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TERADYNE, INC - Quarter Report: 2009 July (Form 10-Q)

Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

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

For the quarterly period ended July 5, 2009

OR

 

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

Commission File No. 001-06462

 

 

TERADYNE, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Massachusetts    04-2272148

(State or Other Jurisdiction of

Incorporation or Organization)

  

(I.R.S. Employer

Identification No.)

600 Riverpark Drive, North Reading, Massachusetts    01864
(Address of Principal Executive Offices)    (Zip Code)

978-370-2700

(Registrant’s Telephone Number, Including Area Code)

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the proceeding 12 months (or for such shorter period that the registrant was required to submit and post such files)    Yes  ¨    No  ¨

* The registrant has not yet been phased in to the interactive data requirements

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

Large accelerated filer  x    Accelerated filer  ¨    Non-accelerated filer  ¨    Smaller reporting company  ¨

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

The number of shares outstanding of the registrant’s only class of Common Stock as of August 4, 2009 was 174,574,204 shares.

 

 

 


Table of Contents

TERADYNE, INC.

INDEX

 

          Page No.
PART I. FINANCIAL INFORMATION

Item 1.

  

Financial Statements (unaudited):

  
  

Condensed Consolidated Balance Sheets as of July 5, 2009 and December 31, 2008

   3
  

Condensed Consolidated Statements of Operations for the Three and Six Months Ended July 5, 2009 and June  29, 2008

   4
  

Condensed Consolidated Statements of Cash Flows for the Six Months Ended July 5, 2009 and June 29, 2008

   5
  

Notes to Condensed Consolidated Financial Statements

   6

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   23

Item 3.

  

Quantitative and Qualitative Disclosures about Market Risk

   34

Item 4.

  

Controls and Procedures

   34
PART II. OTHER INFORMATION

Item 1.

  

Legal Proceedings

   35

Item 1A.

  

Risk Factors

   35

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

   36

Item 4.

  

Submission of Matters to a Vote of Security Holders

   36

Item 6.

  

Exhibits

   37

 

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Table of Contents

PART I

 

Item 1: Financial Statements

TERADYNE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

     July 5,
2009
    December 31,
2008
 
     (in thousands)  
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 334,081      $ 322,705   

Accounts receivable, net of allowance for doubtful accounts of $3,967 and $4,712 at July 5, 2009 and December 31, 2008, respectively

     73,914        109,625   

Inventories:

    

Parts

     64,961        89,140   

Assemblies in process

     50,185        65,818   

Finished goods

     11,543        13,493   
                
     126,689        168,451   

Deferred tax assets

     17,268        16,988   

Prepayments and other current assets

     51,781        60,884   
                

Total current assets

     603,733        678,653   

Property, plant, and equipment, at cost

     784,608        782,774   

Less: accumulated depreciation

     514,239        484,325   
                

Net property, plant, and equipment

     270,369        298,449   

Marketable securities

     38,982        51,613   

Intangible assets, net

     170,545        186,998   

Other assets

     18,751        19,534   
                

Total assets

   $ 1,102,380      $ 1,235,247   
                
LIABILITIES     

Current liabilities:

    

Accounts payable

   $ 47,979      $ 61,164   

Current debt

     2,069        122,500   

Accrued employees’ compensation and withholdings

     54,708        73,521   

Deferred revenue and customer advances

     49,730        58,030   

Other accrued liabilities

     42,590        51,748   
                

Total current liabilities

     197,076        366,963   

Retirement plans liabilities

     133,478        125,877   

Deferred tax liabilities

     3,158        8,730   

Long-term other accrued liabilities

     22,965        27,565   

Long-term debt

     137,087        —     
                

Total liabilities

     493,764        529,135   
                

Commitments and contingencies (Note M)

    
SHAREHOLDERS’ EQUITY     

Common stock, $0.125 par value, 1,000,000 shares authorized, 174,324 shares and 169,651 shares issued and outstanding at July 5, 2009 and December 31, 2008, respectively

     21,791        21,206   

Additional paid-in capital

     1,188,153        1,124,390   

Accumulated other comprehensive loss

     (152,516     (148,108

Accumulated deficit

     (448,812     (291,376
                

Total shareholders’ equity

     608,616        706,112   
                

Total liabilities and shareholders’ equity

   $ 1,102,380      $ 1,235,247   
                

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, 2008, are an integral part of the condensed consolidated financial statements.

 

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Table of Contents

TERADYNE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

     For the Three Months
Ended
    For the Six Months
Ended
 
     July 5,
2009
    June 29,
2008
    July 5,
2009
    June 29,
2008
 
     (in thousands, except per share amounts)  

Net revenues:

        

Products

   $ 115,148      $ 248,779      $ 179,884      $ 481,770   

Services

     54,432        68,926        110,304        133,250   
                                

Net revenues

     169,580        317,705        290,188        615,020   

Cost of revenues:

        

Cost of products

     92,635        124,925        148,795        243,232   

Cost of services

     29,816        38,932        60,904        79,437   
                                

Total cost of revenues

     122,451        163,857        209,699        322,669   
                                

Gross profit

     47,129        153,848        80,489        292,351   

Operating expenses:

        

Engineering and development

     38,451        56,154        85,649        111,303   

Selling and administrative

     47,257        65,463        102,630        130,684   

Acquired intangible asset amortization

     8,214        4,774        16,453        8,637   

In-process research and development

     —          —          —          1,100   

Restructuring and other, net

     15,270        12,726        31,235        24,511   
                                

Operating expenses

     109,192        139,117        235,967        276,235   
                                

(Loss) income from operations

     (62,063     14,731        (155,478     16,116   

Interest income

     1,141        2,932        1,917        7,544   

Interest expense and other

     (8,046     (484     (13,875     (14
                                

(Loss) income before income taxes

     (68,968     17,179        (167,436     23,646   

Income tax (benefit) provision

     (2,200     6,100        (10,000     10,200   
                                

Net (loss) income

   $ (66,768   $ 11,079      $ (157,436   $ 13,446   
                                

Net (loss) income per common share:

        

Basic

   $ (0.39   $ 0.06      $ (0.91   $ 0.08   
                                

Diluted

   $ (0.39   $ 0.06      $ (0.91   $ 0.08   
                                

Weighted average common share—basic

     173,022        170,644        172,576        172,203   
                                

Weighted average common share—diluted

     173,022        174,096        172,576        174,909   
                                

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, 2008 are an integral part of the condensed consolidated financial statements.

 

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TERADYNE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

    For the Six Months
Ended
 
    July 5,
2009
    June 29,
2008
 
    (in thousands)  

Cash flows from operating activities:

   

Net (loss) income

  $ (157,436   $ 13,446   

Adjustments to reconcile net (loss) income to net cash (used for) provided by operating activities:

   

Depreciation

    30,251        39,077   

Amortization

    21,343        9,720   

Provision for excess and obsolete inventory

    17,208        3,254   

Stock-based compensation

    12,109        10,821   

Non-cash charge for the sale of inventories revalued at the date of acquisition

    5,163        4,346   

Loss on sale and impairment of marketable securities

    2,532        —     

Revolving credit facility issue costs

    2,488        —     

Deferred taxes

    (5,852     —     

In-process research and development charge

    —          1,100   

Gain on sale of land and building

    —          (1,682

Other

    955        764   

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

   

Accounts receivable

    35,757        4,488   

Inventories

    29,459        (1,223

Other assets

    2,392        (6,195

Accounts payable, deferred revenue and accrued expenses

    (39,154     10,410   

Retirement plans contributions

    (3,972     (3,717

Income taxes payable

    —          (2,608
               

Net cash (used for) provided by operating activities

    (46,757     82,001   
               

Cash flows from investing activities:

   

Investments in property, plant and equipment

    (17,428     (56,702

Acquisition of business, net of cash acquired

    (3,741     (285,324

Proceeds from life insurance

    1,076        —     

Proceeds from sale and maturities of available-for-sale marketable securities

    11,946        89,777   

Proceeds from sale of land and building

    —          17,716   

Purchases of available-for-sale marketable securities

    —          (40,581
               

Net cash used for investing activities

    (8,147     (275,114
               

Cash flows from financing activities:

   

Net proceeds from long-term debt

    172,914        —     

Repayment of revolving credit facility principal

    (122,500     —     

Repurchase of common stock

    —          (91,191

Issuance of common stock under employee stock option and stock purchase plans

    14,272        9,082   
               

Net cash provided by (used for) financing activities

    64,686        (82,109
               

Effect of exchange rate changes on cash and cash equivalents

    1,594        (1,055
               

Increase (decrease) in cash and cash equivalents

    11,376        (276,277

Cash and cash equivalents at beginning of period

    322,705        562,371   
               

Cash and cash equivalents at end of period

  $ 334,081      $ 286,094   
               

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, 2008 are an integral part of the condensed consolidated financial statements.

