10-Q 1 d717687d10q.htm 10-Q 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019

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  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files)    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act (check one):

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Emerging growth company  
Smaller reporting company       

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which
registered

Common Stock, par value $0.125 per share   TER   Nasdaq Stock Market LLC

The number of shares outstanding of the registrant’s only class of Common Stock as of May 6, 2019 was 171,395,402 shares.

 

 

 


Table of Contents

TERADYNE, INC.

INDEX

 

        Page No.  
  PART I. FINANCIAL INFORMATION  
Item 1.   Financial Statements (Unaudited):  
 

Condensed Consolidated Balance Sheets as  of March 31, 2019 and December 31, 2018

    1  
 

Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2019 and April 1, 2018

    2  
 

Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2019 and April 1, 2018

    3  
 

Condensed Consolidated Statements of Shareholders’ Equity for the Three Months Ended March 31, 2019 and April 1, 2018

    4  
 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and April 1, 2018

    5  
 

Notes to Condensed Consolidated Financial Statements

    6  
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations     34  
Item 3.   Quantitative and Qualitative Disclosures about Market Risk     43  
Item 4.   Controls and Procedures     44  
  PART II. OTHER INFORMATION  
Item 1.   Legal Proceedings     45  
Item 1A.   Risk Factors     45  
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds     45  
Item 4.   Mine Safety Disclosures     45  
Item 6.   Exhibits     46  

 

 


Table of Contents

PART I

 

Item 1:

Financial Statements

TERADYNE, INC.

CO NDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

     March 31,
2019
    December 31,
2018
 
    

(in thousands,

except per share amount)

 
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 483,728     $ 926,752  

Marketable securities

     421,088       190,096  

Accounts receivable, less allowance for doubtful accounts of $1,675 and $1,673 at March 31, 2019 and December 31, 2018, respectively

     333,840       291,267  

Inventories, net

     161,342       153,541  

Prepayments and other current assets

     194,044       170,826  
  

 

 

   

 

 

 

Total current assets

     1,594,042       1,732,482  

Property, plant and equipment, net

     283,300       279,821  

Operating lease right-of-use assets, net

     50,733        

Marketable securities

     91,926       87,731  

Deferred tax assets

     69,687       70,848  

Retirement plans assets

     16,791       16,883  

Other assets

     11,279       11,509  

Acquired intangible assets, net

     119,372       125,482  

Goodwill

     379,513       381,850  
  

 

 

   

 

 

 

Total assets

   $ 2,616,643     $ 2,706,606  
  

 

 

   

 

 

 
LIABILITIES     

Current liabilities:

    

Accounts payable

   $ 118,816     $ 100,688  

Accrued employees’ compensation and withholdings

     89,089       148,566  

Deferred revenue and customer advances

     84,764       77,711  

Other accrued liabilities

     67,422       78,272  

Contingent consideration

     22,803       34,865  

Operating lease liabilities

     17,176        

Income taxes payable

     41,898       36,185  
  

 

 

   

 

 

 

Total current liabilities

     441,968       476,287  

Retirement plans liabilities

     121,205       117,456  

Long-term deferred revenue and customer advances

     32,843       32,750  

Deferred tax liabilities

     19,614       20,662  

Long-term other accrued liabilities

     9,732       37,547  

Long-term contingent consideration

     15,510       35,678  

Long-term operating lease liabilities

     38,062        

Long-term incomes taxes payable

     83,891       83,891  

Debt

     383,590       379,981  
  

 

 

   

 

 

 

Total liabilities

     1,146,415       1,184,252  
  

 

 

   

 

 

 

Commitments and contingencies (See Note S)

    
SHAREHOLDERS’ EQUITY     

Common stock, $0.125 par value, 1,000,000 shares authorized; 172,353 and 175,522 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively

     21,544       21,940  

Additional paid-in capital

     1,679,997       1,671,645  

Accumulated other comprehensive loss

     (15,706     (13,040

Accumulated deficit

     (215,607     (158,191
  

 

 

   

 

 

 

Total shareholders’ equity

     1,470,228       1,522,354  
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 2,616,643     $ 2,706,606  
  

 

 

   

 

 

 

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, 2018, are an integral part of the condensed

consolidated financial statements.

 

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Table of Contents

TERADYNE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

     For the Three Months
Ended
 
     March 31,
2019
    April 1,
2018
 
     (in thousands, except per share amount)  

Revenues:

    

Products

   $ 393,442     $ 403,925  

Services

     100,657       83,542  
  

 

 

   

 

 

 

Total revenues

     494,099       487,467  

Cost of revenues:

    

Cost of products

     165,368       180,958  

Cost of services

     41,096       36,677  
  

 

 

   

 

 

 

Total cost of revenues (exclusive of acquired intangible assets amortization shown separately below)

     206,464       217,635  
  

 

 

   

 

 

 

Gross profit

     287,635       269,832  

Operating expenses:

    

Selling and administrative

     102,013       90,505  

Engineering and development

     76,791       74,408  

Acquired intangible assets amortization

     10,634       7,698  

Restructuring and other

     5,112       (313
  

 

 

   

 

 

 

Total operating expenses

     194,550       172,298  
  

 

 

   

 

 

 

Income from operations

     93,085       97,534  

Non-operating (income) expense:

    

Interest income

     (8,052     (5,981

Interest expense

     5,713       6,890  

Other (income) expense, net

     1,445       805  
  

 

 

   

 

 

 

Income before income taxes

     93,979       95,820  

Income tax (benefit) provision

     (15,159     8,846  
  

 

 

   

 

 

 

Net income

   $ 109,138     $ 86,974  
  

 

 

   

 

 

 

Net income per common share:

    

Basic

   $ 0.63     $ 0.45  
  

 

 

   

 

 

 

Diluted

   $ 0.62     $ 0.43  
  

 

 

   

 

 

 

Weighted average common shares—basic

     173,532       195,255  
  

 

 

   

 

 

 

Weighted average common shares—diluted

     176,972       203,484  
  

 

 

   

 

 

 

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, 2018, are an integral part of the condensed

consolidated financial statements.

 

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Table of Contents

TERADYNE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

     For the Three Months
Ended
 
     March 31,
2019
    April 1,
2018
 
     (in thousands)  

Net income

   $ 109,138     $ 86,974  

Other comprehensive income, net of tax:

    

Foreign currency translation adjustment, net of tax of $0, $0, respectively

     (4,659     10,541  

Available-for-sale marketable securities:

    

Unrealized gains (losses) on marketable securities arising during period, net of tax of $577, $(718), respectively

     2,100       (2,687

Less: Reclassification adjustment for (gains) losses included in net income, net of tax of $(20), $78, respectively

     (70     1,668  
  

 

 

   

 

 

 
     2,030       (1,019

Defined benefit pension and post-retirement plans:

    

Amortization of prior service benefit included in net periodic pension and post-retirement benefit, net of tax of $(11), $(18), respectively

     (37     (61
  

 

 

   

 

 

 

Other comprehensive (loss) income

     (2,666     9,461  
  

 

 

   

 

 

 

Comprehensive income

   $ 106,472     $ 96,435  
  

 

 

   

 

 

 

 

 

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, 2018, are an integral part of the condensed

consolidated financial statements.

 

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Table of Contents

TERADYNE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited)

 

    For the Three Months Ended March 31, 2019  
    Common
Stock Shares
Issued
    Common
Stock Par
Value
    Additional
Paid-in
Capital
    Accumulated
Other
Comprehensive
Loss
    Accumulated
Deficit
    Total
Shareholders’
Equity
 
    (in thousands)  

Balance, December 31, 2018

    175,522     $ 21,940     $ 1,671,645     $ (13,040   $ (158,191   $ 1,522,354  

Issuance of common stock to employees under benefit plans, net of shares withheld for payroll tax of $14,318

    1,287       161       (210         (49

Stock-based compensation expense

        8,562           8,562  

Repurchase of common stock

    (4,456     (557         (150,913     (151,470

Cash dividends ($0.09 per share)

            (15,641     (15,641

Net income

            109,138       109,138  

Foreign currency translation adjustment

          (4,659       (4,659

Unrealized gains on marketable securities:

           

Unrealized gains on marketable securities, net of tax of $577

          2,100         2,100  

Less: reclassification adjustment for gains included in net income, net of tax $(20)

          (70       (70

Amortization of prior service benefit, net of tax of $(11)

          (37       (37
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, March 31, 2019

    172,353     $ 21,544     $ 1,679,997     $ (15,706   $ (215,607   $ 1,470,228  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    For the Three Months Ended April 1, 2018  
    Common
Stock Shares
Issued
    Common
Stock Par
Value
    Additional
Paid-in
Capital
    Accumulated
Other
Comprehensive
Income
    Retained
Earnings
    Total
Shareholders’
Equity
 
    (in thousands)  

Balance, December 31, 2017

    195,548     $ 24,444     $ 1,638,413     $ 18,776     $ 272,013     $ 1,953,646  

Issuance of common stock to employees under benefit plans, net of shares withheld for payroll tax of $19,629

    1,199       150       (8,129         (7,979

Stock-based compensation expense

        8,472           8,472  

Repurchase of common stock

    (2,939     (368         (140,304     (140,672

Cash dividends ($0.09 per share)

            (17,598     (17,598

Net income

            86,974       86,974  

Foreign currency translation adjustment

          10,541         10,541  

Unrealized gains (losses) on marketable securities:

           

Unrealized losses on marketable securities, net of tax of $(718)

          (2,687       (2,687

Less: reclassification adjustment for losses included in net income, net of tax $78

          1,668         1,668  

Reclassification of unrealized gains on equity securities, net of tax of $(902)

          (3,125     3,125       —    

Amortization of prior service benefit, net of tax of $(18)

          (61       (61

Reclassification of tax effects resulting from the Tax Reform Act, net of tax of $769

          769       (769     —    

Cumulative effect of changes in accounting principle related to revenue recognition

            12,679       12,679  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, April 1, 2018

    193,808     $ 24,226     $ 1,638,756     $ 25,881     $ 216,120     $ 1,904,983  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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, 2018, are an integral part of the condensed

consolidated financial statements.

 

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Table of Contents

TERADYNE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     For the Three Months
Ended
 
     March 31,
2019
    April 1,
2018
 
     (in thousands)  

Cash flows from operating activities:

    

Net income

   $ 109,138     $ 86,974  

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation

     16,651       16,336  

Amortization

     12,942       9,204  

Stock-based compensation

     9,474       9,544  

Deferred taxes

     1,206       8,696  

Provision for excess and obsolete inventory

     2,397       3,522  

Contingent consideration fair value adjustment

     2,970       (4,968

(Gains) losses on investments

     (2,828     1,241  

Other

     219       152  

Changes in operating assets and liabilities, net of businesses acquired:

    

Accounts receivable

     (41,706     (140,747

Inventories

     (2,917     (21,017

Prepayments and other assets

     (18,648     (679

Accounts payable and other liabilities

     (53,323     (46,706

Deferred revenue and customer advances

     6,455       9,644  

Retirement plans contributions

     (1,210     (1,020

Income taxes

     (22,804     (12,106
  

 

 

   

 

 

 

Net cash provided by (used for) operating activities

     18,016       (81,930
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchases of property, plant and equipment

     (25,711     (34,797

Purchases of marketable securities

     (375,184     (490,324

Proceeds from sales of marketable securities

     5,440       800,671  

Proceeds from maturities of marketable securities

     141,201       212,698  

Proceeds from life insurance

     273       —    

Acquisition of businesses, net of cash acquired

     (6,970     (25,356
  

 

 

   

 

 

 

Net cash (used for) provided by investing activities

     (260,951     462,892  
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Issuance of common stock under stock purchase and stock option plans

     14,268       10,654  

Repurchase of common stock

     (156,468     (134,276

Dividend payments

     (15,627     (17,588

Payments related to net settlement of employee stock compensation awards

     (14,318     (19,629

Payments of contingent consideration

     (27,615     (13,571
  

 

 

   

 

 

 

Net cash used for financing activities

     (199,760     (174,410
  

 

 

   

 

 

 

Effects of exchange rate changes on cash and cash equivalents

     (329     1,478  
  

 

 

   

 

 

 

(Decrease) increase in cash and cash equivalents

     (443,024     208,030  

Cash and cash equivalents at beginning of period

     926,752       429,843  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 483,728     $ 637,873  
  

 

 

   

 

 

 

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, 2018, are an integral part of the condensed

consolidated financial statements.

