0.7 | 0.4 | 0.3 | |||||||||
Other (income) expense, net | — | (0.1 | ) | 0.1 |
Interest expense increased by $0.3 million due primarily to realized losses on sales of marketable securities in 2016.
(Loss) Income Before Income Taxes
For the Three Months Ended | Dollar Change | |||||||||||
July 3, 2016 | July 5, 2015 | |||||||||||
(in millions) | ||||||||||||
Semiconductor Test | $ | 121.2 | $ | 129.5 | $ | (8.3 | ) | |||||
System Test | 9.0 | (4.3 | ) | 13.3 | ||||||||
Wireless Test | (356.5 | ) | 6.8 | (363.3 | ) | |||||||
Industrial Automation | (4.5 | ) | (1.7 | ) | (2.8 | ) | ||||||
Corporate (1) | — | 1.8 | (1.8 | ) | ||||||||
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$ | (230.8 | ) | $ | 132.1 | $ | (362.9 | ) | |||||
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(1) | Included in Corporate are: impairment of fixed assets and expenses related to the Japan earthquake, property insurance recovery and proceeds, pension actuarial gains, contingent consideration adjustment, gain from the sale of an equity investment, proceeds from life insurance, interest income and interest expense. |
The decrease in income before income taxes in Semiconductor Test was primarily due to unfavorable product mix and sales partially offset by lower excess and obsolete inventory provisions. The increase in income before income taxes in System Test was primarily due to lower excess and obsolete inventory provisions and higher sales in Storage Test of 3.5” hard disk drive testers for cloud storage. The decrease in income before income taxes in Wireless Test was primarily due to goodwill and intangible asset impairment charges and lower revenue driven by lower connectivity and cellular test system sales. In June 2015, we completed the ZTEC acquisition contingent consideration.of Universal Robots, which is our Industrial Automation segment. The loss before income taxes in Industrial Automation in the three months ended July 3, 2016 was primarily due to amortization of intangible assets.
Income Taxes
The effective tax rate for the three months ended October 4,July 3, 2016 and July 5, 2015 was 3.2% and September 28, 2014 was 18.3% and 17.6%22.1%, respectively. The increasedecrease in the effective tax rate is primarily attributable to the effect of the non-deductible goodwill impairment charge which reduced the benefit of the loss before income taxes in the U.S. The rate for the three months ended July 3, 2016 includes the impact of a projected increasedecrease in income subject to tax in the United StatesU.S. as compared to lower rate foreign jurisdictions net of $7.2jurisdictions. The rate for the three months ended July 3, 2016 also reflects a $2.6 million decrease in discreteincome tax expense related to uncertainfrom tax positionsreserve releases resulting from the settlement of a U.S. tax audit and a $2.2 million decrease in income tax expense from non-taxable foreign exchange gains. The rate for transfer pricing and $1.8the three months ended July 5, 2015 includes a $0.7 million of discreteincrease in income tax benefit attributable to a United States Tax Court opinion regarding intercompany cost sharing arrangements. We are in discussion with the Singapore Economic Development Board with respect to extension of the tax holiday for periods after December 31, 2015.expense from non-deductible foreign exchange losses.