 

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TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

A. The Company

Teradyne, Inc. is a leading global supplier of automatic test equipment.

Teradyne’s automatic test equipment products and services include:

 

   

semiconductor test (“Semiconductor Test”) systems, and

 

   

military/aerospace (“Mil/Aero”) test instrumentation and systems, circuit-board test and inspection (“Commercial Board Test”) systems, automotive diagnostic and test (“Diagnostic Solutions”) systems and hard disk drive test (“HDD”) systems, collectively these products represent “Systems Test Group”.

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 Teradyne’s filings with the Securities and Exchange Commission (the “SEC”). See also “Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations—Certain Factors That May Affect Future Results” and Teradyne’s Annual Report on Form 10-K for the year ended December 31, 2008.

B. Accounting Policies

Basis of Presentation

The condensed consolidated interim financial statements include the accounts of Teradyne and its subsidiaries. All significant intercompany balances and transactions have been eliminated. These interim financial statements are unaudited and reflect all normal recurring adjustments that are, in the opinion of management, necessary for the fair presentation of such interim financial statements. Certain prior year’s amounts were reclassified to conform to the current year presentation. The December 31, 2008 condensed consolidated balance sheet data were derived from audited financial statements, but do not include all disclosures required by generally accepted accounting principles.

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 SEC on March 2, 2009 for the year ended December 31, 2008.

Preparation of Financial Statements

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.

C. Recently Issued Accounting Pronouncements

In December 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) No. FAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets,” (“FSP FAS 132(R)-1”), which amends SFAS No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits.” This guidance is intended to ensure that an employer meets the objectives of the disclosures about plan assets in an employer’s defined benefit pension or other postretirement plan to provide users of financial statements with an understanding of the following: how investment allocation decisions are made; the major categories of plan assets; the inputs and valuation techniques used to measure the fair value of

 

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TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

plan assets; the effect of fair value measurements using significant unobservable inputs on changes in plan assets; and significant concentrations of risk within plan assets. FSP FAS 132(R)-1 is effective for Teradyne’s December 31, 2009 annual financial statements. As FSP FAS 132(R)-1 only requires enhanced disclosures, Teradyne determined that the adoption of FSP FAS 132(R)-1 will not have an impact on its financial position or results of operations.

In June 2009, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162” (“SFAS 168”). SFAS 168 replaces SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” and establishes the “FASB Accounting Standards Codification” (“Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with generally accepted accounting principles in the United States. All guidance contained in the Codification carries an equal level of authority. On the effective date of SFAS 168, the Codification will supersede all then-existing non-SEC accounting and reporting standards. SFAS 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. This new statement will not have an impact on the determination or reporting of Teradyne’s financial position or results of operations.

D. Financial Instruments

Financial Instruments

Teradyne uses the market and income approaches to value its financial instruments and there were no changes in valuation techniques during the quarter and six months ended July 5, 2009. SFAS No. 157, “Fair Value Measurements” requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:

Level 1: Quoted prices in active markets for identical assets as of the reporting date.

Level 2: Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reported date. For example, a common approach for valuing fixed income securities is the use of matrix pricing. Matrix pricing is a mathematical technique used to value securities by relying on the securities’ relationship to other benchmark quoted prices, and therefore is considered a Level 2 input.

Level 3: Unobservable inputs that are not corroborated by market data. Unobservable inputs are developed based on the best information available, which might include Teradyne’s own data.

Teradyne elected fair value treatment for the right to sell its auction rate securities back to UBS (“UBS Put”), under SFAS No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities.”

 

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TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

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 July 5, 2009 and December 31, 2008. The UBS Put is included in other assets.

 

     July 5, 2009
   Level 1    Level 2    Level 3    Total
   (in thousands)

Assets:

           

Long-term marketable securities

   $ 6,502    $ 6,294    $ 26,186    $ 38,982

UBS Put

     —        —        3,070      3,070

Derivatives

     —        126      —        126
                           

Total

   $ 6,502    $ 6,420    $ 29,256    $ 42,178
                           
     December 31, 2008
     Level 1    Level 2    Level 3    Total
     (in thousands)

Assets:

           

Long-term marketable securities

   $ 6,192    $ 19,453    $ 25,968    $ 51,613

UBS Put

     —        —        3,330      3,330
                           

Total

   $ 6,192    $ 19,453    $ 29,298    $ 54,943
                           

Liabilities:

           

Derivatives

   $ —      $ 767    $ —      $ 767
                           

Total

   $ —      $ 767    $ —      $ 767
                           

Changes in the fair value of Level 3 financial assets for the three and six months ended July 5, 2009, were as follows.

 

    Level 3 Financial Assets  
    For the Three Months
Ended
    For the Six Months
Ended
 
    July 5,
2009
    July 5,
2009
 
    Long-Term Auction Rate
Securities
  UBS Put     Long-Term Auction Rate
Securities
    UBS Put  
    (in thousands)  

Balance at beginning of period

  $ 25,521   $ 3,277      $ 25,968      $ 3,330   

Change in unrealized gain included in interest income

    665     —          665        —     

Change in unrealized loss included in interest expense and other

    —       (207     (447     (260
                             

Balance at end of period

  $ 26,186   $ 3,070      $ 26,186      $ 3,070   
                             

Teradyne had no Level 3 financial assets for the six months ended June 29, 2008.

On a quarterly basis Teradyne reviews its investments to identify and evaluate those that have an indication of a potential other-than-temporary impairment. Factors considered in determining whether a loss is other-than-temporary include:

 

   

The length of time and the extent to which the market value has been less than cost;

 

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TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

   

The financial condition and near-term prospects of the issuer; and

 

   

The intent and ability to retain the investment in the issuer for a period of time sufficient to allow for any anticipated recovery in market value.

Teradyne determined that it does not intend to hold certain marketable securities for a period of time sufficient to allow for recovery in market value and recognized an other-than-temporary impairment loss in the amount of $0.6 million in the six months ended July 5, 2009, primarily related to mortgage and asset backed debt securities. During the six months ended July 5, 2009, Teradyne recorded a net loss of $0.1 million for the change in the auction rate securities and UBS put fair values. During the six months ended July 5, 2009, Teradyne also recorded $1.9 million of realized losses from sales of marketable securities. Other-than-temporary impairment losses, decreases in auction rate securities fair value and realized losses from sale of marketable securities are included in interest expense and other and increases in auction rate securities fair value are included in interest income.

In April 2009, the FASB issued FSP FAS 107-1 and Accounting Principles Board Opinion (“APB”) 28-1, “Interim Disclosure about Fair Value of Financial Instruments” (“Fair Value FSP”). The Fair Value FSP requires interim disclosures regarding the fair values of financial instruments that are within the scope of SFAS No. 107, “Disclosures about the Fair Value of Financial Instruments.” Additionally, the Fair Value FSP requires disclosure of the methods and significant assumptions used to estimate the fair value of financial instruments on an interim basis as well as changes in the methods and significant assumptions from prior periods. The Fair Value FSP does not change the accounting treatment for these financial instruments. Teradyne adopted the Fair Value FSP during the quarter ended July 5, 2009.

The carrying amounts and fair values of financial instruments at July 5, 2009 and December 31, 2008 are as follows:

 

     July 5, 2009    December 31, 2008
     Carrying Value    Fair Value    Carrying Value    Fair Value
     (in thousands)

Marketable securities

   $ 38,982    $ 38,982    $ 51,613    $ 51,613

UBS Put

     3,070      3,070      3,277      3,277

Revolving credit facility

     —        —        122,500      122,500

Convertible debt (1)

     128,815      273,239      —        —  

Japan loan

     10,340      10,340      —        —  

 

(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 feature.