 

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Table of Contents

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 robotic arms, autonomous mobile robots, and advanced robotic control software used by global manufacturing and light industrial customers to improve quality, increase manufacturing and material handling efficiency and decrease manufacturing costs. Teradyne’s automatic test equipment and industrial automation products and services include:

 

   

semiconductor test (“Semiconductor Test”) systems;

 

   

industrial automation (“Industrial Automation”) products;

 

   

defense/aerospace (“Defense/Aerospace”) test instrumentation and systems, storage test (“Storage Test”) systems, and circuit-board test and inspection (“Production Board Test”) systems (collectively these products represent “System Test”); and

 

   

wireless test (“Wireless Test”) systems.

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 statement of such interim financial statements. Certain prior year amounts were reclassified to conform to the current year presentation. The December 31, 2018 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 March 1, 2019, for the year ended December 31, 2018.

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.

Leases

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842)” (“Topic 842”), which requires a lessee to record a right-of-use (“ROU”) asset and a lease liability on the balance sheet for operating leases with terms longer than twelve months. Teradyne adopted this standard and the related amendments (collectively “ASC 842”) on January 1, 2019 and utilized the modified retrospective approach provided by ASU 2018-11, “Leases (Topic 842): Targeted

 

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Table of Contents

Improvements,” that allowed for a cumulative effect adjustment in the period of adoption. Under this method of adoption, the comparative information in the consolidated financial statements has not been revised and continues to be reported under the previously applicable lease accounting guidance (ASC 840). Teradyne also utilized the package of practical expedients permitted under the transition guidance which included the carry-forward of historical lease classification. Adoption of ASC 842 resulted in recording ROU assets and lease liabilities of approximately $50.1 million and $54.3 million, respectively. Operating lease liabilities were calculated using the discount rate on January 1, 2019. The adoption of ASC 842 did not have a material impact on beginning retained earnings, the consolidated statement of operations, cash flows, or earnings per share.

Under ASC 842, a contract is or contains a lease when Teradyne has the right to control the use of an identified asset. Teradyne determines if an arrangement is a lease at inception of the contract, which is the date on which the terms of the contract are agreed to and the agreement creates enforceable rights and obligations. The commencement date of the lease is the date that the lessor makes an underlying asset available for use by Teradyne. As of March 31, 2019, Teradyne does not have material leases that have not yet commenced.

Teradyne determines if the lease is operating or finance at the lease commencement date based upon the terms of the lease and the nature of the asset. The lease term used to calculate the lease liability includes options to extend or terminate the lease when it is reasonably certain that the option will be exercised.

For leases commencing after January 1, 2019, the lease liability is measured at the present value of future lease payments, discounted using the discount rate for the lease at the commencement date. As Teradyne is typically unable to determine the implicit rate, Teradyne uses an incremental borrowing rate based on the lease term and economic environment at commencement date. Teradyne initially measures payments based on an index by using the applicable rate at lease commencement. Variable payments that do not depend on an index are not included in the lease liability and are recognized as they are incurred. The ROU asset is initially measured as the amount of lease liability, adjusted for any initial lease costs, prepaid lease payments, and reduced by any lease incentives.

Teradyne’s contracts often include non-lease components such as common area maintenance. Teradyne elected the practical expedient to account for the lease and non-lease components as a single lease component. For leases with a term of one year or less Teradyne has elected not to record the lease asset or liability. The lease payments are recognized in the consolidated statement of earnings on a straight-line basis over the lease term. Teradyne includes lease costs within cost of revenues and operating expenses. See Note: H: “Leases.”

C. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

On January 26, 2017, the FASB issued ASU 2017-04, “Intangibles—Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment.” The new guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Goodwill impairment will be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance will remain largely unchanged. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. The same one-step impairment test will be applied to goodwill at all reporting units, even those with zero or negative carrying amounts. Entities will be required to disclose the amount of goodwill at reporting units with zero or negative carrying amounts. The revised guidance will be applied prospectively, and is effective in 2020. Early adoption is permitted for any impairment tests performed after January 1, 2017. Teradyne is currently evaluating the impact of this ASU on its financial position, results of operations and statements of cash flows.

 

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D. ACQUISITIONS

Lemsys SA

On January 30, 2019, Teradyne acquired all of the issued and outstanding shares of Lemsys SA (“Lemsys”) for a total purchase price of approximately $9.1 million. Lemsys strengthens Teradyne’s position in the electrification trends of vehicles, solar, wind, and industrial applications. The Lemsys acquisition was accounted for as a business combination and, accordingly, the results have been included in Teradyne’s Semiconductor Test segment from the date of acquisition. As of the acquisition date, Teradyne’s preliminary purchase price allocation was goodwill of $1.2 million, which is not deductible for tax purposes, acquired intangible assets of $5.5 million with an average estimated useful life of 4.9 years, and $2.4 million of net tangible assets. The acquisition was not material to Teradyne’s condensed consolidated financial statements.

Mobile Industrial Robots

On April 25, 2018, Teradyne acquired all of the issued and outstanding shares of Mobile Industrial Robots Aps (“MiR”), a Danish limited liability company located in Odense, Denmark. MiR is the leading maker of collaborative autonomous mobile robots for industrial applications. MiR is part of Teradyne’s Industrial Automation segment.

The total purchase price of $197.8 million included $145.2 million of cash paid and $52.6 million of contingent consideration measured at fair value. The contingent consideration is payable in Euros upon the achievement of certain thresholds and targets for revenue and earnings before interest and taxes for periods from January 1, 2018 to December 31, 2018; January 1, 2018 to December 31, 2019; and January 1, 2018 to December 31, 2020. The contingent consideration related to revenue for the period from January 1, 2018 to December 31, 2018 in the amount of $30.8 million was paid in March 2019. The remaining maximum contingent consideration that could be paid is $83.2 million.

The valuation of the contingent consideration is dependent on the following assumptions: forecasted revenues, revenue volatility, earnings before interest and taxes, and discount rate. These assumptions were estimated based on a review of the historical and projected results.

The MiR 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. MiR’s products will help expand the Industrial Automation segment, which is a key component of Teradyne’s growth strategy. The allocation of the total purchase price to MiR’s 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 $136.0 million was allocated to goodwill, which is not deductible for tax purposes. MiR’s results have been included in Teradyne’s Industrial Automation segment from the date of acquisition.

The following table represents the final allocation of the purchase price:

 

     Purchase Price Allocation  
     (in thousands)  

Goodwill

   $ 135,976  

Intangible assets

     80,670  

Tangible assets acquired and liabilities assumed:

  

Current assets

     6,039  

Non-current assets

     1,336  

Accounts payable and current liabilities

     (7,336

Long-term deferred tax liabilities

     (18,007

Other long-term liabilities

     (900
  

 

 

 

Total purchase price

   $ 197,778  
  

 

 

 

 

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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

   $ 58,900        7.0  

Trademarks and tradenames

     13,240        11.0  

Customer relationships

     8,500        2.5  

Backlog

     30        0.2  
  

 

 

    

Total intangible assets

   $ 80,670        7.2  
  

 

 

    

The following unaudited pro forma information gives effect to the acquisition of MiR as if the acquisition occurred on January 1, 2017. 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
 
     April 1, 2018  
     (in thousands)  

Revenue

   $ 493,017  

Net income

     85,151  

Net income per common share:

  

Basic

   $ 0.44  
  

 

 

 

Diluted

   $ 0.42  
  

 

 

 

Pro forma results for the three months ended April 1, 2018 were adjusted to exclude $0.6 million of acquisition related costs.

Energid Technologies Corporation

On February 26, 2018, Teradyne acquired all of the issued and outstanding shares of Energid Technologies Corporation (“Energid”) for a total purchase price of approximately $27.6 million. Energid’s technology enables and simplifies the programming of complex robotic motions used in a wide variety of end markets, ranging from heavy industry to healthcare, utilizing both traditional robots and collaborative robots. The Energid acquisition was accounted for as a business combination and, accordingly, Energid’s results have been included in Teradyne’s Industrial Automation segment from the date of acquisition. As of the acquisition date, Teradyne’s purchase price allocation was goodwill of $14.4 million which is deductible for tax purposes, acquired intangible assets of $12.3 million with an average estimated useful life of 7.7 years, and $1.0 million of net tangible assets. The acquisition was not material to Teradyne’s condensed consolidated financial statements.

E. REVENUE

Revenue recognized in accordance with ASC 606: “Revenue from Contracts with Customers” was $492.4 million and $483.2 million for the three months ended March 31, 2019 and April 1, 2018, respectively.

For the three months ended March 31, 2019 and April 1, 2018, Teradyne also recognized $1.7 million and $4.3 million, respectively, of revenues from leases of Teradyne systems, which are accounted for outside of ASC 606.

 

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Disaggregation of Revenue

The following table provides information about disaggregated revenue by primary geographical market, major product line and timing of revenue recognition.

 

    For the Three Months Ended March 31, 2019  
    Semiconductor Test     System Test     Industrial
Automation
    Wireless
Test
    Corporate
and

Other
    Consolidated  
    System
on a Chip
    Memory     Defense/
Aerospace
    Storage
Test
    Production
Board Test
    Universal
Robots
    Mobile
Industrial
Robots
    Energid                    
          (in thousands)  

Americas

                     

Point in time

  $ 7,977     $ 8,051     $ 14,783     $ 1,593     $ 3,254     $ 15,297     $ 3,539     $ —       $ 2,090     $ (151   $ 56,433  

Over time

    8,190       712       6,450       —         729       246       —         260       151       —         16,738  

Europe, Middle East and Africa

                     

Point in time

    11,032       153       39       —         5,064       25,904       3,840       —         736       —         46,768  

Over time

    5,281       280       469       —         1,554       416       —         289       45       —         8,334  

Asia Pacific

                     

Point in time

    219,746       35,571       263       16,605       3,636       14,178       1,727       —         24,628       —         316,354  

Over time

    38,913       3,280       764       2,054       920       228       —         212       1,359       —         47,730  

Lease Revenue

    1,667       —         —         —         43       —         —         —         32       —         1,742  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 292,806     $ 48,047     $ 22,768     $ 20,252     $ 15,200     $ 56,269     $ 9,106     $ 761     $ 29,041     $ (151   $ 494,099  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

    For the Three Months Ended April 1, 2018  
    Semiconductor Test     System Test     Industrial
Automation
    Wireless
Test
    Corporate
and

Other
    Consolidated  
    System
on a Chip
    Memory     Defense/
Aerospace
    Storage
Test
    Production
Board Test
    Universal
Robots
    Mobile
Industrial
Robots
    Energid                    
    (in thousands)  

Americas

                     

Point in time

  $ 9,600     $ 2,862     $ 11,597     $ 279     $ 1,760     $ 14,373     $ —       $ —       $ 4,979     $ (221   $ 45,229  

Over time

    8,791       696       6,188       —         757       89       —         —         112       —         16,633  

Europe, Middle East and Africa

                     

Point in time

    12,125       139       1,497       —         4,037       22,573       —         —         1,041       —         41,412  

Over time

    5,214       269       551       —         1,559       143       —         —         227       —         7,963  

Asia Pacific

                     

Point in time

    224,851       66,273       101       10,122       1,861       11,583       —         —         13,664       —         328,455  

Over time

    36,338       2,323       208       1,533       735       73       —         —         2,296       —         43,506  

Lease Revenue

    3,847       —         —         —         234       —         —         —         188       —         4,269  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 300,766     $ 72,562     $ 20,142     $ 11,934     $ 10,943     $ 48,834     $ —       $ —       $ 22,507     $ (221   $ 487,467  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Contract Balances

The amount of revenue recognized during the three months ended March 31, 2019 and April 1, 2018 that was previously included within the deferred revenue and customer advances balance was $19.5 million and $21.8 million, respectively, and primarily relates to extended warranties, training, application support, and post contract support. Each of these represents a distinct performance obligation. Teradyne expects to recognize 72% of the remaining performance obligation in the next 12 months, 22% in 1-3 years, and the remainder thereafter.

Accounts Receivable

Teradyne sells certain trade accounts receivables on a non-recourse basis to third-party financial institutions pursuant to factoring agreements. Teradyne accounts for these transactions as sales of receivables and presents cash proceeds as a cash provided by operating activities in the consolidated statements of cash flows. Total trade accounts receivable sold under the factoring agreements were $41.7 million and $3.5 million for the three months ended March 31, 2019 and April 1, 2018, respectively. Factoring fees for the sales of receivables were recorded in interest expense and were not material.