NineSix Months of 2016 Compared to Six Months of 2015 Compared to Nine Months of 2014
Revenues
Revenues by our four reportable segments were as follows:
For the Nine Months Ended | For the Six Months Ended | Dollar Change | ||||||||||||||||||||||
October 4, 2015 | September 28, 2014 | Dollar Change | July 3, 2016 | July 5, 2015 | ||||||||||||||||||||
(in millions) | (in millions) | |||||||||||||||||||||||
Semiconductor Test | $ | 996.7 | $ | 1,063.3 | $ | (66.6 | ) | $ | 775.6 | $ | 671.2 | $ | 104.4 | |||||||||||
System Test | 102.6 | 83.3 | 19.3 | |||||||||||||||||||||
Wireless Test | 152.3 | 144.7 | 7.6 | 42.8 | 96.9 | (54.1 | ) | |||||||||||||||||
System Test | 152.3 | 116.6 | 35.7 | |||||||||||||||||||||
Industrial Automation | 19.8 | — | 19.8 | 41.8 | 3.7 | 38.1 | ||||||||||||||||||
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$ | 1,321.1 | $ | 1,324.6 | $ | (3.5 | ) | $ | 962.8 | $ | 855.1 | $ | 107.7 | ||||||||||||
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The decreaseincrease in Semiconductor Test revenues of $66.6$104.4 million, or 6%, was primarily due to lower SOC product volume, driven by the application processor and microcontroller markets. The increase in Wireless Test revenue of $7.6 million, or 5%15.6%, was primarily due to higher cellular test system sales.product volume in the application processor market. The increase in System Test revenue of $35.7$19.3 million, or 31%23.2%, was primarily due to higher sales in Storage Test of 3.5” hard disk drive testers for cloud storage. The decrease in Wireless Test revenue of $54.1 million, or 55.8%, was driven by lower demand for connectivity and cellular test systems primarily from our largest Wireless Test segment customer. As a result of significant customer concentration in our Wireless Test segment, quarterly revenue in that segment is subject to significant fluctuations based on our largest customer’s order levels. The acquisition of Universal Robots, which is our Industrial Automation segment, completed in June 2015, added $41.8 million of revenue in the six months ended July 3, 2016.
Our revenuesRevenues by regioncountry as a percentage of total net revenues were as follows:follows (1):
For the Nine Months Ended | For the Six Months Ended | |||||||||||||||
October 4, 2015 | September 28, 2014 | July 3, 2016 | July 5, 2015 | |||||||||||||
Taiwan | 29 | % | 30 | % | 45 | % | 28 | % | ||||||||
United States | 11 | 13 | ||||||||||||||
China | 16 | 18 | 9 | 16 | ||||||||||||
United States | 12 | 12 | ||||||||||||||
Korea | 8 | 10 | ||||||||||||||
Singapore | 7 | 7 | ||||||||||||||
Japan | 7 | 4 | 7 | 8 | ||||||||||||
Europe | 6 | 6 | 6 | 6 | ||||||||||||
Korea | 6 | 8 | ||||||||||||||
Malaysia | 5 | 5 | ||||||||||||||
Singapore | 4 | 7 | ||||||||||||||
Philippines | 6 | 4 | 3 | 5 | ||||||||||||
Malaysia | 4 | 5 | ||||||||||||||
Thailand | 4 | 3 | 2 | 3 | ||||||||||||
Rest of World | 1 | 1 | 2 | 1 | ||||||||||||
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100 | % | 100 | % | 100 | % | 100 | % | |||||||||
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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 Nine Months Ended | Dollar/Point Change | For the Six Months Ended | Dollar/ Point Change | |||||||||||||||||||||
October 4, 2014 | September 28, 2014 | July 3, 2016 | July 5, 2015 | |||||||||||||||||||||
(in millions) | (in millions) | |||||||||||||||||||||||
Gross Profit | $ | 749.6 | $ | 718.6 | $ | 31.0 | $ | 513.2 | $ | 491.0 | $ | 22.2 | ||||||||||||
Percent of Total Revenue | 56.7 | % | 54.2 | % | 2.5 | |||||||||||||||||||
Percent of Total Revenues | 53.3 | % | 57.4 | % | (4.1 | ) |
Gross profit as a percent of revenue increaseddecreased by 2.54.1 points, dueof which a 5.5 point decrease was related to product mix and sales of previously leased testers in Semiconductor Test.Test in 2015, higher Storage Test sales and lower Wireless Test sales, partially offset by an increase of 1.0 point due to higher product volume.
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 for our Semiconductor Test, System Test and Industrial Automation segments and the next four quarters for our Wireless Test segment, is written-down to estimated net realizable value.
During the ninesix months ended October 4,July 3, 2016, we recorded an inventory provision of $12.1 million included in cost of revenues primarily due to downward revisions to previously forecasted demand levels. Of the $12.1 million of total excess and obsolete provisions, $5.9 million was related to Semiconductor Test, $5.9 million was related to Wireless Test, and $0.3 million was related to System Test.