The fair values of cash and cash equivalents, accounts receivable, net and accounts payable approximate the carrying amount due to the short term maturies of these instruments.

 

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TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Asset backed and corporate debt available-for-sale marketable securities have maturities of one to five years. At July 5, 2009 and December 31, 2008, these investments are reported as follows:

 

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

July 5, 2009

         

Long-term marketable securities:

         

Equity and debt mutual funds

  $ 7,534   $ 130   $ (1,162   $ 6,502   $ 3,352

Asset backed securities

    6,294     —       —          6,294     —  
                               
  $ 13,828   $ 130   $ (1,162   $ 12,796   $ 3,352
                               
    Available-for-Sale   Fair Market
Value of Investments
with Unrealized Losses
    Cost   Unrealized
Gain
  Unrealized
(Loss)
    Fair Market
Value
 
    (in thousands)

December 31, 2008

         

Long-term marketable securities:

         

Equity and debt mutual funds

  $ 8,910   $ 589   $ (3,307   $ 6,192   $ 6,192

Asset backed and corporate debt securities

    19,453     —       —          19,453     —  
                               
  $ 28,363   $ 589   $ (3,307   $ 25,645   $ 6,192
                               

As of July 5, 2009, the fair market value of investments with unrealized losses totaled $3.4 million. Of this value, $2.8 million had an unrealized loss for greater than one year and $0.6 million had an unrealized loss for less than one year. These investments are mutual funds related to employee retirement benefits. Teradyne determined that the unrealized losses related to these investments, at July 5, 2009, are temporary.

Derivatives

In March of 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133” (SFAS 161). SFAS 161 requires entities to provide enhanced disclosure about how and why the entity uses derivative instruments, how the instruments and related hedged items are accounted for under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” (SFAS 133) and how the instruments and related hedged items affect the financial position, results of operations, and cash flows of the entity. Teradyne adopted SFAS 161 during the quarter ended April 5, 2009.

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 denominated net monetary assets and anticipated cash flows. The terms of currency instruments used for hedging purposes are consistent with the timing of the transactions being hedged. 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 net monetary assets 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 fair value of the net monetary assets denominated in foreign currencies.

 

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TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The notional amount of foreign exchange contracts hedging monetary assets and liabilities denominated in foreign currencies was $45.5 million and $100.0 million at July 5, 2009 and December 31, 2008, respectively.

The following table summarizes the fair value of derivative instruments as of July 5, 2009.

 

     Asset Derivatives
     Balance Sheet Location    July 5, 2009
     (in thousands)

Derivatives not designated as hedging instruments:

     

Foreign exchange contracts

   Other assets    $ 126
         

Total derivatives

      $ 126
         

The following table summarizes the effect of derivative instruments in the statement of operations recognized during the three and six months ended July 5, 2009. The table does not reflect the corresponding gain (loss) from the hedged balance sheet.

 

   

Location of Losses
Recognized in Statement
of Operations

   For the Three
Months Ended
    For the Six
Months Ended
 
     July 5,
2009
    July 5,
2009
 
         (in thousands)  

Derivatives not designated as hedging instruments:

      

Foreign exchange contracts

  Interest expense and other    $ (425   $ (2,386
                  

Total derivatives

     $ (425   $ (2,386
                  

See Debt footnote E regarding derivatives related to convertible senior notes.

E. Debt

Loan Agreement

On March 31, 2009, Teradyne K. K., Teradyne’s wholly-owned subsidiary in Japan, entered into a loan agreement with a local bank in Japan to borrow approximately $10 million (the loan is denominated in Japanese Yen). The loan has a term of 5 years and a fixed interest rate of 1.4%. Approximately $6 million of the loan is collateralized by a real estate mortgage on Teradyne K.K.’s building and land in Kumamoto, Japan and approximately $4 million is unsecured. Teradyne, Inc. has guaranteed payment of the loan obligation. The loan is amortized over the term of the loan with semiannual principal payments of approximately $1 million payable on September 30 and March 30 each year. At July 5, 2009, approximately $2 million of the outstanding loan principal is included in current debt and approximately $8 million is classified as long-term debt.

Convertible Senior Notes

On March 31, 2009, Teradyne entered into an underwriting agreement regarding a public offering of $175 million aggregate principal amount of 4.50% convertible senior notes due March 15, 2014 (the “Notes”). On April 1, 2009, the underwriters exercised their option to purchase an additional $15 million aggregate principal amount of the Notes for a total aggregate principal amount of $190 million. The Notes bear interest at a rate of 4.50% per annum, payable semi-annually in arrears on March 15 and September 15 of each year,

 

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TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

beginning on September 15, 2009. The Notes will mature on March 15, 2014, unless earlier repurchased by Teradyne or converted. The Notes are senior unsecured obligations and rank equally with all of Teradyne’s existing and future senior debt and senior to any of Teradyne’s subordinated debt.

The Notes may be converted, under certain circumstances and during certain periods, at an initial conversion rate of approximately 182.65 shares of Teradyne’s common stock per $1,000 principal amount of Notes, which is equivalent to an initial conversion price of approximately $5.48, a 25% conversion premium based on the last reported sale price of $4.38 per share of Teradyne’s common stock on March 31, 2009. The conversion rate is subject to adjustment in certain circumstances.

Holders may convert their Notes at their option prior to the close of business on the business day immediately preceding December 15, 2013, under the following circumstances: (1) during the five business-day period after any five consecutive trading day period (the “measurement period”) in which the price per Note for each day of that measurement period was less than 98% of the product of the last reported sale price of Teradyne’s common stock and the conversion rate for such date; (2) during any calendar quarter, if the last reported sale price of Teradyne’s common stock for 20 or more trading days in a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter exceeds 130% of the applicable conversion price in effect on the last trading day of the immediately preceding calendar quarter; or (3) upon the occurrence of certain specified events. Additionally, the Notes are convertible during the last three months prior to the March 15, 2014 maturity date. Upon conversion, holders will receive, at Teradyne’s option, shares of Teradyne common stock, cash or a combination of cash and shares of Teradyne common stock, subject to Teradyne’s option to irrevocably elect to settle all future conversions in cash up to the principal amount of the Notes and shares of common stock for any excess.

Teradyne may not redeem the Notes prior to their maturity. Holders of the Notes may require Teradyne to purchase in cash all or a portion of their Notes at a price equal to 100% of the principal amount, plus accrued and unpaid interest, upon the occurrence of certain fundamental changes involving Teradyne.

Concurrently with the offering of the Notes, Teradyne entered into a convertible note hedge transaction with a strike price equal to the initial conversion price of the Notes, or approximately $5.48. The convertible note hedge allows Teradyne to receive shares of its common stock and/or cash related to the excess conversion value that it would pay to the holders of the Notes upon conversion. The convertible note hedges will cover, subject to customary antidilution adjustments, approximately 34,703,196 shares of Teradyne’s common stock. Teradyne paid approximately $64.6 million for the convertible note hedges.

Separately, Teradyne entered into a warrant transaction with a strike price of approximately $7.67 per share, which is 75% higher than the closing price of Teradyne’s common stock on March 31, 2009. The warrants will be net share settled and will cover, subject to customary antidilution adjustments, approximately 34,703,196 shares of Teradyne’s common stock. Teradyne received approximately $43.0 million for the warrant.

The convertible note hedge and warrant transaction will generally have the effect of increasing the conversion price of the Notes to approximately $7.67 per share of Teradyne’s common stock, representing a 75% conversion premium based upon the closing price of Teradyne’s common stock on March 31, 2009.

On April 6, 2009, Teradyne completed its registered public offering of the $190 million aggregate principal amount convertible senior notes and settled the related convertible bond hedge and warrant transaction and received approximately $163 million as a result of these financing transactions.

 

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TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Teradyne analyzed the convertible note hedge and warrant transactions under EITF Issue No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled In, a Company’s Own Stock”, EITF Issue No. 07-5 “Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock” and other relevant literature, and determined that they meet the criteria for classification as equity transactions. As a result, Teradyne recorded the purchase of the convertible note hedge as a reduction in additional paid-in capital and the proceeds from the warrants as an increase to additional paid-in capital. Teradyne does not recognize subsequent changes in fair value of the convertible note hedge and warrant in its financial statements.