 

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Table of Contents

F. INVENTORIES

Inventories, net consisted of the following at March 31, 2019 and December 31, 2018:

 

     March 31,
2019
     December 31,
2018
 
     (in thousands)  

Raw material

   $ 94,862      $ 89,365  

Work-in-process

     29,725        31,014  

Finished goods

     36,755        33,162  
  

 

 

    

 

 

 
   $ 161,342      $ 153,541  
  

 

 

    

 

 

 

Inventory reserves at March 31, 2019 and December 31, 2018 were $100.9 million and $100.8 million, respectively.

G. FINANCIAL INSTRUMENTS

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’s available-for-sale debt securities are classified as Level 2 and equity securities are classified as Level 1. Contingent consideration is classified as Level 3. 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.

During the three months ended March 31, 2019 and April 1, 2018, there were no transfers in or out of Level 1, Level 2, or Level 3 financial instruments.

Realized gains recorded in the three months ended March 31, 2019 and April 1, 2018 were $0.1 million and $0.3 million, respectively. Realized losses recorded in the three months ended March 31, 2019 and April 1, 2018 were $0.1 million and $1.5 million, respectively. Realized gains are included in interest income and realized losses are included in interest expense.

Unrealized gains and losses on available-for-sale debt securities are included in accumulated other comprehensive income (loss) on the balance sheet.

Unrealized gains on equity securities are included in interest income and unrealized losses are included in interest expense. Unrealized gains related to equity securities recognized in the three months ended March 31, 2019 were $2.8 million.

The cost of securities sold is based on the specific identification method.

 

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Table of Contents

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 March 31, 2019 and December 31, 2018.

 

     March 31, 2019  
     Quoted Prices
in Active
Markets for
Identical
Instruments
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
     Total  
     (in thousands)  

Assets

           

Cash

   $ 222,714      $ —        $ —        $ 222,714  

Cash equivalents

     186,520        74,494        —          261,014  

Available-for-sale securities:

           

U.S. Treasury securities

     —          191,043        —          191,043  

Commercial paper

     —          180,604        —          180,604  

Corporate debt securities

     —          91,244        —          91,244  

Certificates of deposit and time deposits

     —          11,496        —          11,496  

U.S. government agency securities

     —          9,629        —          9,629  

Debt mutual funds

     3,331        —          —          3,331  

Non-U.S. government securities

     —          378        —          378  

Equity securities:

           

Mutual funds

     25,289        —          —          25,289  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 437,854      $ 558,888      $ —        $ 996,742  

Derivative assets

     —          17        —          17  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 437,854      $ 558,905      $ —        $ 996,759  
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Contingent consideration

   $ —        $ —        $ 38,313      $ 38,313  

Derivative liabilities

     —          291        —          291  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —        $ 291      $ 38,313      $ 38,604  
  

 

 

    

 

 

    

 

 

    

 

 

 

Reported as follows:

 

     (Level 1)      (Level 2)      (Level 3)      Total  
     (in thousands)  

Assets

           

Cash and cash equivalents

   $ 409,234      $ 74,494      $ —        $ 483,728  

Marketable securities

     —          421,088        —          421,088  

Long-term marketable securities

     28,620        63,306        —          91,926  

Prepayments

     —          17        —          17  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 437,854      $ 558,905      $ —        $ 996,759  
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

     .           

Other current liabilities

   $ —        $ 291      $ —        $ 291  

Contingent consideration

     —          —          22,803        22,803  

Long-term contingent consideration

     —          —          15,510        15,510  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —        $ 291      $ 38,313      $ 38,604  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     December 31, 2018  
     Quoted Prices
in Active
Markets for
Identical
Instruments
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
     Total  
     (in thousands)  

Assets

           

Cash

   $ 312,512      $ —        $ —        $ 312,512  

Cash equivalents

     253,525        360,715        —          614,240  

Available-for-sale securities:

           

U.S. Treasury securities

     —          109,721        —          109,721  

Commercial paper

     —          86,117        —          86,117  

Corporate debt securities

     —          40,020        —          40,020  

U.S. government agency securities

     —          9,611        —          9,611  

Certificates of deposit and time deposits

     —          7,604        —          7,604  

Debt mutual funds

     3,187        —          —          3,187  

Non-U.S. government securities

     —          376        —          376  

Equity securities:

           

Mutual funds

     21,191        —          —          21,191  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 590,415      $ 614,164      $ —        $ 1,204,579  

Derivative assets

     —          79        —          79  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 590,415      $ 614,243      $ —        $ 1,204,658  
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Contingent consideration

   $ —        $ —        $ 70,543      $ 70,543  

Derivative liabilities

     —          514        —          514  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —        $ 514      $ 70,543      $ 71,057  
  

 

 

    

 

 

    

 

 

    

 

 

 

Reported as follows:

 

     (Level 1)      (Level 2)      (Level 3)      Total  
     (in thousands)  

Assets

           

Cash and cash equivalents

   $ 566,037      $ 360,715      $ —        $ 926,752  

Marketable securities

     —          190,096        —          190,096  

Long-term marketable securities

     24,378        63,353        —          87,731  

Prepayments

     —          79        —          79  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 590,415      $ 614,243      $ —        $ 1,204,658  
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Other accrued liabilities

   $ —        $ 514      $ —        $ 514  

Contingent consideration

     —          —          34,865        34,865  

Long-term contingent consideration

     —          —          35,678        35,678  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —        $ 514      $ 70,543      $ 71,057  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Changes in the fair value of Level 3 contingent consideration for the three months ended March 31, 2019 and April 1, 2018 were as follows:

 

     For the Three Months
Ended
 
     March 31,      April 1,  
     2019      2018  
     (in thousands)  

Balance at beginning of period

   $ 70,543      $ 45,102  

Foreign currency impact

     (610      —    

Payments (a)

     (34,590      (24,553

Fair value adjustment (b)

     2,970        (4,968
  

 

 

    

 

 

 

Balance at end of period

   $ 38,313      $ 15,581  
  

 

 

    

 

 

 

 

(a)

In the three months ended March 31, 2019, Teradyne paid $30.8 million and $3.8 million of contingent consideration for the earn-outs in connection with the acquisition of MiR and Universal Robots A/S (“Universal Robots”), respectively. In the three months ended April 1, 2018, Teradyne paid $24.6 million of contingent consideration for the earn-out in connection with the acquisition of Universal Robots.

(b)

In the three months ended March 31, 2019, the fair value of contingent consideration for the earn-out in connection with the acquisition of MiR was increased by $3.0 million. In the three months ended April 1, 2018, the fair value of contingent consideration for the earn-out in connection with the acquisition of Universal Robots was decreased by $5.0 million, primarily due to a decrease in forecasted revenue.

The following table provides quantitative information associated with the fair value measurement of Teradyne’s Level 3 financial instruments:

 

Liability            

   March 31,
2019 Fair
Value
   Valuation
Technique
  

Unobservable Inputs

   Weighted
Average
     (in thousands)               

Contingent consideration

(MiR)

   $38,313    Monte Carlo

Simulation

   Revenue volatility    17.0%
         Discount Rate    0.4%

As of March 31, 2019, the significant unobservable inputs used in the Monte Carlo simulation to fair value the MiR contingent consideration include forecasted revenues, revenue volatility, earnings before interest and taxes, and discount rate. Increases or decreases in the inputs would result in a higher or lower fair value measurement. As of March 31, 2019, the maximum amount of contingent consideration that could be paid in connection with the acquisition of MiR is $83.2 million. The remaining earn-out periods end on December 31, 2019 and December 31, 2020.

The carrying amounts and fair values of Teradyne’s financial instruments at March 31, 2019 and December 31, 2018 were as follows:

 

     March 31, 2019      December 31, 2018  
     Carrying Value      Fair Value      Carrying Value      Fair Value  
     (in thousands)  

Assets

           

Cash and cash equivalents

   $ 483,728      $ 483,728      $ 926,752      $ 926,752  

Marketable securities

     513,014        513,014        277,827        277,827  

Derivative assets

     17        17        79        79  

Liabilities

           

Contingent consideration

     38,313        38,313        70,543        70,543  

Derivative liabilities

     291        291        514        514  

Convertible debt (1)

     383,590        644,575        379,981        547,113  

 

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Table of Contents

 

(1)

The carrying value represents the bifurcated debt component only, while the fair value is based on quoted market prices for the convertible note, which includes the equity conversion features.

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 table summarizes the composition of available-for-sale marketable securities at March 31, 2019:

 

     March 31, 2019  
     Available-for-Sale      Fair Market
Value of
Investments
with Unrealized
Losses
 
     Cost      Unrealized
Gain
     Unrealized
(Loss)
    Fair
Market

Value
 
     (in thousands)  

U.S. Treasury securities

   $ 191,715      $ 144      $ (816   $ 191,043      $ 82,132  

Commercial paper

     180,610        1        (7     180,604        11,237  

Corporate debt securities

     90,402        1,343        (501     91,244        18,150  

Certificates of deposit and time deposits

     11,497        1        (2     11,496        4,419  

U.S. government agency securities

     9,646        4        (21     9,629        4,101  

Debt mutual funds

     3,255        76        —         3,331        —    

Non-U.S. government securities

     378        —          —         378        —    
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
   $ 487,503      $ 1,569      $ (1,347   $ 487,725      $ 120,039  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Reported as follows:

 

     Cost      Unrealized
Gain
     Unrealized
(Loss)
    Fair Market
Value
     Fair Market
Value of
Investments
with Unrealized
Losses
 
     (in thousands)  

Marketable securities

   $ 421,024      $ 126      $ (62   $ 421,088      $ 91,100  

Long-term marketable securities

     66,479        1,443        (1,285     66,637        28,939  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
   $ 487,503      $ 1,569      $ (1,347   $ 487,725      $ 120,039  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

The following table summarizes the composition of available-for-sale marketable securities at December 31, 2018:

 

     December 31, 2018  
     Available-for-Sale      Fair Market
Value of
Investments
with Unrealized
Losses
 
     Cost      Unrealized
Gain
     Unrealized
(Loss)
    Fair Market
Value
 
     (in thousands)  

U.S. Treasury securities

   $ 110,969      $ 112      $ (1,360   $ 109,721      $ 75,040  

Commercial paper

     86,130        13        (26     86,117        85,094  

Corporate debt securities

     41,133        432        (1,545     40,020        24,767  

U.S. government agency securities

     9,646        1        (36     9,611        7,077  

Certificates of deposit and time deposits

     7,604        —          —         7,604        —    

Debt mutual funds

     3,153        34        —         3,187        —    

Non-U.S. government securities

     376        —          —         376        —    
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
   $ 259,011      $ 592      $ (2,967   $ 256,636      $ 191,978  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

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Reported as follows:

 

     Cost      Unrealized
Gain
     Unrealized
(Loss)
    Fair
Market

Value
     Fair Market
Value of
Investments
with Unrealized
Losses
 
     (in thousands)  

Marketable securities

   $ 190,100      $ 88      $ (92   $ 190,096      $ 140,262  

Long-term marketable securities

     68,911        504        (2,875     66,540        51,716  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
   $ 259,011      $ 592      $ (2,967   $ 256,636      $ 191,978  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

As of March 31, 2019, the fair market value of investments in available-for-sale securities with unrealized losses totaled $120.0 million. Of this value, $32.9 million had unrealized losses of $1.3 million for greater than one year and $87.1 million had unrealized losses of $0.1 million for less than one year.

As of December 31, 2018, the fair market value of investments with unrealized losses totaled $192.0 million. Of this value, $28.5 million had unrealized losses of $1.6 million greater than one year and $163.5 million had unrealized losses of $1.4 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 March 31, 2019 and December 31, 2018 were temporary.

The contractual maturities of investments in available-for-sale securities held at March 31, 2019 were as follows:

 

     March 31, 2019  
     Cost      Fair Market
Value
 
     (in thousands)  

Due within one year

   $ 421,024      $ 421,088  

Due after 1 year through 5 years

     9,325        9,343  

Due after 5 years through 10 years

     14,026        13,659  

Due after 10 years

     39,873        40,304  
  

 

 

    

 

 

 

Total

   $ 484,248      $ 484,394  
  

 

 

    

 

 

 

Contractual maturities of investments in available-for-sale securities held at March 31, 2019 exclude $3.3 million of debt mutual funds as they do not have a contractual maturity date.

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 at March 31, 2019 and December 31, 2018 was $148.8 million and $163.1 million, respectively.

 

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Gains and losses on foreign currency forward contracts and foreign currency remeasurement gains and losses on monetary assets and liabilities are included in other (income) expense, net.