During the six months ended July 5, 2015, we recorded an inventory provision of $18.9$15.9 million included in cost of revenues primarily due to $7.7 million related to a downward revisionsrevision to previously forecasted demand levels for our 2.5” hard disk drive testers in Storage Test $6.0 million related to product transition in Semiconductor Test, and $2.1 million related to downward revision to previously forecasted demand levels in Wireless Test. Of the $18.9 million of total excess and obsolete provisions, $8.6 million was related to Semiconductor Test, $8.2 million was related to System Test, and $2.1 million was related to Wireless Test.
During the nine months ended September 28, 2014, we recorded an inventory provision of $21.5 million included in cost of revenues with $15.3 million due to downward revisions to previously forecasted demand levels and $6.2$6.0 million related to product transition in Semiconductor Test. Of the $21.5$15.9 million of total excess and obsolete provisions, $14.3$7.8 million was related to System Test, $6.9 million was related to Semiconductor Test, $5.2and $1.2 million was related to Wireless Test, and $2.0 million was related to System Test.
During the ninesix months ended October 4,July 3, 2016 and July 5, 2015, and September 28, 2014, we scrapped $5.0$2.2 million and $14.3$1.4 million of inventory, respectively. During the ninesix months ended October 4,July 3, 2016 and July 5, 2015, and September 28, 2014, we sold $6.4$6.2 million and $9.8$4.5 million of previously written-down or written-off inventory, respectively. As of October 4, 2015,July 3, 2016, we had inventory related reserves for inventory which had been written-down or written-off totaling $121.1$125.1 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 | For the Six Months Ended | Dollar Change | |||||||||||||||||||||
October 4, 2015 | September 28, 2014 | July 3, 2016 | July 5, 2015 | |||||||||||||||||||||
(in millions) | (in millions) | |||||||||||||||||||||||
Engineering and Development | $ | 221.3 | $ | 212.5 | $ | 8.8 | $ | 149.6 | $ | 147.3 | $ | 2.3 | ||||||||||||
Percent of Total Revenue | 16.8 | % | 16.0 | % | ||||||||||||||||||||
Percent of Total Revenues | 15.5 | % | 17.2 | % |
The increase of $8.8$2.3 million in engineering and development expenses was due primarily to increased spendingfrom the acquisition of Universal Robots completed in Semiconductor Test and higher variable compensation.June 2015.
Selling and Administrative
Selling and administrative expenses were as follows:
For the Nine Months Ended | Dollar Change | For the Six Months Ended | Dollar Change | |||||||||||||||||||||
October 4, 2015 | September 28, 2014 | July 3, 2016 | July 5, 2015 | |||||||||||||||||||||
(in millions) | (in millions) | |||||||||||||||||||||||
Selling and Administrative | $ | 226.6 | $ | 228.6 | $ | (2.0 | ) | $ | 160.6 | $ | 149.1 | $ | 11.5 | |||||||||||
Percent of Total Revenue | 17.2 | % | 17.3 | % | ||||||||||||||||||||
Percent of Total Revenues | 16.7 | % | 17.4 | % |
The decreaseincrease of $2.0$11.5 million in selling and administrative expenses was due primarily to additional costs as a one-time $6.6 million stock-based compensation charge relatedresult of the acquisition of Universal Robots in June 2015.
Acquired Intangible Assets Amortization
Acquired intangible assets amortization expense was as follows:
For the Six Months Ended | Dollar Change | |||||||||||
July 3, 2016 | July 5, 2015 | |||||||||||
(in millions) | ||||||||||||
Acquired Intangible Assets Amortization | $ | 36.2 | $ | 29.1 | $ | 7.1 | ||||||
Percent of Total Revenues | 3.8 | % | 3.4 | % |
Acquired intangible assets amortization expense increased due to Michael Bradley’s (retired Chief Executive Officer) Retirement Agreementthe Universal Robots acquisition in the nine months ended September 28, 2014,June 2015, partially offset by higher variable compensation.lower amortization expense in the Wireless Test segment due to the impairment of intangible assets.