The provisions of FSP APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“FSP APB 14-1”), are applicable to the Notes. FSP APB 14-1 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 $63.4 million of the $190.0 million principal amount of the Notes to the equity component, which represents a discount to the debt and will be amortized into interest expense using the effective interest method through March 2014. Accordingly, Teradyne’s effective annual interest rate on the Notes will be approximately 14.5%. The Notes are classified as long-term debt in the balance sheet at July 5, 2009 based on their March 15, 2014 maturity date. Debt issuance costs of approximately $4.1 million are being amortized to interest expense over the five year term of the Notes.

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

 

     July 5,
2009
     (in thousands)

Debt principal

   $ 190,000

Unamortized discount

     61,185
      

Net carrying amount of the convertible debt

   $ 128,815
      

 

     For the Three Months
Ended
     July 5,
2009
     (in thousands)

Contractual interest expense on the coupon

   $ 2,161

Amortization of the discount component and debt issue fees recognized as interest expense

     2,455
      

Total interest expense on the convertible debt

   $ 4,616
      

As of July 5, 2009, the unamortized discount was $61.2 million which will be amortized over approximately 4.75 years and the carrying amount of the equity component was $63.4 million.

As of July 5, 2009, the conversion rate was equal to the initial conversion price of approximately $5.48 per share and the if-converted value of the Notes was $234.6 million.

Revolving Credit Facility

On April 7, 2009, Teradyne repaid and terminated its revolving credit facility agreement. Teradyne used approximately $123.3 million of the net proceeds of the convertible senior notes transaction to repay $122.5 million

 

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TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

of principal and $0.8 million of accrued interest outstanding under the revolving credit facility agreement. During the three months ended July 5, 2009, Teradyne expensed the remaining revolving credit facility debt issue costs of approximately $2.5 million.

F. Product Warranty

Teradyne generally provides a one-year warranty on its products commencing upon installation 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 following represents the warranty accrual activity and is included in other accrued liabilities.

 

     For the Three Months
Ended
     For the Six Months
Ended
 
     July 5,
2009
     June 29,
2008
     July 5,
2009
     June 29,
2008
 
     (in thousands)  

Balance at beginning of period

   $ 6,013       $ 9,933       $ 8,372       $ 9,340   

Acquisition

     —           —           —           492   

Accruals for warranties issued during the period

     1,777         3,606         3,174         7,209   

Accruals related to pre-existing warranties

     (212      577         (997      1,182   

Settlements made during the period

     (2,567      (4,334      (5,538      (8,441
                                   

Balance at end of period

   $ 5,011       $ 9,782       $ 5,011       $ 9,782   
                                   

Revenue for extended warranties beyond one year is deferred and recognized on a straight-line basis over the contract period. Related costs are expensed as incurred. The following represents the extended warranty accrual activity and is included in short-term deferred revenue and long-term other accrued liabilities.

 

     For the Three Months
Ended
     For the Six Months
Ended
 
     July 5,
2009
     June 29,
2008
     July 5,
2009
     June 29,
2008
 
     (in thousands)  

Balance at beginning of period

   $ 5,317       $ 6,612       $ 6,369       $ 6,610   

Deferral of new extended warranty reserve

     600         1,686         877         2,880   

Recognition of extended warranty deferred revenue

     (1,270      (1,195      (2,599      (2,387
                                   

Balance at end of period

   $ 4,647       $ 7,103       $ 4,647       $ 7,103   
                                   

G. Stock-Based Compensation

At Teradyne’s annual meeting of stockholders held May 28, 2009, Teradyne’s stockholders approved an amendment to Teradyne’s 2006 Equity and Cash Compensation Incentive Plan to increase the number of shares issuable thereunder by 10 million, for an aggregate of 22 million shares issuable thereunder, and Teradyne’s stockholders also approved an amendment to Teradyne’s 1996 Employee Stock Purchase Plan to increase the number of shares issuable thereunder by 5 million, for an aggregate of 25.4 million shares issuable thereunder.

During the six months ended July 5, 2009, Teradyne granted service based restricted stock units to employees and directors, and service based restricted stock units and stock options to executive officers. The total number of restricted stock units granted was 4.2 million at the weighted average grant date fair value of $4.90. The total number of stock options granted was 1.1 million at the weighted average grant date fair value of $1.97. These

 

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TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

restricted stock units awards and stock options vest in equal installments over four years. Awards granted to non-employee directors vest on the first anniversary of the grant date. Stock options have a term of seven years from the date of grant.

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

 

     For the Six Months
Ended
 
     July 5,
2009
 

Expected life (years)

   4.75   

Interest rate

   1.6

Volatility-historical

   44.9

Dividend yield

   0.0

During the six months ended June 29, 2008, Teradyne granted restricted stock units to employees, executives and directors. The total number of restricted stock units granted was 3.1 million at the weighted average grant date fair value of $10.66. Service based awards granted to employees and executives vest in equal installments over four years. Awards granted to non-employee directors vest on the first anniversary of the grant date. A significant number of awards granted to executive officers were performance-based restricted stock units; however, the performance criteria were not met for the year ended December 31, 2008 and the performance-based restricted stock units were forfeited.

H. Comprehensive (Loss) Income

Comprehensive (loss) income is calculated as follows:

 

    For the Three Months
Ended
    For the Six Months
Ended
 
      July 5,  
2009
      June 29,  
2008
    July 5,
2009
    June 29,
2008
 
    (in thousands)  

Net (loss) income

  $ (66,768   $ 11,079      $ (157,436   $ 13,446   

Foreign currency translation adjustments

    1,214        (233     1,594        (1,055

Change in unrealized gain (loss) on marketable securities, net of taxes of $0

    12        (672     1,707        (3,126

Retirement plans net (loss) gain, net of taxes of $793, $431, $1,012 and $447

    (441     2,643        (8,304     2,988   

Retirement plans prior service benefit, net of taxes of $0

    138        137        596        291   
                               

Comprehensive (loss) income

  $ (65,845   $ 12,954      $ (161,843   $ 12,544   
                               

 

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TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

I. Intangible Assets

Amortizable intangible assets consist of the following:

 

     July 5, 2009
     Gross
Carrying
Amount
   Accumulated
Amortization
   Net
Carrying
Amount
   Weighted
Average
Useful Life
     (in thousands)

Developed technology

   $ 122,393    $ 38,003    $ 84,390    6.1 years

Customer relationships and service and software maintenance contracts

     92,279      16,659      75,620    8.6 years

Trade names and trademarks

     15,000      4,465      10,535    11.5 years
                       

Total intangible assets

   $ 229,672    $ 59,127    $ 170,545    7.5 years
                       
     December 31, 2008
     Gross
Carrying
Amount
   Accumulated
Amortization
   Net
Carrying
Amount
   Weighted
Average
Useful Life
     (in thousands)

Developed technology

   $ 122,393    $ 27,889    $ 94,504    6.1 years

Customer relationships and service and software maintenance contracts

     92,279      11,001      81,278    8.6 years

Tradenames and trademarks

     15,000      3,784      11,216    11.5 years
                       

Total intangible assets

   $ 229,672    $ 42,674    $ 186,998    7.5 years
                       

Aggregate intangible asset amortization expense was $8.2 million and $16.5 million, respectively, for the three and six months ended July 5, 2009 and $4.8 million and $8.6 million, respectively, for the three and six months ended June 29, 2008. Estimated intangible asset amortization expense for each of the next five fiscal years is as follows:

 

Year

   Amount
(in thousands)

2009 (remainder)

   $ 15,934

2010

     29,717

2011

     28,259

2012

     26,132

2013

     25,066

During the three and six months ended July 5, 2009, there were no events or changes in circumstances indicating that the carrying amounts of Teradyne’s long-lived assets may not be recoverable.