The following table summarizes the fair value of derivative instruments as of March 31, 2019 and December 31, 2018:

 

     Balance Sheet Location      March 31,
2019
    December 31,
2018
 
            (in thousands)  

Derivatives not designated as hedging instruments:

       

Foreign exchange contracts

     Prepayments      $ 17     $ 79  

Foreign exchange contracts

     Other current liabilities        (291     (514
     

 

 

   

 

 

 

Total derivatives

      $ (274   $ (435
     

 

 

   

 

 

 

The following table summarizes the effect of derivative instruments recognized in the statement of operations for the three months ended March 31, 2019 and April 1, 2018.

 

    

Location of Losses (Gains)

Recognized in

Statement of Operations

   For the Three Months
Ended
 
     March 31,
2019
     April 1,
2018
 
          (in thousands)  

Derivatives not designated as hedging instruments:

        

Foreign exchange contracts

   Other (income) expense, net    $ 3,934      $ 1,575  

 

(1)

The table does not reflect the corresponding gains and losses from the remeasurement of monetary assets and liabilities denominated in foreign currencies.

(2)

For the three months ended March 31, 2019 and April 1, 2018, net gains from the remeasurement of monetary assets and liabilities denominated in foreign currencies were $3.2 million and $0.6 million, respectively.

See Note I: “Debt” regarding derivatives related to the convertible senior notes.

H. LEASES

On January 1, 2019, Teradyne adopted ASC 842 using the modified retrospective approach. Under this method of adoption, the comparative information in the consolidated financial statements has not been revised and continues to be reported under the previously applicable lease accounting guidance (ASC 840). Adoption of ASC 842 resulted in recording ROU assets and lease liabilities of approximately $50.1 million and $54.3 million, respectively. The adoption of ASC 842 did not have a material impact on beginning retained earnings, the consolidated statement of operations, cash flows, or earnings per share.

Teradyne has facility and auto leases, which are accounted for as operating leases. Teradyne’s facility leases are primarily used for administrative functions, research and development, manufacturing, and storage and distribution. Remaining lease terms range from less than one year to ten years.

Total lease expense for the three months ended March 31, 2019 was $7.2 million, and included $1.4 million of variable lease costs and $0.7 million of costs related to short terms leases which are not recorded on the consolidated balance sheets.

At March 31, 2019, the weighted average remaining lease term and weighted average discount rate for operating leases was 4.2 years and 5.1%, respectively.

 

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Supplemental cash flow information related to leases was as follows:

 

     For the Three Months
Ended
 
     March 31,
2019
 
     (in thousands)  

Cash paid for amounts included in the measurement of lease liabilities included in operating cash flows

   $ 5,059  

Right-of-use assets obtained in exchange for new lease obligations

     5,737  

Maturities of lease liabilities as of March 31, 2019 were as follows:

 

     Operating Leases  
     (in thousands)  

2019

   $ 15,375  

2020

     18,967  

2021

     14,514  

2022

     10,262  

2023

     5,719  

Thereafter

     11,484  
  

 

 

 

Total lease payments

     76,321  

Less imputed interest

     (21,083
  

 

 

 

Total lease liabilities

   $ 55,238  
  

 

 

 

As of December 31, 2018, future non-cancelable rent obligations as determined under ASC 840 were as follows:

 

     Operating Leases  
     (in thousands)  

2019

   $ 19,570  

2020

     18,293  

2021

     13,578  

2022

     9,693  

2023

     5,449  

Thereafter

     9,472  
  

 

 

 

Total lease payments

   $ 76,055  
  

 

 

 

I. DEBT

Convertible Senior Notes

On December 12, 2016, Teradyne completed a private offering of $460.0 million aggregate principal amount of 1.25% convertible senior unsecured notes (the “Notes”) due December 15, 2023 and received net proceeds, after issuance costs, of approximately $450.8 million, $33.0 million of which was used to pay the net cost of the convertible note hedge transactions and $50.1 million of which was used to repurchase 2.0 million shares of Teradyne’s common stock under its existing stock repurchase program from purchasers of the Notes in privately negotiated transactions effected through one of the initial purchasers or its affiliates conducted concurrently with the pricing of the Note offering. The Notes will mature on December 15, 2023, unless earlier repurchased or converted. The Notes bear interest from December 12, 2016 at a rate of 1.25% per year payable

 

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semiannually in arrears on June 15 and December 15 of each year, beginning on June 15, 2017. The Notes will be convertible at the option of the noteholders at any time prior to the close of business on the business day immediately preceding September 15, 2023, only under the following circumstances: (1) during any calendar quarter beginning after March 31, 2017 (and only during such calendar quarter), if the closing sale price of Teradyne’s common stock, for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than 130% of the conversion price on each applicable trading day; (2) during the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price (as defined in the Indenture) per $1,000 principal amount of Notes for each trading day of the measurement period was less than 98% of the product of the closing sale price of the Teradyne’s common stock and the conversion rate on each such trading day; and (3) upon the occurrence of specified corporate events. On or after September 15, 2023 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their Notes at any time, regardless of the foregoing circumstances. Teradyne may satisfy its conversion obligation by paying or delivering cash, shares of its common stock or a combination of cash and shares of its common stock, at Teradyne’s election. As of December 31, 2018, the conversion price was approximately $31.70 per share of Teradyne’s common stock. The conversion rate is subject to adjustment under certain circumstances.

Concurrent with the offering of the Notes, Teradyne entered into convertible note hedge transactions (the “Note Hedge Transactions”) with the initial purchasers or their affiliates (the “Option Counterparties”). The Note Hedge Transactions cover, subject to customary anti-dilution adjustments, the number of shares of the common stock that underlie the Notes, with a strike price equal to the conversion price of the Notes of $31.70. The Note Hedge Transactions cover, subject to customary anti-dilution adjustments, approximately 14.5 million shares of Teradyne’s common stock.

Separately and concurrent with the pricing of the Notes, Teradyne entered into warrant transactions with the Option Counterparties (the “Warrant Transactions”) in which it sold net-share-settled (or, at its election subject to certain conditions, cash-settled) warrants to the Option Counterparties. The Warrant Transactions cover, subject to customary anti-dilution adjustments, approximately 14.5 million shares of common stock. As of March 31, 2019, the strike price of the warrants was approximately $39.78 per share. The strike price is subject to adjustment under certain circumstances. The Warrant Transactions could have a dilutive effect to Teradyne’s common stock to the extent that the market price per share of Teradyne’s common stock, as measured under the terms of the Warrant Transactions, exceeds the applicable strike price of the warrants.

The Note Hedge Transactions are expected to reduce the potential dilution to Teradyne’s common stock upon any conversion of the Notes. However, the Warrant Transactions could separately have a dilutive effect to the extent that the market value per share of Teradyne’s common stock exceeds the applicable strike price of the warrant. The net cost of the Note Hedge Transactions, after being partially offset by the proceeds from the sale of the warrants, was approximately $33.0 million.

In connection with establishing their initial hedge of these convertible note hedge and warrant transactions, the Option Counterparties have entered into various derivative transactions with respect to Teradyne’s common stock and/or purchased shares of Teradyne’s common stock or other securities, including the Notes, concurrent with, or shortly after, the pricing of the Notes. In addition, the Option Counterparties may modify their hedge positions by entering into or unwinding various derivative transactions with respect to Teradyne’s common stock or by selling Teradyne’s common stock or other securities, including the Notes, in secondary market transactions (and may do so during any observation period related to the conversion of the Notes). These activities could adversely affect the value of Teradyne’s common stock and the Notes.

Teradyne considered the guidance of ASC 815-40, “Derivatives and Hedging—Contracts in Entity’s Own Equity,” and concluded that the convertible note hedge is both indexed to Teradyne’s common stock and should be classified in stockholders’ equity in its statements of financial position. The convertible note hedge is

 

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considered indexed to Teradyne’s common stock as the terms of the Note Hedge Transactions do not contain an exercise contingency and the settlement amount equals the difference between the fair value of a fixed number of Teradyne’s shares and a fixed strike price. Because the only variable that can affect the settlement amount is Teradyne’s stock price, which is an input to the fair value of a fixed-for-fixed option contract, the convertible note hedge is considered indexed to Teradyne’s common stock.

Teradyne assessed whether the convertible note hedge should be classified as equity under ASC 815-40. In the Note Hedge Transactions contract the settlement terms permit net cash settlement or net share settlement, at the option of Teradyne. Therefore, the criteria as set forth in ASC 815-40 were evaluated by Teradyne. In reviewing the criteria, Teradyne noted the following: (1) the convertible note hedge does not require Teradyne to issue shares; (2) there is no requirement to net cash settle the convertible note hedge for failure to make timely filings with the SEC; (3) in the case of termination, the convertible note hedge is settled in the same consideration as the holders of the underlying stock; (4) the counterparty does not have rights that rank higher than those of a shareholder of the stock underlying the convertible note hedge; and (5) there is no requirement to post collateral. Based on its analysis of those criteria, Teradyne concluded that the convertible note hedge should be recorded in equity and no further adjustment should be made in future periods to adjust the value of the convertible note hedge.

Teradyne analyzed the Warrant Transactions under ASC 815-40, “Derivatives and Hedging—Contracts in Entity’s Own Equity,” and other relevant literature, and determined that it met the criteria for classification as an equity transaction and is considered indexed to Teradyne’s common stock. As a result, Teradyne recorded the proceeds from the warrants as an increase to additional paid-in capital. Teradyne does not recognize subsequent changes in fair value of the warrants in its financial statements.

The provisions of ASC 470-20,Debt with Conversion and Other Options,” are applicable to the Notes. ASC 470-20 requires Teradyne to separately account for the liability (debt) and equity (conversion feature) components of the Notes in a manner that reflects Teradyne’s nonconvertible debt borrowing rate at the date of issuance when interest cost is recognized in subsequent periods. Teradyne allocated $100.8 million of the $460.0 million principal amount of the Notes to the equity component, which represents a discount to the debt and will be amortized to interest expense using the effective interest method through December 2023. Accordingly, Teradyne’s effective annual interest rate on the Notes will be approximately 5.0%. The Notes are classified as long-term debt in the balance sheet based on their December 15, 2023 maturity date. Debt issuance costs of approximately $7.2 million are being amortized to interest expense using the effective interest method over the seven year term of the Notes. As of March 31, 2019, debt issuance costs were approximately $5.1 million.

The below tables represent the key components of Teradyne’s convertible senior notes:

 

     March 31,
2019
     December 31,
2018
 
     (in thousands)  

Debt Principal

   $ 460,000      $ 460,000  

Unamortized discount

     76,410        80,019  
  

 

 

    

 

 

 

Net Carrying amount of convertible debt

   $ 383,590      $ 379,981  
  

 

 

    

 

 

 

 

     For the Three Months
Ended
 
     March 31,
2019
     April 1,
2018
 
     (in thousands)  

Contractual interest expense on the coupon

   $ 1,438      $ 1,438  

Amortization of the discount component recognized as interest expense

     3,608        3,434  
  

 

 

    

 

 

 

Total interest expense on the convertible debt

   $ 5,046      $ 4,872  
  

 

 

    

 

 

 

 

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As of March 31, 2019, the remaining unamortized discount was $76.4 million, which will be amortized over 4.7 years using the effective interest rate method. The carrying amount of the equity component was $100.8 million. As of March 31, 2019, the if-converted value of the Notes was $578.1 million.

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 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-year term of the revolving credit facility and are included in interest expense in the statements of operations. As of May 10, 2019, 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 May 10, 2019, 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.

J. PREPAYMENTS

Prepayments consist of the following and are included in prepayments and other assets on the balance sheet:

 

     March 31,
2019
     December 31,
2018
 
     (in thousands)  

Contract manufacturer and supplier prepayments

   $ 147,015      $ 131,642  

Prepaid taxes

     13,404        9,646  

Prepaid maintenance and other services

     7,703        8,487  

Other prepayments

     16,111        12,744  
  

 

 

    

 

 

 

Total prepayments

   $ 184,233      $ 162,519  
  

 

 

    

 

 

 

 

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K. 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:

 

     March 31,
2019
     December 31,
2018
 
     (in thousands)  

Maintenance and training

   $ 58,394      $ 58,362  

Extended warranty

     27,242        27,422  

Customer advances, undelivered performance obligations and other

     31,971        24,677  
  

 

 

    

 

 

 

Total deferred revenue and customer advances

   $ 117,607      $ 110,461  
  

 

 

    

 

 

 

L. 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
 
     March 31,
2019
     April 1,
2018
 
     (in thousands)  

Balance at beginning of period

   $ 7,909      $ 8,200  

Acquisition

     14        —    

Accruals for warranties issued during the period

     3,066        3,063  

Accruals related to pre-existing warranties

     1,330        (139

Settlements made during the period

     (4,567      (3,576
  

 

 

    

 

 

 

Balance at end of period

   $ 7,752      $ 7,548  
  

 

 

    

 

 

 

When Teradyne receives revenue for extended warranties, beyond one year, it is deferred and recognized on a straight-line basis over the contract period. Related costs are expensed as incurred. The balance below is included in short and long-term deferred revenue and customer advances on the balance sheet.