Goodwill Impairment
We assess goodwill for impairment at least annually, in the fourth quarter, as of December 31, or on an interim basis between annual tests when events or circumstances indicate that it is more-likely-than-not that the
fair value of a reporting unit is less than its carrying value. In the second quarter of 2016, the Wireless Test reporting unit (which is our Wireless Test operating and reportable segment) reduced headcount by 11% as a result of a sharp decline in projected demand attributable to an estimated smaller future wireless test market. The decrease in projected demand was due to lower forecasted buying from our largest Wireless Test segment customer (who has contributed between 51% and 73% of annual Wireless Test sales since the LitePoint acquisition in 2011) as a result of the customer’s numerous operational efficiencies; slower smartphone growth rates; and a slowdown of new wireless technology adoption. We considered the headcount reduction and sharp decline in projected demand to be a triggering event for an interim goodwill impairment test. Following the interim goodwill impairment test, we recorded a goodwill impairment charge of $255 million.
Acquired Intangible Assets Impairment
We review long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of these assets are no longer appropriate. As a result of the Wireless Test segment goodwill impairment review in the second quarter of 2016, we performed an impairment test of the Wireless Test segment’s intangible and long-lived assets based on a comparison of the estimated undiscounted cash flows to the recorded value of the assets. If undiscounted cash flows for the asset are less than the carrying amount, the asset is written down to its estimated fair value based on a discounted cash flow analysis. The cash flow estimates used to determine the impairment contain management’s best estimates using appropriate assumptions and projections at that time. As a result of the analysis, we recorded an $83.3 million impairment charge in the second quarter of 2016 in acquired intangible assets impairment on the statement of operations.
Restructuring and Other
Other
During the ninesix months ended October 4, 2015,July 3, 2016, we recorded a $2.6$4.2 million gain fromfor an impairment of fixed assets and $0.9 million for expenses related to an earthquake in Kumamoto, Japan and $2.5 million for the decreaseincrease in the fair value of contingent consideration liability, of which $1.6$1.9 million was related to the ZTEC acquisitionUniversal Robots and $1.0$0.6 million was related to the AIT, acquisition, partially offset by $1.1$5.1 million of property insurance proceeds related to the Japan earthquake.
During the six months ended July 5, 2015, we recorded a $1.6 million fair value adjustment to decrease the ZTEC acquisition contingent consideration, partially offset by $1.0 million of acquisition costs related to Universal Robots.
During the nine months ended September 28, 2014, we recorded a $0.6 million gain from the fair value adjustment to decrease the ZTEC acquisition contingent consideration.
Restructuring
During the ninesix months ended October 4, 2015,July 3, 2016, we recorded $1.4$1.7 million of severance charges related to headcount reductions of 2274 people, primarilyof which 47 people were in SystemWireless Test and 27 people were in Semiconductor Test.
During the ninesix months ended September 28, 2014,July 5, 2015, we recorded $0.8$0.3 million of severance charges related to headcount reductions of 304 people, primarily in Semiconductor Test.
Interest and Other
For the Six Months Ended | Dollar Change | |||||||||||
July 3, 2016 | July 5, 2015 | |||||||||||
(in millions) | ||||||||||||
Interest Income | $ | (3.3 | ) | $ | (3.5 | ) | $ | 0.2 | ||||
Interest Expense | 1.4 | 0.6 | 0.8 | |||||||||
Other (income) expense, net | (0.2 | ) | (5.8 | ) | 5.6 |
Interest income decreased by $0.2 million due primarily to lower cash and marketable securities balances in 2016. Interest expense increased by $0.8 million due primarily to costs related to the revolving credit facility and realized losses on sales of marketable securities in 2016. In 2015, other (income) expense, net included a $4.8 million gain from the sale of an equity investment.
Income (Loss) Before Income Taxes
For the Six Months Ended | Dollar Change | |||||||||||
July 3, 2016 | July 5, 2015 | |||||||||||
(in millions) | ||||||||||||
Semiconductor Test | $ | 194.4 | $ | 172.7 | $ | 21.7 | ||||||
System Test | 18.5 | (3.3 | ) | 21.8 | ||||||||
Wireless Test | (376.6 | ) | (3.6 | ) | (373.0 | ) | ||||||
Industrial Automation | (11.7 | ) | (1.7 | ) | (10.0 | ) | ||||||
Corporate (1) | 1.8 | 10.5 | (8.7 | ) | ||||||||
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$ | (173.6 | ) | $ | 174.6 | $ | (348.2 | ) | |||||
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(1) | Included in Corporate are: impairment of fixed assets and expenses related to the Japan earthquake, property insurance recovery and proceeds, pension actuarial gains, contingent consideration adjustment, gain from the sale of an equity investment, proceeds from life insurance, interest income and interest expense. |
The increase in income before income taxes in Semiconductor Test was primarily due to higher revenues in the application processor market. The increase in income before income taxes in System Test was primarily due to higher sales in Storage Test of 3.5” hard disk drive testers for cloud storage and lower excess and obsolete inventory provisions. The decrease in income before income taxes in Wireless Test.Test was primarily due to goodwill and intangible assets impairment charges and lower revenue driven by lower connectivity and cellular test system sales. In June 2015, we completed the acquisition of Universal Robots, which is our Industrial Automation segment. The loss before income taxes in Industrial Automation in the six months ended July 3, 2016 was primarily due to amortization of intangible assets.