 

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TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

J. Net (Loss) Income per Common Share

The following table sets forth the computation of basic and diluted net income per common share:

 

    For the Three Months
Ended
  For the Six Months
Ended
    July 5,
2009
    June 29,
2008
  July 5,
2009
    June 29,
2008
    (in thousands, except per share amounts)

Net (loss) income

  $ (66,768   $ 11,079   $ (157,436   $ 13,446

Shares used in (loss) income per common share—basic

    173,022        170,644     172,576        172,203

Effect of potential dilutive common shares:

       

Employee and director stock options

    —          1,986     —          1,582

Restricted stock units

    —          1,269     —          999

Employee stock purchase rights

    —          197     —          125
                           

Potential dilutive common shares

    —          3,452     —          2,706
                           

Shares used in net (loss) income per common share—diluted

    173,022        174,096     172,576        174,909
                           

Net (loss) income per common share—basic

  $ (0.39   $ 0.06   $ (0.91   $ 0.08
                           

Net (loss) income per common share—diluted

  $ (0.39   $ 0.06   $ (0.91   $ 0.08
                           

The computation of diluted net loss per common share for the three and six months ended July 5, 2009 excludes all outstanding stock options, restricted stock units and warrants, and shares related to the Notes because Teradyne had a net loss.

The computation of diluted net income per common share for the three and six months ended June 29, 2008 excludes the effect of the potential exercise of options to purchase approximately 13.6 million and 14.2 million shares and restricted stock units of 1.2 million and 1.3 million shares, respectively, because the effect would have been anti-dilutive.

K. Restructuring and Other, Net

The tables below represent activity related to restructuring and other, net, in the six months ended July 5, 2009. The accrual for severance payments and employees’ benefits is reflected in accrued employees’ compensation and withholdings and is expected to be paid by the end of the fourth quarter of 2009. The accrual for lease payments on vacated facilities is reflected in other accrued liabilities and other long-term accrued liabilities and is expected to be paid over the lease terms, the latest of which expires in 2013. Teradyne expects to pay approximately $2.4 million against the lease accruals over the next twelve months. Teradyne’s future lease commitments are net of expected sublease income of $6.3 million as of July 5, 2009.

2009 Activities

 

     Severance
and
Benefits
    Long-Lived
Asset
Impairment
    Other     Total  
     (in thousands)  

Balance at December 31, 2008

   $ —        $ —        $ —        $ —     

Charges/(Credits)

     31,682        1,068        (1,487     31,263   

Cash payments

     (18,227     —          —          (18,227

Other

     —          (1,068     1,487        419   
                                

Balance at July 5, 2009

   $ 13,455      $ —        $ —        $ 13,455   
                                

 

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TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

During the six months ended July 5, 2009, Teradyne recorded the following restructuring activities:

 

   

$31.7 million of severance charges related to headcount reductions of approximately 800 people across both segments;

 

   

$1.1 million of long lived asset impairment charges across both segments primarily related to the disposal of fixed assets as a result of the consolidation of Teradyne’s facilities in North Reading, MA;

 

   

($1.5) million of credits related to finalization of certain Eagle Test purchase accounting items.

2008 Activities

 

     Severance
and
Benefits
    Facility
Related
    Total  
     (in thousands)  

Balance at December 31, 2008

   $ 5,342      $ 831      $ 6,173   

Credits

     (28     —          (28

Cash payments

     (5,142     (288     (5,430
                        

Balance at July 5, 2009

   $ 172      $ 543      $ 715   
                        

Pre-2008 Activities

 

     Severance
and
Benefits
    Facility
Related
    Total  
     (in thousands)  

Balance at December 31, 2008

   $ 81      $ 8,472      $ 8,553   

Cash payments

     (62     (900     (962
                        

Balance at July 5, 2009

   $ 19      $ 7,572      $ 7,591   
                        

L. Retirement Plans

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 the plans in accordance with local laws and to the extent that such contributions are tax deductible. The assets of the plans consist primarily of equity and fixed income securities. In addition, Teradyne has an unfunded supplemental executive defined benefit plan in the United States to provide retirement benefits in excess of levels allowed by the Employment Retirement Income Security Act and the Internal Revenue Code, as well as unfunded foreign plans.

 

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TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Components of net periodic pension cost for all plans for the three and six months ended July 5, 2009 and June 29, 2008 are as follows:

 

     For the Three Months
Ended
    For the Six Months
Ended
 
     July 5,
2009
    June 29,
2008
    July 5,
2009
    June 29,
2008
 
     (in thousands)  

Net Periodic Benefit Cost:

        

Service cost

   $ 877      $ 1,107      $ 1,995      $ 2,490   

Interest cost

     4,688        4,418        9,176        8,856   

Expected return on plan assets

     (4,836     (5,167     (9,706     (10,345

Amortization of unrecognized:

        

Prior service cost

     197        205        404        409   

Net loss

     1,013        346        2,088        713   

Curtailment gain

     —          (357     (111     (357

Settlement loss

     1,550        —          1,550        —     
                                

Total expense

   $ 3,489      $ 552      $ 5,396      $ 1,766   
                                

In the six months ended July 5, 2009, Teradyne contributed $2.6 million to its foreign defined benefit pension plans and U.S. supplemental executive defined benefit plan.

Post-Retirement Benefit Plans

In addition to receiving pension benefits, Teradyne’s U.S. employees who meet specific retirement eligibility requirements as of their termination dates may participate in Teradyne’s Welfare Plan, which includes death benefits, and medical and dental benefits up to age 65. Death benefits provide a fixed amount 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.

Components of net periodic postretirement benefits cost are as follows:

 

     For the Three Months
Ended
    For the Six Months
Ended
 
     July 5,
2009
    June 29,
2008
    July 5,
2009
    June 29,
2008
 
     (in thousands)  

Net Periodic Benefit Cost:

        

Service cost

   $ 15      $ 22      $ 55      $ 84   

Interest cost

     268        291        546        613   

Amortization of unrecognized:

        

Prior service benefit

     (59     (59     (117     (117

Net loss

     59        17        114        70   
                                

Total expense

   $ 283      $ 271      $ 598      $ 650   
                                

 

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TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

In the six months ended July 5, 2009, Teradyne contributed $1.4 million to its U.S. Post-Retirement Benefits Plan.

M. Commitments and Contingencies

Legal Claims

On July 11, 2008, Xyratex Technology, Ltd (“Xyratex”) filed a complaint against Teradyne in the United States District Court in Los Angeles, California alleging that certain of Teradyne disk drive test products infringe one of Xyratex’s patents. The suit seeks temporary, preliminary and permanent injunctive relief as well as unspecified monetary damages, including treble damages, for patent infringement. On December 17, 2008, Teradyne filed an answer and counterclaims, denying that Teradyne’s disk drive test products infringe the asserted Xyratex patent and asking the court to declare such patent invalid. The case is currently in the discovery phase and trial is scheduled to begin in November 2009. On April 14, 2009, Teradyne filed a separate complaint in the United States District Court in Los Angeles alleging that Xyratex’s disk drive test products infringe two of Teradyne’s patents. Teradyne intends to vigorously defend itself against the Xyratex claim.

On September 5, 2001, after Teradyne’s August 2000 acquisition of Herco Technology Corp. and Perception Laminates, Inc., the former owners of those companies filed a complaint against Teradyne and two of Teradyne’s then executive officers in the United States District Court in San Diego, California, asserting securities fraud and breach of contract related to the acquisition. The District Court dismissed certain of the plaintiffs’ claims, granted partial summary judgment against them with respect to their breach of contract claim and denied their motion for reconsideration. In July 2007, after an appeal by the plaintiffs, the U.S. Court of Appeals for the Ninth Circuit affirmed in part and reversed in part the District Court rulings. Teradyne petitioned the Ninth Circuit for rehearing, which was denied, and the case was remanded back to the District Court. On August 29, 2008, the District Court granted Teradyne’s motion for judgment on the pleadings. On September 11, 2008, the plaintiffs filed their notice of appeal. No hearing date has been scheduled for the appeal.

In 2001, Teradyne was designated as a Potentially Responsible Party (“PRP”) at a clean-up site in Los Angeles, California. This claim arose out of Teradyne’s acquisition of Perception Laminates in August 2000. Prior to that date, Perception Laminates had itself acquired certain assets of Alco Industries Inc. under an asset purchase agreement in 1992. Neither Teradyne nor Perception Laminates have ever conducted any operations at the Los Angeles site. Teradyne has asked the State of California to drop the PRP designation, but California has not yet agreed to do so.

In November 2008, Teradyne received a general notice letter from the California Department of Toxic Substances Control (“DTSC”) that informed it of potential liability with respect to contamination at the BKK Corporation Landfill Facility Site in West Covina, California. Similar to the PRP claim discussed above, this claim arose out of Teradyne’s acquisition of Perception Laminates in August 2000. Neither Teradyne nor Perception Laminates have ever conducted any operations at the West Covina site. Teradyne has asked the DTSC and the group of settling defendants to remove it as a PRP for this site.