 

     For the Three Months
Ended
 
     March 31,
2019
     April 1,
2018
 
     (in thousands)  

Balance at beginning of period

   $ 27,422      $ 24,438  

Deferral of new extended warranty revenue

     5,820        5,139  

Recognition of extended warranty deferred revenue

     (6,000      (4,987
  

 

 

    

 

 

 

Balance at end of period

   $ 27,242      $ 24,590  
  

 

 

    

 

 

 

M. 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”).

 

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Time-based 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 earlier of (a) the first anniversary of the grant date or (b) the date of the following year’s Annual Meeting of Shareholders. Teradyne expenses the cost of the restricted stock unit awards subject to time-based vesting, which is determined to be the fair market value of the shares at the date of grant, ratably over the period during which the restrictions lapse.

Teradyne grants performance-based restricted stock units (“PRSUs”) to its executive officers with a performance metric based on relative total shareholder return (“TSR”). Teradyne’s three-year TSR performance is measured against the 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% to 0% of the target shares capped at four times the grant date value. 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 shorter of the three-year service period or the period from the grant to the date described in the retirement provisions below. Compensation expense for employees meeting the retirement provisions prior to the grant date will be recognized in full on the date of the grant. 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 2019 and 2018, Teradyne granted PRSUs to its executive officers with a performance metric based on three-year cumulative non-GAAP profit before interest and tax (“PBIT”) as a percent of Teradyne’s revenue. 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; non-cash convertible debt interest expense; 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 shorter of the three year service period or the period from the grant date to the date described in the retirement provisions below. Compensation expense for employees meeting the retirement provisions prior to the grant date will be recognized in full on the date of grant. 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.

If a PRSU 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 PRSUs will vest if the executive officer is no longer an employee at the end of the three-year period.

 

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During the three months ended March 31, 2019 and April 1, 2018, Teradyne granted 0.1 million and 0.1 million TSR PRSUs, respectively, with a grant date fair value of $48.47 and $54.85, respectively. The fair value was estimated using the Monte Carlo simulation model with the following assumptions:

 

     For the Three Months
Ended
 
     March 31,
2019
    April 1,
2018
 

Risk-free interest rate

     2.6     2.2

Teradyne volatility-historical

     31.8     26.8

NYSE Composite Index volatility-historical

     12.0     12.4

Dividend yield

     1.0     0.8

Expected volatility was based on the historical volatility of Teradyne’s stock and the NYSE Composite Index for the 2019 and 2018 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 $0.36 per share for 2019 grants and 2018 grants, divided by Teradyne’s stock price on the grant date of $36.75 for the 2019 grant and $47.70 for the 2018 grant.

During the three months ended March 31, 2019 and April 1, 2018, Teradyne granted 0.1 million and 0.1 million, respectively, of PBIT PRSUs with a grant date fair value of $35.67 and $46.62, respectively.

During the three months ended March 31, 2019, Teradyne granted 0.6 million of service-based restricted stock unit awards to employees at a weighted average grant date fair value of $35.88 and 0.1 million of service-based stock options to executive officers at a weighted average grant date fair value of $10.26.

During the three months ended April 1, 2018, Teradyne granted 0.5 million of service-based restricted stock unit awards to employees at a weighted average grant date fair value of $46.58 and 0.1 million of service-based stock options to executive officers at a weighted average grant date fair value of $12.17.

Restricted stock unit awards granted to employees vest in equal annual installments over four years. Stock options to purchase Teradyne’s common stock at 100% of the fair market value on the grant date vest in equal annual installments over four years from the grant date and have a maximum term of seven years.

The fair value of stock options was estimated using the Black-Scholes option-pricing model with the following assumptions:

 

     For the Three Months
Ended
 
     March 31,
2019
    April 1,
2018
 

Expected life (years)

     5.0       5.0  

Risk-free interest rate

     2.6     2.4

Volatility-historical

     30.1     26.4

Dividend yield

     1.0     0.8

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 $0.36 per share for 2019 and 2018 grants divided by Teradyne’s stock price on the grant date of $36.75 for the 2019 grant and $47.70 for the 2018 grant.

 

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N. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

Changes in accumulated other comprehensive income (loss), which are presented net of tax, consist of the following:

 

     Foreign
Currency
Translation
Adjustment
    Unrealized
Gains
(Losses) on
Marketable
Securities
    Retirement
Plans Prior
Service
Credit
    Total  
     (in thousands)  

Three Months Ended March 31, 2019

        

Balance at December 31, 2018, net of tax of $0, $(521),  $(1,081), respectively

   $ (12,523   $ (1,845   $ 1,328     $ (13,040

Other comprehensive income before reclassifications, net of tax of $0, $577, $0, respectively

     (4,659     2,100       —         (2,559

Amounts reclassified from accumulated other comprehensive income, net of tax of $0, $(20), $(11), respectively

     —         (70     (37     (107
  

 

 

   

 

 

   

 

 

   

 

 

 

Net current period other comprehensive income (loss), net of tax of $0, $557, $(11), respectively

     (4,659     2,030       (37     (2,666
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2019, net of tax of $0, $36, $(1,092), respectively

   $ (17,182   $ 185     $ 1,291     $ (15,706
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     Foreign
Currency
Translation
Adjustments
     Unrealized
Gains
(Losses) on
Marketable
Securities
    Retirement
Plans Prior
Service
Credit
    Total  
     (in thousands)  

Three Months Ended April 1, 2018

         

Balance at December 31, 2017, net of tax of $0, $1,815, $(932), respectively

   $ 15,919      $ 1,362     $ 1,495     $ 18,776  

Other comprehensive income (loss) before reclassifications, net of tax of $0, $(718), $0, respectively

     10,541        (2,687     —         7,854  

Amounts reclassified from accumulated other comprehensive income, net of tax of $0, $78, $(18), respectively

     —          1,668       (61     1,607  
  

 

 

    

 

 

   

 

 

   

 

 

 

Net current period other comprehensive income (loss), net of tax of $0, $(640), $(18), respectively

     10,541        (1,019     (61     9,461  

Reclassification of income tax effects from the Tax Reform Act, net of tax of $0, $(691), $(78), respectively (a)

     —          691       78       769  

Reclassification of unrealized gains on equity securities, net of tax of $0, $(902), $0, respectively (b)

     —          (3,125     —         (3,125
  

 

 

    

 

 

   

 

 

   

 

 

 

Balance as April 1, 2018, net of tax of $0, $(418), $(1,028), respectively

   $ 26,460      $ (2,091   $ 1,512     $ 25,881  
  

 

 

    

 

 

   

 

 

   

 

 

 

 

(a)

In the three months ended April 1, 2018, Teradyne early adopted the ASU 2018-02, “Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” As a result, the stranded tax effects resulting from the Tax Reform Act enacted in December 2017 were reclassified from accumulated other comprehensive income to retained earnings.

(b)

In the three months ended April 1, 2018, Teradyne adopted the ASU 2016-01,Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.”

 

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Reclassifications out of accumulated other comprehensive income (loss) to the statement of operations for the three months ended March 31, 2019 and April 1, 2018 were as follows:

 

Details about Accumulated Other Comprehensive Income Components

   For the Three Months
Ended
   

Affected Line Item

in the Statements

of Operations

     March 31,
2019
     April 1,
2018
     
     (in thousands)      

Available-for-sale marketable securities:

       

Unrealized gains (losses), net of tax of $20, $(78), respectively

   $ 70      $ (1,668   Interest (expense) income

Defined benefit pension and postretirement plans:

       

Amortization of prior service benefit, net of tax of $11, $18, respectively

     37        61     (a)
  

 

 

    

 

 

   

Total reclassifications, net of tax of $31, $(60), respectively

   $ 107      $ (1,607   Net income
  

 

 

    

 

 

   

 

(a)

The amortization of prior service benefit is included in the computation of net periodic pension cost and postretirement benefit. See Note R: “Retirement Plans.”

O. GOODWILL AND ACQUIRED 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.

The changes in the carrying amount of goodwill by reportable segments for the three months ended March 31, 2019, were as follows:

 

     Industrial
Automation
    System
Test
    Wireless
Test
    Semiconductor
Test
    Total  
     (in thousands)  

Balance at December 31, 2018

          

Goodwill

   $ 363,358     $ 158,699     $ 361,819     $ 260,540     $ 1,144,416  

Accumulated impairment losses

     —         (148,183     (353,843     (260,540     (762,566
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     363,358       10,516       7,976       —         381,850  

Lemsys acquisition

     —         —         —         1,145       1,145  

Foreign currency translation adjustment

     (3,494     —         —         12       (3,482
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2019

          

Goodwill

     359,864       158,699       361,819       261,697       1,142,079  

Accumulated impairment losses

     —         (148,183     (353,843     (260,540     (762,566
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ 359,864     $ 10,516     $ 7,976     $ 1,157     $ 379,513  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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.

 

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Amortizable intangible assets consist of the following and are included in intangible assets, net on the balance sheet:

 

     March 31, 2019  
     Gross
Carrying
Amount (1)
     Accumulated
Amortization
     Foreign
Currency
Translation
Adjustment
     Net
Carrying
Amount
 
     (in thousands)  

Developed technology

   $ 337,218      $ (259,129    $ (4,812    $ 73,277  

Customer relationships

     100,743        (85,469      (408      14,866  

Tradenames and trademarks

     64,670        (32,897      (973      30,800  

Non-compete agreement

     320        (320      —          —    

Backlog

     780        (349      (2      429  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total intangible assets

   $ 503,731      $ (378,164    $ (6,195    $ 119,372  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2018  
     Gross
Carrying
Amount
     Accumulated
Amortization
     Foreign
Currency
Translation
Adjustment
     Net
Carrying
Amount
 
     (in thousands)  

Developed technology

   $ 336,308      $ (252,080    $ (4,079    $ 80,149  

Customer relationships

     97,153        (83,448      (340      13,365  

Tradenames and trademarks

     64,420        (31,653      (799      31,968  

Non-compete agreement

     320        (320      —          —    

Backlog

     30        (30      —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total intangible assets

   $ 498,231      $ (367,531    $ (5,218    $ 125,482  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Includes $5.5 million of intangible assets from Lemsys acquisition.

Aggregate intangible asset amortization expense was $10.6 million and $7.7 million, for the three months ended March 31, 2019 and April 1, 2018, respectively.

Estimated intangible asset amortization expense for each of the five succeeding fiscal years is as follows:

 

Year

   Amortization Expense  
     (in thousands)  

2019 (remainder)

     29,184  

2020

     24,852  

2021

     14,707  

2022

     13,815  

2023

     13,339  

Thereafter

     23,475  

 

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P. 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
 
     March 31,
2019
     April 1,
2018
 
     (in thousands, except per share amounts)  

Net income for basic and diluted net income per share

   $ 109,138      $ 86,974  
  

 

 

    

 

 

 

Weighted average common shares-basic

     173,532        195,255  

Effect of dilutive potential common shares:

     

Incremental shares from assumed conversion of convertible notes (1)

     2,186        4,398  

Convertible note hedge warrant shares (2)

     —          1,830  

Restricted stock units

     1,021        1,666  

Stock options

     222        321  

Employee stock purchase plan

     11        14  
  

 

 

    

 

 

 

Dilutive potential common shares

     3,440        8,229  
  

 

 

    

 

 

 

Weighted average common shares-diluted

     176,972        203,484  
  

 

 

    

 

 

 

Net income per common share-basic

   $ 0.63      $ 0.45  
  

 

 

    

 

 

 

Net income per common share-diluted

   $ 0.62      $ 0.43  
  

 

 

    

 

 

 

 

(1)

Incremental shares from assumed conversion of the convertible notes was calculated using the difference between the average Teradyne stock price for the period and the conversion price of $31.70, multiplied by 14.5 million shares. The result of this calculation, representing the total intrinsic value of the convertible debt, was divided by the average Teradyne stock price for the period.

(2)

Convertible notes hedge warrant shares were calculated using the difference between the average Teradyne stock price for the period and the warrant price of $39.78, multiplied by 14.5 million shares. The result of this calculation, representing the total intrinsic value of the warrant, was divided by the average Teradyne stock price for the period.

The computation of diluted net income per common share for the three months ended March 31, 2019 excludes the effect of the potential vesting of 0.6 million of restricted stock units because the effect would have been anti-dilutive.