Income Taxes
The effective tax rate for the ninesix months ended October 4,July 3, 2016 and July 5, 2015 was 0.0% and September 28, 2014 was 20.9% and 15.9%22.3%, respectively. The increasedecrease in the effective tax rate is primarily attributable to the effect of the non-deductible goodwill impairment charge which reduced the benefit of the loss before income taxes in the U.S. The rate for the six months ended July 3, 2016 includes the impact of a projected increasedecrease in income subject to tax in the United StatesU.S. as compared to lower rate foreign jurisdictions net of $7.2jurisdictions. The rate for the six months ended July 3, 2016 also reflects a $3.4 million decrease in discreteincome tax expense related to uncertainfrom non-taxable foreign exchange gains and a $2.6 million decrease in income tax positionsexpense from tax reserve releases resulting from the settlement of a U.S. tax audit. The rate for transfer pricing and $1.8the six months ended July 5, 2015 includes a $0.8 million of discretedecrease in income tax benefit attributable to a United States Tax Court opinion regarding intercompany cost sharing arrangements. We are in discussion with the Singapore Economic Development Board with respect to extension of the tax holiday for periods after December 31, 2015.expense from non-taxable foreign exchange gains.
Contractual Obligations
The following table reflects our contractual obligations as of October 4, 2015:July 3, 2016:
Payments Due by Period | Payments Due by Period | |||||||||||||||||||||||||||||||||||||||||||||||
Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | Other | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | Other | |||||||||||||||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
Purchase obligations | $ | 219,633 | $ | 214,196 | $ | 5,437 | $ | — | $ | — | $ | — | $ | 201,094 | $ | 200,028 | $ | 1,066 | $ | — | $ | — | $ | — | ||||||||||||||||||||||||
Retirement plans contributions | 111,206 | 4,079 | 8,364 | 9,263 | 89,500 | — | 110,579 | 4,034 | 8,076 | 17,852 | 80,617 | — | ||||||||||||||||||||||||||||||||||||
Operating lease obligations | 59,361 | 15,262 | 18,492 | 12,099 | 13,508 | — | 72,290 | 16,142 | 26,776 | 16,882 | 12,490 | — | ||||||||||||||||||||||||||||||||||||
Fair value of contingent consideration | 34,595 | 14,447 | 15,055 | 5,093 | — | — | 24,914 | 1,050 | 23,864 | — | — | — | ||||||||||||||||||||||||||||||||||||
Other long-term liabilities reflected on the balance sheet under GAAP (1) | 93,288 | — | 29,490 | — | — | 63,798 | 76,448 | — | 26,927 | — | — | 49,521 | ||||||||||||||||||||||||||||||||||||
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Total | $ | 518,083 | $ | 247,984 | $ | 76,838 | $ | 26,455 | $ | 103,008 | $ | 63,798 | $ | 485,325 | $ | 221,254 | $ | 86,709 | $ | 34,734 | $ | 93,107 | $ | 49,521 | ||||||||||||||||||||||||
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(1) | Included in Other Long-Term Liabilities are liabilities for customer advances, extended warranty, uncertain tax positions, deferred tax liabilities and other obligations. For certain long-term obligations, we are unable to provide a reasonably reliable estimate of the timing of future payments relating to these obligations and therefore we included these amounts in the column marked “Other.” |
Liquidity and Capital Resources
Our cash, cash equivalents and marketable securities balances decreasedincreased by $221.7$97.5 million in the ninesix months ended October 4, 2015,July 3, 2016 to $1,077$1,106 million.