Teradyne believes that it has meritorious defenses against the above unsettled claims and intends to vigorously contest them. While it is not possible to predict or determine the outcomes of the unsettled claims or to provide possible ranges of losses that may arise, Teradyne believes the potential losses associated with all of these actions are unlikely to have a material adverse effect on its consolidated financial position, but could possibly be material to its consolidated results of operations and of cash flows of any one period.

 

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TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

N. Segment Information

Teradyne’s two reportable segments are Semiconductor Test and Systems Test Group. The Semiconductor Test segment includes operations related to the design, manufacturing and marketing of semiconductor test products and services. The Systems Test Group segment includes operations related to the design, manufacturing and marketing of products and services for: military/aerospace instrumentation test, circuit-board test, hard disk drive test and automotive diagnostic and test.

Teradyne evaluates performance based on several factors, of which the primary financial measure is business segment income before taxes. The accounting policies of the business segments are the same as those described in Note B: “Accounting Policies” in Teradyne’s Annual Report on Form 10-K for the year ended December 31, 2008. Segment information for the three and six months ended July 5, 2009 and June 29, 2008 is as follows:

 

    Semiconductor
Test
    Systems
Test Group
    Corporate
and
Eliminations
    Consolidated  
    (in thousands)  

Three months ended July 5, 2009:

       

Net revenues

  $ 102,820      $ 66,760      $ —        $ 169,580   

Loss before income taxes(1)(2)

    (56,222     (2,474     (10,272     (68,968

Three months ended June 29, 2008:

       

Net revenues

  $ 263,588      $ 54,117      $ —        $ 317,705   

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

    18,983        (3,898     2,094        17,179   

Six months ended July 5, 2009:

       

Net revenues

  $ 181,347      $ 108,841      $ —        $ 290,188   

Loss before income taxes(1)(2)

    (143,163     (7,870     (16,403     (167,436

Six months ended June 29, 2008:

       

Net revenues

  $ 511,251      $ 103,769      $ —        $ 615,020   

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

    23,542        (6,607     6,711        23,646   

 

(1) Interest income and interest expense and other are included in Corporate and Eliminations.

 

(2) Included in the income (loss) before income taxes for each of the segments for the three and six months ended July 5, 2009 and June 29, 2008 are charges that include restructuring and other, net, in-process research and development and inventory charges.

Included in the Semiconductor Test segment are charges for the following:

 

     For the Three Months
Ended
   For the Six Months
Ended
     July 5,
2009
   June 29,
2008
   July 5,
2009
   June 29,
2008
     (in thousands)

Cost of revenues—inventory charges

   $ 8,984    $ 884    $ 14,614    $ 2,039

Cost of revenues—inventory step-up

     3,924      —        5,163      4,346

Restructuring and other, net

     11,324      8,901      24,671      19,033

In-process research and development

     —        —        —        1,100
                           

Total

   $ 24,232    $ 9,785    $ 44,448    $ 26,518
                           

 

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TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Included in the Systems Test Group segment are charges for the following:

 

     For the Three Months
Ended
   For the Six Months
Ended
       July 5,  
2009
     June 29,  
2008
     July 5,  
2009
     June 29,  
2008
     (in thousands)

Cost of revenues—inventory charges

   $ 2,507    $ 1,022    $ 5,474    $ 1,215

Restructuring and other, net

     1,486      3,311      3,463      4,745
                           

Total

   $ 3,993    $ 4,333    $ 8,937    $ 5,960
                           

Included in the Corporate and Eliminations segment are charges for the following:

 

     For the Three Months
Ended
   For the Six Months
Ended
       July 5,  
2009
     June 29,  
2008
     July 5,  
2009
     June 29,  
2008
     (in thousands)

Restructuring and other, net

   $ 2,460    $ 514    $ 3,101    $ 733

Interest expense and other

     4,911      —        7,473      —  
                           

Total

   $ 7,371    $ 514    $ 10,574    $ 733
                           

O. Subsequent Events

Teradyne management evaluated activity of Teradyne through August 13, 2009 (the issue date of the financial statements) and concluded that no subsequent events have occurred that would require recognition in the financial statements or disclosure in the notes to the financial statements.

 

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Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

Critical Accounting Policies and Estimates

We have identified the policies that are critical to understanding our business and our results of operations. Management believes that there have been no significant changes during the six months ended July 5, 2009 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 its Annual Report on Form 10-K for the fiscal year ended December 31, 2008.

SELECTED RELATIONSHIPS WITHIN THE CONDENSED CONSOLIDATED

STATEMENTS OF OPERATIONS

 

     For the Three Months
Ended
    For the Six Months
Ended
 
       July 5,  
2009
      June 29,  
2008
      July 5,  
2009
      June 29,  
2008
 

Percentage of total net revenues:

        

Products

   68   78   62   78

Services

   32      22      38      22   
                        

Total net revenues

   100      100      100      100   

Cost of revenues:

        

Cost of products

   55      39      51      39   

Cost of services

   17      13      21      13   
                        

Total cost of revenues

   72      52      72      52   
                        

Gross profit

   28      48      28      48   

Operating expenses:

        

Engineering and development

   23      18      30      18   

Selling and administrative

   28      21      35      21   

Acquired intangible asset amortization

   5      1      5      2   

Restructuring and other, net

   8      4      11      4   
                        

Total operating expenses

   64      44      81      45   
                        

(Loss) income from operations

   (36   4      (53   3   

Interest & other

   (4   1      (4   1   
                        

(Loss) income before income taxes

   (40   5      (57   4   

(Benefit) provision for income taxes

   (1   2      (3   2   
                        

Net (loss) income

   (39 )%    3   (54 )%    2
                        

Benefit/provision for income taxes as a percentage of (loss) income before income taxes

   3   36   6   43
                        

 

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Table of Contents

Second Quarter 2009 Compared to Second Quarter 2008

Revenue

For the three months ended July 5, 2009, our book to bill ratio (net bookings divided by net sales) was 1.34 for the total Company, our Semiconductor Test segment and our Systems Test Group segment.

Net revenues for our two reportable segments were as follows:

 

     For the Three Months
Ended
   Dollar
Change
 
       July 5,  
2009
     June 29,  
2008
  
     (in millions)  

Semiconductor Test

   $ 102.8    $ 263.6    $ (160.8

Systems Test Group

     66.8      54.1      12.7   
                      
   $ 169.6    $ 317.7    $ (148.1
                      

Semiconductor Test revenue decreased $160.8 million or 61% from the second quarter of 2008 to 2009, due to lower sales across all products primarily in Taiwan, Japan, Korea and Singapore. The decrease was due to excess test capacity at our customers as a result of the global economic downturn.

The increase in Systems Test Group revenue of $12.7 million or 23% from the second quarter of 2008 to 2009 was primarily due to sales of Hard Disk Drive systems, partially offset by a decrease in Commercial Board Test and Diagnostic Solutions product sales.

Our sales by region as a percentage of total net sales were as follows:

 

     For the Three Months
Ended
 
       July 5,  
2009
      June 29,  
2008
 

United States

   27   19

Thailand

   17      2  

South Asia

   14      16   

Europe

   11      10   

Taiwan

   11      23   

Singapore

   10      9   

Japan

   5      11   

Korea

   3      7   

Rest of the World

   2      3   
            
   100   100
            

Gross Profit

Our gross profit was as follows:

 

     For the Three Months
Ended
    Dollar/Point
Change
 
     July 5,
2009
    June 29,
2008
   
     (in millions)  

Gross Profit

   $ 47.1      $ 153.8      $ (106.7

Percent of Total Revenue

     27.8     48.4     (20.6

Gross profit as a percentage of revenue decreased from the second quarter of 2008 to 2009 by 20.6 percentage points. This decrease in gross margin is the result of a decrease of 15.5 points from lower product

 

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sales volume, a decrease of 5.0 points related to $26 million of Hard Disk Drive test system revenues at zero gross margin and a decrease of 2.3 points related to inventory charges across both segments. These decreases were partially offset by an increase of 2.2 points primarily from lower spending due to workforce reductions.