The computation of diluted net income per common share for the three months ended April 1, 2018 excludes the effect of the potential vesting of 0.4 million shares of restricted stock units because the effect would have been anti-dilutive.

Q. RESTRUCTURING AND OTHER

During the three months ended March 31, 2019, Teradyne recorded an expense of $3.0 million for the increase in the fair value of the MiR contingent consideration liability, $1.3 million of acquisition related compensation and expenses, and $0.8 million of severance charges related to headcount reductions primarily in Semiconductor Test.

During the three months ended April 1, 2018, Teradyne recorded a $5.0 million credit for the decrease in the fair value of the Universal Robots contingent consideration liability, partially offset by $3.9 million recorded for employee severance charges, primarily in Semiconductor Test, and $0.8 million of acquisition related expenses.

 

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R. RETIREMENT PLANS

ASC 715, “Compensation—Retirement Benefits” requires an employer with a defined benefit plan or other postretirement benefit plan to recognize an asset or a liability on its balance sheet for the overfunded or underfunded status of the plan. 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 the U.S. qualified pension plan consist primarily of fixed income and equity securities. In addition, Teradyne has unfunded qualified foreign plans as well as 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”).

In the three months ended March 31, 2019, Teradyne contributed $0.7 million to the U.S. supplemental executive defined benefit pension plan and $0.2 million to certain qualified pension plans for non-U.S. subsidiaries.

For the three months ended March 31, 2019 and April 1, 2018, Teradyne’s net periodic pension cost was comprised of the following:

 

     For the Three Months Ended  
     March 31, 2019      April 1, 2018  
     United
States
     Foreign      United
States
     Foreign  
     (in thousands)  

Service cost

   $ 405      $ 188      $ 571      $ 213  

Interest cost

     1,795        173        2,997        186  

Expected return on plan assets

     (1,511      (7      (3,369      (5

Amortization of prior service cost

     —          —          14        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total net periodic pension cost

   $ 689      $ 354      $ 213      $ 394  
  

 

 

    

 

 

    

 

 

    

 

 

 

Postretirement Benefit Plan

In addition to receiving pension benefits, Teradyne employees in the United States who meet early retirement eligibility requirements as of their termination dates may participate in Teradyne’s Welfare Plan, which includes 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.

 

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For the three months ended March 31, 2019 and April 1, 2018, Teradyne’s net periodic postretirement benefit cost was comprised of the following:

 

     For the Three
Months Ended
 
     March 31,
2019
     April 1,
2018
 
     (in thousands)  

Service cost

   $ 9      $ 9  

Interest cost

     85        50  

Amortization of prior service credit

     (48      (93

Special termination benefits

     —          1,626  
  

 

 

    

 

 

 

Total net periodic postretirement benefit cost

   $ 46      $ 1,592  
  

 

 

    

 

 

 

S. COMMITMENTS AND CONTINGENCIES

Purchase Commitments

As of March 31, 2019, Teradyne had entered into purchase commitments for certain components and materials. The purchase commitments covered by the agreements aggregate to approximately $263.0 million, of which $255.3 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.

T. INCOME TAXES

The effective tax rate for the three months ended March 31, 2019 and April 1, 2018 was (16.1)% and 9.2%, respectively.

The decrease in the effective tax rate from the three months ended April 1, 2018 to the three months ended March 31, 2019 resulted from discrete tax benefits from the release of reserves for uncertain tax positions, increases in benefits related to the U.S. foreign derived intangible income deduction and U.S. research and development tax credits, a decrease in expense related to the uncertain tax positions for transfer pricing and a reduction in discrete tax expense associated with remeasurement of deferred tax assets as a result of reductions in tax rates. These reductions were partially offset by a projected shift in the geographic distribution of income, which increases the income subject to taxation in higher tax rate jurisdictions relative to lower tax rate jurisdictions, an increase in the U.S. global intangible low-taxed income inclusion and a reduction in the discrete benefit from stock based compensation.

The effective tax rate for the three months ended March 31, 2019 and April 1, 2018 was lower than the expected federal statutory rate because of the favorable effect of statutory rates applicable to income earned outside the United States, the benefit from U.S. research and development tax credits, the benefit from stock based compensation deductions, and the benefit of the U.S. foreign derived intangible income deduction partially offset by the U.S. global intangible low-taxed income inclusion. The effective tax rate for the three months ended March 31, 2019 was also reduced by discrete tax benefits from the release of reserves for uncertain tax positions. The effective rate for the three months ended April 1, 2018 was also increased by additions to the uncertain tax positions for transfer pricing.

 

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Discrete tax items recorded in the three months ended March 31, 2019 amounted to $30.2 million of net benefit. The $30.2 million of discrete tax benefit consisted of $28.8 million of benefit resulting from the release of reserves for uncertain tax positions, $3.8 million of benefit from stock based compensation, $2.9 million of expense from an increase in U.S. state valuation allowances and $0.5 million of other discrete tax benefit. The release of reserves for uncertain tax positions and the increase in U.S. state valuation allowances were associated with the conclusion of the U.S. Federal income tax audit for the year ended December 31, 2015.

Discrete tax items recorded in the three months ended April 1, 2018 amounted to $6.0 million of net benefit. The $6.0 million of discrete tax benefit consisted of $7.6 million of benefit from stock based compensation, $1.7 million of expense from the write down of deferred tax assets as a result of reductions in tax rates, $0.7 million of other discrete tax benefits and $0.6 million of other discrete tax expenses.

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 March 31, 2019, Teradyne believes that it will ultimately realize the deferred tax assets recorded on the condensed consolidated balance sheet. However, should Teradyne believe that it is more-likely-than-not that the deferred tax assets would not be realized, the tax provision would increase in the 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 March 31, 2019 and December 31, 2018, Teradyne had $13.5 million and $43.4 million, respectively, of reserves for uncertain tax positions. The $29.9 million net decrease in reserves for uncertain tax positions is composed of reductions in uncertain tax positions amounting to $22.4 million related to transfer pricing and $7.4 million associated with U.S. research and development tax credits. These reductions resulted from the conclusion of the U.S. Federal income tax audit for the year ended December 31, 2015.

As of March 31, 2019, Teradyne estimates that it is reasonably possible that the balance of unrecognized tax benefits may decrease approximately $0.2 million in the next twelve months, as a result of a lapse of statutes of limitation. The estimated decrease is composed of reserves relating to local tax incentives.

Teradyne recognizes interest and penalties related to income tax matters in income tax expense. As of March 31, 2019 and December 31, 2018, $0.6 million and $0.3 million, respectively, of interest and penalties were accrued for uncertain tax positions. For the three months ended March 31, 2019 and April 1, 2018, expense of $0.3 million and $0.1 million, respectively, 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 three months ended March 31, 2019 was $2.1 million, or $0.01 per diluted share. The tax savings due to the tax holiday for the three months ended April 1, 2018 was $3.0 million, or $0.01 per diluted share. The tax holiday is scheduled to expire on December 31, 2020.

U. SEGMENT INFORMATION

Teradyne has four reportable segments (Semiconductor Test, System Test, Industrial Automation and Wireless Test). Each of the Semiconductor Test, System Test, and Wireless Test segments is also an individual operating segment. The Industrial Automation reportable segment consists of operating segments with discrete financial information, which have been combined into one reportable segment as they share similar economic characteristics, types of products, production processes, distribution channels, and currency risks. The Semiconductor Test segment includes operations related to the design, manufacturing and marketing of semiconductor 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 Industrial Automation segment includes operations related to the design,

 

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manufacturing and marketing of collaborative robotic arms, autonomous mobile robots and advanced robotic control software. The Wireless Test segment includes operations related to the design, manufacturing and marketing of wireless test products and services.

Teradyne evaluates performance based on several factors, of which the primary financial measure is business segment income (loss) 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, 2018.

Segment information for the three months ended March 31, 2019 and April 1, 2018 is as follows:

 

    Semiconductor
Test
    Industrial
Automation
    System
Test
    Wireless
Test
    Corporate
and
Other
    Consolidated  
    (in thousands)  

Three Months Ended March 31, 2019

           

Revenues

  $ 340,853     $ 66,136     $ 58,220     $ 29,041     $ (151   $ 494,099  

Income (loss) before income taxes (1)(2)

    83,049       (5,295     15,340       3,628       (2,743     93,979  

Total assets (3)

    770,967       596,899       98,916       73,066       1,076,795       2,616,643  

Three Months Ended April 1, 2018

           

Revenues

  $ 373,328     $ 48,834     $ 43,019     $ 22,507     $ (221   $ 487,467  

Income before income taxes (1)(2)

    88,079       784       5,888       464       605       95,820  

Total assets (3)

    758,737       406,557       90,785       59,739       1,679,375       2,995,193  

 

(1)

Included in Corporate and Other are: contingent consideration adjustments, severance charges, interest income, interest expense, net foreign exchange gains (losses), intercompany eliminations and acquisition related charges.

(2)

Included in the income (loss) before income taxes for each of the segments are charges and credits related to restructuring and other and inventory charges.

(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
 
     March 31,
2019
     April 1,
2018
 
     (in thousands)  

Cost of revenues—inventory charge

   $ 1,174      $ 2,166  

Restructuring and other—employee severance

     567        3,761  

Included in the Industrial Automation segment are charges in the following line items in the statements of operations:

 

     For the Three Months
Ended
 
     March 31,
2019
     April 1,
2018
 
     (in thousands)  

Restructuring and other—acquisition related expenses and compensation

   $ 1,261      $ —    

Cost of revenues—inventory charge

     416        200  

 

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Included in the System Test segment are charges in the following line item in the statements of operations:

 

     For the Three Months
Ended
 
     March 31,
2019
     April 1,
2018
 
     (in thousands)  

Cost of revenues—inventory charge

   $ 468      $ 320  

Included in the Wireless Test segment are charges in the following line items in the statements of operations:

 

     For the Three Months
Ended
 
     March 31,
2019
     April 1,
2018
 
     (in thousands)  

Cost of revenues—inventory charge

   $ 339      $ 836  

Included in Corporate and Other are charges and credits in the following line items in the statements of operations:

 

     For the Three Months
Ended
 
     March 31,
2019
     April 1,
2018
 
     (in thousands)  

Restructuring and other—MiR contingent consideration adjustment

   $ 3,003      $ —    

Restructuring and other—Universal Robots contingent consideration adjustment

     —          (4,968

Restructuring and other—acquisition related expenses

     —          774  

V. SHAREHOLDERS’ EQUITY

Stock Repurchase Program

In January 2018, Teradyne’s Board of Directors cancelled the December 2016 stock repurchase program and authorized a new stock repurchase program for up to $1.5 billion of common stock. Teradyne intends to repurchase $500 million in 2019.

During the three months ended March 31, 2019, Teradyne repurchased 4.5 million shares of common stock for $156.5 million at an average price of $35.12 per share. The cumulative repurchases under the $1.5 billion stock repurchase program as of March 31, 2019 totaled 26.1 million shares of common stock for $979.9 million at an average price per share of $37.55.

During the three months ended April 1, 2018, Teradyne repurchased 2.9 million shares of common stock for $134.3 million at an average price of $45.69 per share.

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.

 

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In January 2019, Teradyne’s Board of Directors declared a quarterly cash dividend of $0.09 per share. Dividend payments for the three months ended March 31, 2019 were $15.6 million.

In January 2018, Teradyne’s Board of Directors declared a quarterly cash dividend of $0.09 per share. Dividend payments for the three months ended April 1, 2018 were $17.6 million.

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 statements,” are made pursuant to the safe harbor provisions of Section 21E of the Securities Exchange Act of 1934, as amended. Investors are cautioned that all forward-looking statements involve risks and uncertainties, including those detailed in our filings with the Securities and Exchange Commission. See also Part II, Item 1A of this Quarterly Report on Form 10-Q and Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018. Readers are cautioned not to place undue reliance on these forward-looking statements which reflect management’s analysis only as of the date hereof. We assume no obligation to update these forward-looking statements to reflect actual results or changes in factors or assumptions affecting forward-looking statements, except as may be required by law.

Overview

We are a leading global supplier of automation equipment for test and industrial applications. We design, develop, manufacture and sell 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. Our industrial automation products include collaborative robotic arms, autonomous mobile robots and advanced robotic control software used by global manufacturing and light industrial customers to improve quality, increase manufacturing and material handling efficiency and decrease manufacturing costs. Our automatic test equipment and industrial automation products and services include:

 

   

semiconductor test (“Semiconductor Test”) systems;

 

   

industrial automation (“Industrial Automation”) products;

 

   

defense/aerospace (“Defense/Aerospace”) test instrumentation and systems, storage test (“Storage Test”) systems, and circuit-board test and inspection (“Production Board Test”) systems (collectively these products represent “System Test”); and

 

   

wireless test (“Wireless Test”) systems.