In the ninesix months ended October 4, 2015,July 3, 2016, changes in operating assets and liabilities providedused cash of $39.9$33.1 million. This was due to a $42.2$121.7 million increase in operating assets and an $82.1$88.6 million increase in operating liabilities.
The increase in operating assets was due to a $91.1$138.2 million increase in accounts receivable due to higher sales and a $13.7 million increase in prepayments and other assets, partially offset by a $30.2 million decrease in inventories. The increase in operating liabilities was due to a $106.1 million increase in customer advance payments and deferred revenue, an $11.6 million increase in accounts payable and a $7.2 million increase in other accrued liabilities, partially offset by a $33.9 million decrease in accrued employee compensation due primarily to variable compensation and employee stock compensation awards payroll tax payments and $2.3 million of retirement plan contributions.
Investing activities during the six months ended July 3, 2016 used cash of $16.0 million, due to $437.3 million used for purchases of marketable securities and $46.6 million used for purchases of property, plant and equipment, partially offset by $334.8 million and $128.0 million in proceeds from sales and maturities of marketable securities, respectively, and proceeds from property insurance of $5.1 million related to the Japan earthquake.
Financing activities during the six months ended July 3, 2016 used cash of $75.0 million, due to $56.8 million used for the repurchase of 2.9 million shares of common stock at an average price of $19.29 per share, $24.4 million used for dividend payments and $11.7 million used for a payment related to the Universal Robots acquisition contingent consideration, partially offset by $17.9 million from the issuance of common stock under employee stock purchase and stock option plans.
In the six months ended July 5, 2015, changes in operating assets and liabilities used cash of $24.6 million. This was due to a $104.9 million increase in operating assets and an $80.3 million increase in operating liabilities.
The increase in operating assets was due to a $142.5 million increase in accounts receivable due to higher sales, partially offset by a $33.4$23.5 million decrease in inventories and a $15.5$14.1 million decrease in prepayments and other assets. The increase in operating liabilities was due to a $41.8$40.6 million increase in other accrued liabilities, a $25.9$31.2 million increase in accounts payable due to higher sales, a $25.7$23.3 million increase in accrued income taxes, and a $6.8$5.7 million increase in customer advance payments and deferred revenue, partially offset by a $15.1$18.4 million decrease in accrued employee compensation due primarily to variable compensation and employee stock compensation awards’awards payroll tax payments, and $3.0$2.0 million of retirement plansplan contributions.
Investing activities during the ninesix months ended October 4,July 5, 2015 used cash of $126.5$49.4 million, due to $957.7$590.3 million used for purchases of marketable securities, $282.7$282.3 million used for the acquisition of Universal Robots, and $66.7$46.1 million used for purchases of property, plant and equipment, partially offset by proceeds from maturities and sales of marketable securities of $330.4$231.4 million and $843.7$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 $79.6 million was primarily due to higher purchases of testers for customer leasing in the nine months ended September 28, 2014.
Financing activities during the ninesix months ended October 4,July 5, 2015 used cash of $246.2$137.7 million, due to $226.8$128.3 million used for the repurchase of 11.96.5 million shares of common stock at an average price of $19.09$19.74 per share, $38.4$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 $18.1$17.9 million from the issuance of common stock under employee stock purchase and stock option plans and $3.2$0.9 million from the tax benefit related to employee stock compensation awards.
In the nine months ended September 28, 2014, changes in operating assetsJanuary 2016 and liabilities used cash of $27.3 million. This was due to a $77.6 million increase in operating assets and a $50.3 million increase in operating liabilities.
The increase in operating assets was due to a $163.7 million increase in accounts receivable due to higher sales and increase in days sales outstanding (“DSO”). DSO for the three months ended September 28, 2014 was 61 days as compared to December 31, 2013 DSO of 50 days. The increase in accounts receivable was partially offset by a $47.8 million decrease in prepayments and other assets and a $38.3 million decrease in inventories due to higher sales. The increase in operating liabilities was due to a $52.2 million increase in other accrued liabilities, a $14.3 million increase in customer advance payments and deferred revenue and a $10.2 million increase in accrued income taxes, partially offset by a $16.2 million decrease in accrued employee compensation due primarily to variable compensation and employee stock award payroll tax payments, a $4.3 million convertible note interest payment, $3.3 million of retirement plan contributions and a $2.6 million decrease in accounts payable.