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. Forecasted revenue information is obtained from the sales and marketing groups and incorporates factors such as backlog and future revenue demand. This quarterly process identifies obsolete and excess inventory. Obsolete inventory, which represents items for which there is no demand, is fully reserved. Excess inventory, which represents inventory items that are not expected to be consumed during the next four quarters, is written-down to estimated net realizable value.

The provisions for excess and obsolete inventory were $8.6 million and $1.9 million for the three months ended July 5, 2009 and June 29, 2008, respectively. During the three months ended July 5, 2009 and June 29, 2008, we scrapped $0.9 million and $2.3 million of inventory, respectively. As of July 5, 2009, we have inventory related reserves for amounts which had been written-down or written-off totaling $141.2 million. We have no pre-determined timeline to scrap the remaining inventory.

Engineering and Development

Engineering and development expenses were as follows:

 

     For the Three Months
Ended
    Dollar
Change
 
     July 5,
2009
    June 29,
2008
   
     (in millions)  

Engineering and Development

   $ 38.5      $ 56.2      $ (17.7

Percent of Total Revenue

     22.7     17.7  

The decrease of $17.7 million from the second quarter of 2008 to 2009 is due primarily to a $18.0 million decrease in spending due to workforce reductions, lower project spending and lower variable compensation and $2.2 million due to temporary salary reductions. This decrease was partially offset by additional costs of $2.5 million related to the acquisition of Eagle Test Systems, Inc. (“Eagle Test”).

Selling and Administrative

Selling and administrative expenses were as follows:

 

     For the Three Months
Ended
    Dollar
Change
 
     July 5,
2009
    June 29,
2008
   
     (in millions)  

Selling and Administrative

   $ 47.3      $ 65.5      $ (18.2

Percent of Total Revenue

     27.9     20.6  

The decrease of $18.2 million from the second quarter of 2008 to 2009 is due primarily to a $18.4 million decrease from workforce reductions and on-going cost reduction initiatives, $3.5 million due to temporary salary reductions and $1.6 million related to a decrease in variable compensation, partially offset by additional costs of $5.3 million related to the acquisition of Eagle Test.

Restructuring and Other, Net

The tables below represent activity related to restructuring and other, net, in the six months ended July 5, 2009. The accrual for severance payments and employees’ benefits is reflected in accrued employees’

 

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compensation and withholdings and is expected to be paid by the end of the fourth quarter of 2009. The accrual for lease payments on vacated facilities is reflected in other accrued liabilities and other long-term accrued liabilities and is expected to be paid over the lease terms, the latest of which expires in 2013. We expect to pay approximately $2.4 million against the lease accruals over the next twelve months. Our future lease commitments are net of expected sublease income of $6.3 million as of July 5, 2009.

The restructuring actions taken during the three months ended July 5, 2009 are expected to generate quarterly cost savings of approximately $6.0 million across all segments.

2009 Activities

 

     Severance
and
Benefits
    Long-Lived
Asset
Impairment
    Other     Total  
     (in thousands)  

Balance at April 5, 2009

   $ 11,804     $ —        $ —        $ 11,804  

Charges/(Credits)

     15,351        1,068        (774     15,645   

Cash payments

     (13,700     —          —          (13,700

Other

     —          (1,068     774        (294
                                

Balance at July 5, 2009

   $ 13,455      $ —        $ —        $ 13,455   
                                

During the three months ended July 5, 2009, Teradyne recorded the following restructuring activities:

 

   

$15.4 million of severance charges related to headcount reductions of approximately 300 people across both segments;

 

   

$1.1 million of long lived asset impairment charges across both segments primarily related to the disposal of fixed assets as a result of the consolidation of Teradyne’s facilities in North Reading, MA;

 

   

($0.8) million of credits related to finalization of certain Eagle Test purchase accounting items.

2008 Activities

 

     Severance
and
Benefits
    Facility
Related
    Total  
     (in thousands)  

Balance at April 5, 2009

   $ 1,016      $ 821      $ 1,837   

Credits

     (374     —          (374

Cash payments

     (470     (278     (748
                        

Balance at July 5, 2009

   $ 172      $ 543      $ 715   
                        

Pre-2008 Activities

 

     Severance
and
Benefits
    Facility
Related
    Total  
     (in thousands)  

Balance at April 5, 2009

   $ 25      $ 7,970      $ 7,995   

Cash payments

     (6     (398     (404
                        

Balance at July 5, 2009

   $ 19      $ 7,572      $ 7,591   
                        

Interest Income

Interest income decreased by $1.8 million from the second quarter of 2008 to 2009, due primarily to lower cash balances as a result of our acquisition of Eagle Test and lower interest rates.

 

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Interest Expense and Other

Interest expense and other increased by $7.6 million due primarily to the following: $4.6 million of interest expense related to our convertible senior notes and $2.5 million related to the write off of the remaining revolving credit facility debt issue costs due to the termination of our revolving credit facility agreement.

Income Taxes

For the three months ended July 5, 2009, we recorded a tax benefit of $2.2 million primarily due to benefiting operating losses in foreign jurisdictions. For the three months ended June 29, 2008, we recorded tax expense of $6.1 million which consisted primarily of foreign taxes. Due to the continued uncertainty of realization, we have maintained our valuation allowance at July 5, 2009 for deferred tax assets in the U.S. and Singapore. We do not expect to significantly reduce our valuation allowance until sufficient positive evidence exists, including sustained profitability, that realization is more likely than not.

Six Months of 2009 Compared to Six Months of 2008

Revenue

Net revenues for our two reportable segments were as follows:

 

     For the Six Months
Ended
   Dollar
Change
 
     July 5,
2009
   June 29,
2008
  
     (in millions)  

Semiconductor Test

   $ 181.4    $ 511.2    $ (329.8

Systems Test Group

     108.8      103.8      5.0   
                      
   $ 290.2    $ 615.0    $ (324.8
                      

Semiconductor Test revenue decreased $329.8 million or 65% from the first six months of 2008 to 2009, due to lower sales across all products primarily in Taiwan, Japan, Korea and Singapore. The decrease was due to excess test capacity at our customers as a result of the global economic downturn.

The increase in Systems Test Group revenue of $5.0 million or 5% from the first six months of 2008 to 2009 was primarily due to sales of Hard Disk Drive systems, partially offset by a decrease in Commercial Board Test and Diagnostic Solutions service and product sales.

Our sales by region as a percentage of total net sales were as follows:

 

     For the Six Months
Ended
 
     July 5,
2009
    June 29,
2008
 

United States

   30   19

South Asia

   17      17   

Europe

   13      9   

Taiwan

   10      21   

Thailand

   10      2  

Singapore

   8      9   

Japan

   7      11   

Korea

   3      8   

Rest of the World

   2      4   
            
   100   100
            

 

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Table of Contents

Gross Profit

Our gross profit was as follows:

 

     For the Six Months
Ended
    Dollar/Point
Change
 
       July 5,  
2009
      June 29,  
2008
   
     (in millions)  

Gross Profit

   $ 80.5      $ 292.4      $ (211.9

Percent of Total Revenue

     27.7     47.5     (19.8

Gross margins as a percentage of revenue decreased from the first six months of 2008 to 2009 by 19.8 percentage points. This decrease in gross margin is the result of a decrease of 17.0 points from lower product sales volume, a decrease of 2.8 points related to $26 million of Hard Disk Drive test system revenues at zero gross margin and a decrease of 2.1 points related to inventory charges across both segments. These decreases were partially offset by an increase of 2.1 points primarily from lower operations spending due to restructuring and lower freight and warranty charges, which were the result of lower product sales.

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 provisions. Forecasted revenue information is obtained from the sales and marketing groups and incorporates factors such as backlog and future revenue demand. This quarterly process identifies obsolete and excess inventory. Obsolete inventory, which represents items for which there is no demand, is fully reserved. Excess inventory, which represents inventory items that are not expected to be consumed during the next four quarters, is written down to estimated net realizable value.

The provisions for excess and obsolete inventory were $17.2 million and $3.3 million for the six months ended July 5, 2009 and June 29, 2008, respectively. During the six months ended July 5, 2009 and June 29, 2008, we scrapped $2.0 million and $10.1 million of inventory, respectively. In the first six months of 2008 we sold $1.3 million of previously written-down or written-off inventory. As of July 5, 2009, we have inventory related reserves for amounts which had been written-down or written-off totaling $141.2 million. We have no pre-determined timeline to scrap the remaining inventory.