We have a customer base which includes integrated device manufacturers (“IDMs”), outsourced semiconductor assembly and test providers (“OSATs”), original equipment manufacturers (“OEMs”), 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, autonomous mobile robots and wireless test systems.

The market for our test products is concentrated with a limited number of significant customers accounting for a substantial portion of the purchases of test equipment. One customer drives significant demand for our products both through direct sales and sales to the customer’s supply partners. We expect that sales of our test products will continue to be concentrated with a limited number of significant customers for the foreseeable future.

 

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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 because 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.

On February 26, 2018, we acquired Energid Technologies Corporation (“Energid”) for a total purchase price of approximately $27.6 million. Energid’s technology enables and simplifies the programming of complex robotic motions used in a wide variety of end markets, ranging from heavy industry to healthcare, utilizing both traditional robots and collaborative robots.

On April 25, 2018, we acquired Mobile Industrial Robots ApS (“MiR”), a Danish limited liability company. MiR is the leading maker of collaborative autonomous mobile robots for industrial applications. The total purchase price was approximately $198 million, which included cash paid of approximately $145 million and $53 million in fair value of contingent consideration payable upon achievement of certain thresholds and targets for revenue and earnings before interest and taxes through 2020. Contingent consideration for 2018 was $31 million and was paid in March 2019. The maximum payment for the remaining MiR contingent consideration that could be paid is $83.2 million.

MiR and Energid are included in our Industrial Automation segment.

On January 30, 2019, we acquired all of the issued and outstanding shares of Lemsys SA (“Lemsys”) for a total purchase price of approximately $9.1 million. Lemsys strengthens our position in the electrification trends of vehicles, solar, wind, and industrial applications. Lemsys is included in our Semiconductor 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.

Critical Accounting Policies and Estimates

We have identified the policies which are critical to understanding our business and our results of operations. There have been no significant changes during the three months ended March 31, 2019 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, 2018, except as noted below.

Leases

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842)” (“Topic 842”), which requires a lessee to record a right-of-use (“ROU”) asset and a lease liability on the balance sheet for operating leases with terms longer than twelve months. We adopted this standard and the related amendments (collectively “ASC 842”) on January 1, 2019 and utilized the modified retrospective approach provided by ASU 2018-11, “Leases (Topic 842): Targeted Improvements,” that allowed for a cumulative effect adjustment in the period of adoption. Under this method of adoption, the comparative information in the consolidated financial statements has not been revised and continues to be reported under the previously applicable lease accounting guidance (ASC 840). We also utilized the package of practical expedients permitted under the transition guidance which included the carry-forward of historical lease classification. Adoption of ASC 842 resulted in recording ROU assets and lease liabilities of approximately $50.1 million and $54.3 million, respectively. Operating lease liabilities were calculated using the discount rate on January 1, 2019. The adoption of ASC 842 did not have a material impact on beginning retained earnings, the consolidated statement of operations, cash flows, or earnings per share.

 

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Under ASC 842, a contract is or contains a lease when we have the right to control the use of an identified asset. We determine if an arrangement is a lease at inception of the contract, which is the date on which the terms of the contract are agreed to and the agreement creates enforceable rights and obligations. The commencement date of the lease is the date that the lessor makes an underlying asset available for use. As of March 31, 2019, we do not have material leases that have not yet commenced.

We determine if the lease is operating or finance at the lease commencement date based upon the terms of the lease and the nature of the asset. The lease term used to calculate the lease liability includes options to extend or terminate the lease when it is reasonably certain that the option will be exercised.

For leases commencing after January 1, 2019, the lease liability is measured at the present value of future lease payments, discounted using the discount rate for the lease at the commencement date. As we are typically unable to determine the implicit rate, we use an incremental borrowing rate based on the lease term and economic environment at commencement date. We initially measure payments based on an index by using the applicable rate at lease commencement. Variable payments that do not depend on an index are not included in the lease liability and are recognized as they are incurred. The ROU asset is initially measured as the amount of lease liability, adjusted for any initial lease costs, prepaid lease payments, and reduced by any lease incentives.

Our contracts often include non-lease components such as common area maintenance. We elected the practical expedient to account for the lease and non-lease components as a single lease component. For leases with a term of one year or less we elected not to record the lease asset or liability. The lease payments are recognized in the consolidated statement of earnings on a straight-line basis over the lease term. We include lease costs within cost of revenues and operating expenses

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.

 

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SELECTED RELATIONSHIPS WITHIN THE CONDENSED CONSOLIDATED

STATEMENTS OF OPERATIONS

 

     For the Three Months
Ended
 
     March 31,
2019
    April 1,
2018
 

Percentage of revenues:

    

Revenues:

    

Products

     80     83

Services

     20       17  
  

 

 

   

 

 

 

Total revenues

     100       100  

Cost of revenues:

    

Cost of products

     33       37  

Cost of services

     8       8  
  

 

 

   

 

 

 

Total cost of revenues (exclusive of acquired intangible assets amortization shown separately below)

     42       45  
  

 

 

   

 

 

 

Gross profit

     58       55  

Operating expenses:

    

Selling and administrative

     21       19  

Engineering and development

     16       15  

Acquired intangible assets amortization

     2       2  

Restructuring and other

     1       —    
  

 

 

   

 

 

 

Total operating expenses

     39       35  
  

 

 

   

 

 

 

Income from operations

     19       20  

Non-operating (income) expense:

    

Interest income

     (2     (1

Interest expense

     1       1  

Other (income) expense, net

     —         —    
  

 

 

   

 

 

 

Income before income taxes

     19       20  

Income tax provision

     (3     2  
  

 

 

   

 

 

 

Net income

     22     18
  

 

 

   

 

 

 

Results of Operations

First Quarter 2019 Compared to First Quarter 2018

Revenues

Revenues by our four reportable segments were as follows:

 

     For the Three Months
Ended
        
     March 31,
2019
     April 1,
2018
     Dollar
Change
 
     (in millions)  

Semiconductor Test

   $ 340.9      $ 373.3      $ (32.4

Industrial Automation

     66.1        48.8        17.3  

System Test

     58.2        43.0        15.2  

Wireless Test

     29.0        22.5        6.5  
  

 

 

    

 

 

    

 

 

 
   $ 494.1      $ 487.5      $ 6.6  
  

 

 

    

 

 

    

 

 

 

 

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The decrease in Semiconductor Test revenues of $32.4 million, or 8.7%, was driven primarily by a decrease in memory test sales and lower mobility test sales, partially offset by higher image sensor test sales. The increase in Industrial Automation revenues of $17.3 million, or 35.5%, was due to higher demand for collaborative robotic arms and the acquisition of MiR, which was acquired in April 2018. MiR added $9.1 million of revenue in the three months ended March 31, 2019.

The increase in System Test revenues of $15.2 million, or 35.3%, was primarily due to higher sales in Storage Test of 3.5” hard disk drive and higher sales in Production Board Test. The increase in Wireless Test revenues of $6.5 million, or 28.9%, was primarily due to higher demand for millimeter wave and cellular test products.

Revenues by country as a percentage of total revenues were as follows (1):

 

     For the Three Months
Ended
 
     March 31,
2019
    April 1,
2018
 

Taiwan

     17     28

China

     17       17  

United States

     15       13  

Japan

     12       5  

Europe

     11       10  

Korea

     10       11  

Singapore

     6       3  

Philippines

     4       6  

Thailand

     4       2  

Malaysia

     3       4  

Rest of World

     1       1  
  

 

 

   

 

 

 
     100     100
  

 

 

   

 

 

 

 

(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
 
     March 31,
2019
    April 1,
2018
 
     (in millions)  

Gross profit

   $ 287.6     $ 269.8     $ 17.8  

Percent of total revenues

     58.2     55.4     2.8  

Gross profit as a percent of revenue increased by 2.8 points, primarily due to favorable product mix.

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 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.

 

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During the three months ended March 31, 2019, we recorded an inventory provision of $2.4 million included in cost of revenues primarily due to downward revisions to previously forecasted demand levels, of which $1.2 million was related to Semiconductor Test and $0.5 million was related to System Test.

During the three months ended April 1, 2018, we recorded an inventory provision of $3.5 million included in cost of revenues primarily due to downward revisions to previously forecasted demand levels of which $2.2 million was related to Semiconductor Test, $0.8 million was related to Wireless Test, $0.3 million was related to System Test, and $0.2 million was related to Industrial Automation.

During the three months ended March 31, 2019 and April 1, 2018, we scrapped $0.4 million and $0.3 million of inventory, respectively. During the three months ended March 31, 2019 and April 1, 2018, we sold $0.8 million and $2.2 million of previously written-down or written-off inventory, respectively. As of March 31, 2019, we had inventory related reserves for inventory, which had been written-down or written-off totaling $100.9 million. We have no pre-determined timeline to scrap the remaining inventory.

Selling and Administrative

Selling and administrative expenses were as follows:

 

     For the Three Months
Ended
       
     March 31,
2019
    April 1,
2018
    Dollar
Change
 
     (in millions)  

Selling and administrative

   $ 102.0     $ 90.5     $ 11.5  

Percent of total revenues

     20.6     18.6  

The increase of $11.5 million in selling and administrative expenses was due primarily to higher spending in Industrial Automation due to higher sales and marketing spending in Universal Robots and due to the acquisitions of MiR and Energid in 2018.

Engineering and Development

Engineering and development expenses were as follows:

 

     For the Three Months
Ended
    Dollar
Change
 
     March 31,
2019
    April 1,
2018
 
     (in millions)  

Engineering and development

   $ 76.8     $ 74.4     $ 2.4  

Percent of total revenues

     15.5     15.3  

The increase of $2.4 million in engineering and development expenses was primarily due to higher spending in Industrial Automation and Wireless Test, partially offset by lower spending in Semiconductor Test.

Acquired Intangible Assets Amortization

Acquired intangible assets amortization expense was as follows:

 

     For the Three Months
Ended
       
     March 31,
2019
    April 1,
2018
    Dollar
Change
 
     (in millions)  

Acquired intangible assets amortization

   $ 10.6     $ 7.7     $ 2.9  

Percent of total revenues

     2.2     1.6  

 

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Acquired intangible assets amortization expense increased primarily due to Industrial Automation acquisitions of MiR and Energid in 2018 and the Semiconductor Test acquisition of Lemsys in 2019.

Restructuring and Other

During the three months ended March 31, 2019, we recorded an expense of $3.0 million for the increase in the fair value of the MiR contingent consideration liability, $1.3 million of acquisition related compensation and expenses, and $0.8 million of severance charges related to headcount reductions primarily in Semiconductor Test.

During the three months ended April 1, 2018, we recorded a $5.0 million credit for the decrease in the fair value of the Universal Robots contingent consideration liability, partially offset by $3.9 million recorded for employee severance charges, primarily in Semiconductor Test, and $0.8 million of acquisition related expenses.

Interest and Other

 

     For the Three Months
Ended
        
     March 31,
2019
     April 1,
2018
     Dollar
Change
 
     (in millions)  

Interest income

   $ (8.1    $ (6.0    $ (2.1

Interest expense

     5.7        6.9        (1.2

Other (income) expense, net

     1.4        0.8        0.6  

Interest income increased by $2.1 million due primarily to unrealized gains on equity marketable securities in 2019. Interest expense decreased by $1.2 million due primarily to lower realized losses on sales of marketable securities in 2019.

Income (Loss) Before Income Taxes

 

     For the Three Months
Ended
        
     March 31,
2019
     April 1,
2018
     Dollar
Change
 
     (in millions)  

Semiconductor Test

   $ 83.0      $ 88.1      $ (5.0

System Test

     15.3        5.9        9.5  

Wireless Test

     3.6        0.5        3.2  

Industrial Automation

     (5.3      0.8        (6.1

Corporate and Other (1)

     (2.7      0.6        (3.3
  

 

 

    

 

 

    

 

 

 
   $ 94.0      $ 95.8      $ (1.8
  

 

 

    

 

 

    

 

 

 

 

(1)

Included in Corporate and Other are: contingent consideration adjustments, employee severance, interest income, interest expense, net foreign exchange gains and losses, intercompany eliminations, and acquisition related expenses.