Investing activities during the nine months ended September 28, 2014 used cash of $254.4 million, due to $844.1 million used for purchases of marketable securities and $146.4 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 million and $236.1 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.
Financing activities during the nine months ended September 28, 2014 used cash of $192.6 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 million was used for dividend payments, partially offset by $21.0 million provided by 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 January 2014 and August 2014,May 2016, our Board of Directors declared a quarterly cash dividend of $0.06 per share. In the ninesix months ended September 28, 2014,July 3, 2016, dividend payments were $24.4 million.
In January 2015 May 2015, and AugustMay 2015, our Board of Directors declared a quarterly cash dividend of $0.06 per share. In the ninesix months ended October 4,July 5, 2015, dividend payments were $38.4$25.9 million.
In January 2015, our Board of Directors authorized the repurchase of up to $500 million of common stock of which $300 million of whichwas repurchased in 2015. In 2016, we intend to repurchase in 2015. As of October 4, 2015between $100 million and $200 million. During the six months ended July 3, 2016, we repurchased 11.92.9 million shares of common stock at an average price of $19.09,$19.29, for a total cost of $226.8$56.8 million. The cumulative repurchases under this program as of July 3, 2016 totaled 18.6 million shares of common stock for $356.7 million at an average price of $19.22 per share.
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 future. Future cash dividends and stock repurchases are subject to the discretion of our Board of Directors which will consider, among other things, our earnings, capital requirements and financial condition.
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 $550$668 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 N: “Stock Based Compensation” in our 20142015 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
In September 2015,On March 31, 2016, the FASBFinancial Accounting Standards Board (“FASB”) issued Accounting StandardStandards Update (“ASU”) 2015-16,2016-09,“Business CombinationsCompensation-Stock Compensation (Topic 805)—Simplifying the Accounting for Measurement-Period Adjustments.718): Improvements to Employee Share-Based Payment Accounting.” This ASU 2015-16 requires that an acquirer recognize adjustmentschanges how companies account for certain aspects of share-based payment awards to provisional amounts that are identified duringemployees, including the measurement periodaccounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the reporting period in which the adjustments are identified, including the cumulative effectstatement of the change in provisional amount as if the accounting had been completed at the acquisition date. ASU 2015-16cash flows. This pronouncement is effective for reportingannual periods beginning after December 15, 2016. Early adoption is permitted. We are currently evaluating the impact of this ASU on our financial position and results of operations.
In February 2016, the FASB issued ASU 2016-02,“Leases (Topic 842).” The guidance in this ASU supersedes the lease recognition requirements in Accounting Standards Codification (“ASC”) Topic 840,“Leases.” The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record an ROU asset and a lease liability on the balance sheet for all leases with terms longer than twelve months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for annual periods beginning after December 15, 2018, including interim periods within those years, with early adoption permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. We are currently evaluating the impact of this ASU on our financial position and results of operations.
In January 2016, the FASB issued ASU 2016-01,“Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.”This ASU provides guidance for the recognition, measurement, presentation, and disclosure of financial instruments. The new pronouncement revises accounting related to equity investments and the presentation of certain fair value changes for financial liabilities measured at fair value. Among other things, it amends the presentation and disclosure requirements of equity securities that do not result in consolidation and are not accounted for under the equity method. Changes in the fair value of these equity securities will be recognized directly in net income. This pronouncement is effective for fiscal years and interim periods within those years beginning after December 15, 2017. We are currently evaluating the impact of this ASU on our financial position and results of operations.
In November 2015, the FASB issued ASU 2015-17,“Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes.” ASU 2015-17 simplifies the presentation of deferred income taxes by eliminating the separate classification of deferred income tax liabilities and assets into current and noncurrent amounts in the balance sheet. The amendments in the update require that all deferred tax liabilities and assets be classified as noncurrent in the balance sheet. This ASU is effective for annual periods beginning after December 15, 2016, and interim periods within those years and may be applied prospectively.either prospectively or retrospectively to all periods presented. Early adoption is permitted. We early adopted this ASU prospectively in the three months ended October 4, 2015. Adoptionfirst quarter of this ASU did not have a material impact on our financial position and results of operations.2016.
On April 7, 2015, the FASB issued ASU 2015-03,“Simplifying the Presentation of Debt Issuance Costs,” which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability, consistent with the presentation for debt discount. ASU 2015-03 does not specifically address requirements for the presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements. On August 8, 2015, the FASB issued ASU 2015-15, “Interest—Imputation of Interest (Subtopic 835-30)” which clarifies theclarifying that debt issuance costs related to line-of-credit arrangements stating that they could be presented as an asset and amortized over the term of the line-of-credit arrangement, regardless of whether there
are any outstanding borrowings on the line-of-credit arrangement. For us,We adopted this ASU in the standard is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those years. Thisfirst quarter of 2016. Adoption of this ASU is expected todid not have noa material impact on our financial position and results of operations.
In May 2014, the FASB issued Accounting Standard Update (“ASU”)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,In August 2015, the FASB proposed a deferral ofissued ASU 2015-14, which deferred the effective date of the new revenue standard by one year, until January 1, 2018. This deferral was approved on July 22, 2015. Theyear. For Teradyne, the standard will be effective in ourthe first quarter of 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. 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 27, 2015.29, 2016. 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, 2014.2015.
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, except for any changes in internal controls related to the integration of Universal Robots, acquired on June 11, 2015, 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.
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 |
In 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, 2014,2015, 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.The recent natural disaster in Japan could disrupt our operations and adversely affect our results of operations.
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 facilityThe recent earthquake in an aggregate principal amount not to exceed $150.0 million.Japan has damaged our building and impacted our operations located in Kumamoto. 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 restricthave a significant impact on our ability to pursuemanufacture our products or sell products to our customers. However, the situation in Kumamoto remains uncertain so the events could have a short-term impact to our 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 Japan. 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 forincur significant uninsured costs in order to rebuild our acquisitions may be complex, costlyoperations which could have an adverse effect on our financial condition and time consuming and include unanticipated issues, expenses and liabilities. We may have difficulty in developing, manufacturing and marketing the productsresults 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.operations.
Item 2: | Unregistered Sales of Equity Securities and Use of Proceeds |
In January 2015, our Board of Directors cancelled our 2010 stockauthorized the repurchase program and authorized a new stock repurchase program forof up to $500 million of common stock of which $300 million of whichwas repurchased in 2015. In 2016, we intend to repurchase in 2015.between $100 million and $200 million. During the six months ended July 3, 2016, we repurchased 2.9 million shares of common stock at an average price of $19.29, for a total cost of $56.8 million. The cumulative repurchases under this program as of October 4, 2015July 3, 2016 totaled 11.918.6 million shares of common stock for $226.8$356.7 million at an average price of $19.22 per share of $19.09.share.
The following table includes information with respect to repurchases we made of our common stock during the three months ended October 4, 2015July 3, 2016 (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 | ||||||||||||||||||||
July 6, 2015 – August 2, 2015 | 1,361 | $ | 19.10 | 1,359 | $ | 345,722 | ||||||||||||||||||
August 3, 2015 – August 30, 2015 | 1,598 | $ | 18.35 | 1,598 | $ | 316,402 | ||||||||||||||||||
August 31, 2015 – October 4, 2015 | 2,432 | $ | 17.82 | 2,427 | $ | 273,158 | ||||||||||||||||||
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5,391 | (1) | $ | 18.30 | (1) | 5,384 | |||||||||||||||||||
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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 4, 2016 – May 1, 2016 | 433 | $ | 20.96 | 428 | $ | 163,063 | ||||||||||||||||||
May 2, 2016 – May 29, 2016 | 476 | $ | 18.91 | 476 | $ | 154,063 | ||||||||||||||||||
May 30, 2016 – July 3, 2016 | 555 | $ | 19.59 | 551 | $ | 143,269 | ||||||||||||||||||
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1,464 | (1) | $ | 19.78 | (1) | 1,455 | |||||||||||||||||||
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(1) | Includes |
We satisfy U.S. federal and state minimum withholding tax obligations 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 | |
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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