The decrease in income before income taxes in Semiconductor Test was driven primarily by a decrease in memory test sales and lower mobility test sales partially offset by higher image sensor test sales. 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 and higher sales in Production Board Test. The increase in income before income taxes in Wireless Test was primarily due to higher demand for millimeter wave and cellular test products. The decrease in income before income taxes in Industrial Automation was primarily due to increased intangible assets amortization expense from the acquisitions of MiR and Energid in 2018.

 

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Income Taxes

The effective tax rate for the three months ended March 31, 2019 and April 1, 2018 was (16.1)% and 9.2%, respectively. The decrease in the effective tax rate from the three months ended April 1, 2018 to the three months ended March 31, 2019 resulted from discrete tax benefit from the release of reserves for uncertain tax positions, increases in benefits related to the U.S. foreign derived intangible income deduction and U.S. research and development tax credits, a decrease in expense related to the uncertain tax positions for transfer pricing and a reduction in discrete tax expense associated with remeasurement of deferred tax assets as a result of reductions in tax rates. These reductions were partially offset by a projected shift in the geographic distribution of income, which increases the income subject to taxation in higher tax rate jurisdictions relative to lower tax rate jurisdictions, an increase in the U.S. global intangible low-taxed income inclusion and a reduction in the discrete benefit from stock based compensation.

Contractual Obligations

The following table reflects our contractual obligations as of March 31, 2019:

 

     Payments Due by Period  
     Total      Less than
1 year
     1-3 years      3-5 years      More than
5 years
     Other  
     (in thousands)  

Convertible debt

   $ 460,000      $ —        $ —        $ 460,000      $ —        $ —    

Purchase obligations

     262,970        255,335        7,635        —          —          —    

Retirement plans contributions

     126,034        4,993        10,370        11,019        99,652        —    

Transition tax payable (1)

     91,186        7,295        14,590        14,590        54,711        —    

Operating lease obligations

     76,323        20,487        31,178        14,346        10,312        —    

Fair value of contingent consideration

     38,313        22,803        15,510        —          —          —    

Interest on long-term debt

     28,750        5,750        11,500        11,500        —          —    

Other long-term liabilities reflected on the balance sheet under GAAP (2)

     62,189        —          25,571        7,272        —          29,346  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,145,765      $ 316,663      $ 116,354      $ 518,727      $ 164,675      $ 29,346  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Represents our estimate of a provisional tax amount for the transition tax liability associated with our accumulated foreign earnings as a result of the enactment of the Tax Reform Act on December 22, 2017.

(2)

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 decreased by $207.8 million in the three months ended March 31, 2019 to $996.7 million.

Operating activities during the three months ended March 31, 2019 provided cash of $18.0 million. Changes in operating assets and liabilities used cash of $134.2 million. This was due to a $63.3 million increase in operating assets and a $70.9 million decrease in operating liabilities.

The increase in operating assets was primarily due to a $41.7 million increase in accounts receivable due to increased sales, a $18.6 million increase in prepayments and other assets, and a $2.9 million increase in inventories.

 

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The decrease in operating liabilities was due to a $59.5 million decrease in accrued employee compensation due primarily to first quarter payments related to variable compensation, a $22.8 million decrease in income taxes, an $11.5 million decrease in other accrued liabilities, and $1.2 million of retirement plan contributions, partially offset by a $17.7 million increase in accounts payable, and a $6.5 million increase in deferred revenue and customer advance payments.

Investing activities during the three months ended March 31, 2019 used cash of $261.0 million, due to $375.2 million used for purchases of marketable securities, $25.7 million used for purchases of property, plant and equipment, and $7.0 million, net of cash acquired, used for the acquisition of Lemsys, partially offset by $141.2 million and $5.4 million in proceeds from maturities and sales of marketable securities, respectively, and proceeds from life insurance of $0.3 million related to the cash surrender value from the cancellation of a Teradyne owned life insurance policy.

Financing activities during the three months ended March 31, 2019 used cash of $199.8 million, due to $156.5 million used for the repurchase of 4.5 million shares of common stock at an average price of $35.12 per share, $27.6 million used for a payment related to MiR and Universal Robots acquisition contingent consideration, $15.6 million used for dividend payments, and $14.3 million used for payments related to net settlements of employee stock compensation awards, partially offset by $14.3 million from the issuance of common stock under employee stock purchase and stock option plans.

Operating activities during the three months ended April 1, 2018 used cash of $81.9 million. Changes in operating assets and liabilities used cash of $212.6 million. This was due to a $162.4 million increase in operating assets and a $50.2 million decrease in operating liabilities.

The increase in operating assets was primarily due to a $140.7 million increase in accounts receivable due to an increase in shipments during the last month of the quarter and the impact of the new revenue recognition standard, a $21.0 million increase in inventories, and a $0.7 million increase in prepayments and other assets.

The decrease in operating liabilities was due to a $56.3 million decrease in accrued employee compensation due primarily to first quarter payments related to variable compensation, a $12.1 million decrease in income taxes, a $7.5 million decrease in other accrued liabilities, and $1.0 million of retirement plan contributions, partially offset by a $17.1 million increase in accounts payable and a $9.6 million increase in deferred revenue and customer advance payments.

Investing activities during the three months ended April 1, 2018 provided cash of $462.9 million, due to $800.7 million and $212.7 million in proceeds from sales and maturities of marketable securities, respectively, partially offset by $490.3 million used for purchases of marketable securities, $34.8 million used for purchases of property, plant and equipment and $25.4 million used for the acquisition of Energid.

Financing activities during the three months ended April 1, 2018 used cash of $174.4 million, due to $134.3 million used for the repurchase of 2.9 million shares of common stock at an average price of $45.69 per share, $19.6 million used for payment related to net settlement of employee stock compensation awards, $17.6 million used for dividend payments, and $13.6 million used for a payment related to Universal Robots acquisition contingent consideration, partially offset by $10.7 million from the issuance of common stock under employee stock purchase and stock option plans.

In January 2019, our Board of Directors declared a quarterly cash dividend of $0.09 per share. Dividend payments for the three months ended March 31, 2019 were $15.6 million.

In January 2018, our Board of Directors declared a quarterly cash dividend of $0.09 per share. Dividend payments for the three months ended April 1, 2018 were $17.6 million.

 

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In January 2018, our Board of Directors cancelled the December 2016 stock repurchase program and authorized a new stock repurchase program for up to $1.5 billion of common stock. We intend to repurchase $500 million in 2019. During the three months ended March 31, 2019, we repurchased 4.5 million shares of common stock for $156.5 million at an average price of $35.12 per share. During the three months ended April 1, 2018, we repurchased 2.9 million shares of common stock for $134.3 million at an average price of $45.69 per share. The cumulative repurchases under the $1.5 billion stock repurchase program as of March 31, 2019 totaled 26.1 million shares of common stock for $979.9 million at an average price per share of $37.55.

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. Inflation has not had a significant long-term impact on earnings.

Equity Compensation Plans

As discussed in Note O: “Stock Based Compensation” in our 2018 Annual Report on Form 10-K, we have a 1996 Employee Stock Purchase Plan and a 2006 Equity and Cash Compensation Incentive Plan (the “2006 Equity Plan”).

The purpose of the 1996 Employee Stock Purchase Plan is to encourage stock ownership by all eligible employees of Teradyne. The purpose of the 2006 Equity Plan is to provide equity ownership and compensation opportunities in Teradyne to our employees, officers, directors, consultants and/or advisors. Both plans were approved by our shareholders.

Recently Issued Accounting Pronouncements

On January 26, 2017, the FASB issued ASU 2017-04, “Intangibles—Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment.” The new guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Goodwill impairment will be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance will remain largely unchanged. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. The same one-step impairment test will be applied to goodwill at all reporting units, even those with zero or negative carrying amounts. Entities will be required to disclose the amount of goodwill at reporting units with zero or negative carrying amounts. The revised guidance will be applied prospectively, and is effective in 2020. Early adoption is permitted for any impairment tests performed after January 1, 2017. We are currently evaluating the impact of this ASU on our financial position, results of operations and statements of cash flows.

 

Item 3:

Quantitative and Qualitative Disclosures about Market Risks

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 March 1, 2018. There were no material changes in our exposure to market risk from those set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

In addition to market risks described in our Annual Report on Form 10-K, we have an equity price risk related to the fair value of our convertible senior unsecured notes issued in December 2016. In December 2016,

 

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Teradyne issued $460 million aggregate principal amount of 1.25% convertible senior unsecured notes (the “Notes”) due December 15, 2023. As of March 31, 2019, the Notes had a fair value of $644.6 million. The table below provides a sensitivity analysis of hypothetical 10% changes of Teradyne’s stock price as of the end of the first quarter of 2019 and the estimated impact on the fair value of the Notes. The selected scenarios are not predictions of future events, but rather are intended to illustrate the effect such event may have on the fair value of the Notes. The fair value of the Notes is subject to equity price risk due to the convertible feature. The fair value of the Notes will generally increase as Teradyne’s common stock price increases and will generally decrease as the common stock price declines in value. The change in stock price affects the fair value of the convertible senior notes, but does not impact Teradyne’s financial position, cash flows or results of operations due to the fixed nature of the debt obligation. Additionally, we carry the Notes at face value less unamortized discount on our balance sheet, and we present the fair value for required disclosure purposes only. In connection with the offering of the Notes we also sold warrants to the option counterparties. These transactions have been accounted for as an adjustment to our shareholders’ equity. The convertible note hedge transactions are expected to reduce the potential equity dilution upon conversion of the Notes. The warrants along with any shares issuable upon conversion of the Notes will have a dilutive effect on our earnings per share to the extent that the average market price of our common stock for a given reporting period exceeds the applicable strike price or conversion price of the warrants or Notes, respectively.

 

Hypothetical Change in Teradyne Stock Price

   Fair Value      Estimated change
in fair value
    Hypothetical percentage
increase (decrease) in
fair value
 

10% Increase

   $ 693,013      $ 48,438       7.5

No Change

     644,575        —         —    

10% Decrease

     598,497        (46,078     (7.1

See Note I: “Debt” for further information.

 

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) or Rule 15d-15(f) 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.

 

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PART II. OTHER INFORMATION

 

Item 1:

Legal Proceedings

We are subject to various legal proceedings and claims, which have arisen, in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on our results of operations, financial condition or cash flows.

 

Item 1A:

Risk Factors

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, 2018, 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.

 

Item 2:

Unregistered Sales of Equity Securities and Use of Proceeds

In January 2018, our Board of Directors cancelled the December 2016 stock repurchase program and authorized a new stock repurchase program for up to $1.5 billion of common stock. We intend to repurchase $500 million in 2019. During the three months ended March 31, 2019, we repurchased 4.5 million shares of common stock for $156.5 million at an average price of $35.12 per share. During the three months ended April 1, 2018, we repurchased 2.9 million shares of common stock for $134.3 million at an average price of $45.69 per share. The cumulative repurchases under the $1.5 billion stock repurchase program as of March 31, 2019 totaled 26.1 million shares of common stock for $979.9 million at an average price per share of $37.55.

The following table includes information with respect to repurchases we made of our common stock during the three months ended March 31, 2019 (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
 

January 1, 2019 – January 27, 2019

    2,424       $ 31.59         2,424     $ 599,950  

January 28, 2019 – February 24, 2019

    1,240       $ 37.58         853     $ 567,513  

February 25, 2019 – March 31, 2019

    1,183       $ 40.24         1,180     $ 520,054  
 

 

 

     

 

 

     

 

 

   
    4,847       (1   $ 35.24       (1     4,457    
 

 

 

     

 

 

     

 

 

   

 

(1)

Includes three hundred ninety one thousand shares at an average price of $36.60 withheld from employees for the payment of taxes.

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

 

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Item 6:

Exhibits

 

Exhibit

Number

  

Description

  10.1    Teradyne Offer of Employment dated February 8, 2019 for Sanjay Mehta*
  10.2    Executive Officer Change in Control Agreement dated April 25, 2019 between Teradyne, Inc. and Sanjay Mehta*
  10.3    Employment Agreement dated April 25, 2019 between Teradyne, Inc. and Sanjay Mehta *
  10.4    Agreement Regarding Termination Benefits dated April 25, 2019 between Teradyne, Inc. and Sanjay Mehta*
  10.5    Time-Based Restricted Stock Unit Agreement dated May 1, 2019 for Sanjay Mehta under 2006 Equity and Cash Compensation Incentive Plan*
  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

 

*

Mangement Contract and Compensatory Plan

 

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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/ SANJAY MEHTA

Sanjay Mehta

Vice President,

Chief Financial Officer and Treasurer

(Duly Authorized Officer

and Principal Financial Officer)

May 10, 2019

 

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