Engineering and Development

Engineering and development expenses were as follows:

 

     For the Six Months
Ended
    Dollar
Change
 
       July 5,  
2009
      June 29,  
2008
   
     (in millions)  

Engineering and Development

   $ 85.6      $ 111.3      $ (25.7

Percent of Total Revenue

     29.5     18.1  

The decrease of $25.7 million from the first six months of 2008 to 2009 is due primarily to a $27.2 million decrease in spending due to workforce reductions, lower project spending and lower variable compensation and $4.4 million due to temporary salary reductions This decrease was partially offset by additional costs of $5.9 million related to the acquisition of Eagle Test.

 

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Selling and Administrative

Selling and administrative expenses were as follows:

 

     For the Six Months
Ended
    Dollar
Change
 
       July 5,  
2009
      June 29,  
2008
   
     (in millions)  

Selling and Administrative

   $ 102.6      $ 130.7      $ (28.1

Percent of Total Revenue

     35.4     21.2  

The decrease of $28.1 million from the first six months of 2008 to 2009 is due primarily to a $29.6 million decrease from workforce reductions and on-going cost reduction initiatives, $7.0 million due to temporary salary reductions and $4.2 million related to a decrease in variable compensation, partially offset by additional costs of $12.7 million related to the acquisition of Eagle Test.

Restructuring and Other, Net

The tables below represent activity related to restructuring and other, net, in the six months ended July 5, 2009. The accrual for severance payments and employees’ benefits is reflected in accrued employees’ compensation and withholdings and is expected to be paid by the end of the fourth quarter of 2009. The accrual for lease payments on vacated facilities is reflected in other accrued liabilities and other long-term accrued liabilities and is expected to be paid over the lease terms, the latest of which expires in 2013. We expect to pay approximately $2.4 million against the lease accruals over the next twelve months. Our future lease commitments are net of expected sublease income of $6.3 million as of July 5, 2009.

The restructuring actions taken during the six months ended July 5, 2009 are expected to generate quarterly cost savings of approximately $16.9 million across all segments.

2009 Activities

 

     Severance
and
Benefits
    Long-Lived
Asset
Impairment
    Other     Total  
     (in thousands)  

Balance at December 31, 2008

   $ —        $ —        $ —        $ —     

Charges/(Credits)

     31,682        1,068        (1,487     31,263   

Cash payments

     (18,227     —          —          (18,227

Other

     —          (1,068     1,487        419   
                                

Balance at July 5, 2009

   $ 13,455      $ —        $ —        $ 13,455   
                                

During the six months ended July 5, 2009, Teradyne recorded the following restructuring activities:

 

   

$31.7 million of severance charges related to headcount reductions of approximately 800 people across both segments;

 

   

$1.1 million of long lived asset impairment charges across both segments primarily related to the disposal of fixed assets as a result of the consolidation of Teradyne’s facilities in North Reading, MA;

 

   

($1.5) million of credits related to finalization of certain Eagle Test purchase accounting items.

 

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Table of Contents

2008 Activities

 

     Severance
and
Benefits
    Facility
Related
    Total  
     (in thousands)  

Balance at December 31, 2008

   $ 5,342      $ 831      $ 6,173   

Credits

     (28     —          (28

Cash payments

     (5,142     (288     (5,430
                        

Balance at July 5, 2009

   $ 172      $ 543      $ 715   
                        

Pre-2008 Activities

 

     Severance
and
Benefits
    Facility
Related
    Total  
     (in thousands)  

Balance at December 31, 2008

   $ 81      $ 8,472      $ 8,553   

Cash payments

     (62     (900     (962
                        

Balance at July 5, 2009

   $ 19      $ 7,572      $ 7,591   
                        

Interest Income

Interest income decreased by $5.6 million in the first six months of 2008 to 2009, due primarily to lower cash balances as a result of our acquisitions of Nextest and Eagle Test and lower interest rates.

Interest Expense and Other

Interest expense and other increased by $13.9 million due primarily to the following: $4.6 million of interest expense related to our convertible senior notes, $2.5 million of realized and other than temporary impairment losses on our marketable securities, $2.5 million related to the write off of the remaining revolving credit facility debt issue costs due to the termination of our revolving credit facility agreement, $2.1 million of interest expense related to the revolving credit facility and $1.1 million of foreign exchange losses.

Income Taxes

The tax benefit of $10.0 million for the first six months of 2009 is due to benefiting operating losses in foreign jurisdictions and tax expense of $10.2 million for the first six months of 2008 primarily consists of foreign taxes. Due to the continued uncertainty of realization, we have maintained our valuation allowance at July 5, 2009 for deferred tax assets in the U.S. and Singapore. We do not expect to significantly reduce our valuation allowance until sufficient evidence exists, including sustained profitability, that realization is more likely than not.

 

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Contractual Obligations

The following table reflects our contractual obligations as of July 5, 2009:

 

Payments Due by Period

   Purchase
Obligations
   Non-cancelable
Lease
Commitments(1)
   Debt    Interest
on Debt
   Pension
Contributions
   Total

2009

   $ 101,341    $ 10,236    $ 1,034    $ 3,944    $ 3,559    $ 120,114

2010

     3,484      18,091      2,068      8,791      —        32,434

2011

     —        15,729      2,068      8,762      —        26,559

2012

     —        11,847      2,068      8,734      —        22,649

2013

     —        6,281      2,068      8,705      —        17,054

Beyond 2013

     —        9,264      191,034      4,329      —        204,627
                                         

Total

   $ 104,825    $ 71,448    $ 200,340    $ 43,265    $ 3,559    $ 423,437
                                         

 

(1) Non-cancelable lease payments have not been reduced by sublease income of $6.3 million due in the future under non-cancelable sublease agreements.

Liquidity and Capital Resources

Our cash, cash equivalents and marketable securities balance decreased $1.3 million in the first six months of 2009, to $373.1 million. Cash and cash equivalents activity for the first six months of 2009 and 2008 were as follows:

 

     For the Six Months
Ended
 
     July 5,
2009
    June 29,
2008
 
     (in millions)  

Cash (used for) provided by operating activities:

    

Net (loss) income adjusted for non-cash items

   $ (71.3   $ 80.8   

Changes in operating assets and liabilities, net of businesses acquired

     24.5        1.2   
                

Total cash (used for) provided by operating activities

     (46.8     82.0   
                

Total cash used for investing activities

     (8.1     (275.1
                

Total cash provided by (used for) financing activities

     64.7        (82.1
                

Effects on exchange rate changes on cash and cash equivalents

   $ 1.6      $ (1.1
                

Increase (decrease) in cash and cash equivalents

   $ 11.4      $ (276.3
                

In the six months ended July 5, 2009, changes in operating assets and liabilities, net of businesses acquired, provided cash of $24.5 million. This was due primarily to a decrease in operating assets of $67.6 million offset by a decrease in operating liabilities of $43.1 million. The decrease in operating assets consisted mainly of a decrease in accounts receivable of $35.8 million due to lower sales volume and improved collections and a decrease in inventories of $29.5 million. The decrease in operating liabilities consisted primarily of a decrease in accounts payable, deferred revenue and other accrued expenses of $39.2 million due to lower sales volume and on-going cost reduction initiatives and retirement plan contributions of $4.0 million.

Investing activities in the six months ended July 5, 2009 used cash of $8.1 million due to investments in property, plant and equipment of $17.4 million and payment of transaction fees related to the Eagle Test acquisition of $3.7 million partially offset by sales of marketable securities that provided cash of $11.9 million and proceeds from life insurance policies that provided cash of $1.1 million.

 

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During the six months ended July 5, 2009, financing activities provided cash of $64.7 million due to approximately $163 million of net proceeds from the issuance of the senior convertible note, $10 million of long-term debt proceeds from a loan in Japan and $14.3 million from the issuance of common stock under stock option and stock purchase plans. These increases were partially offset by $122.5 million of cash used for the repayment of our revolving credit facility.

In the six months ended June 29, 2008, changes in operating assets and liabilities, net of product lines and businesses sold and acquired, provided cash of $1.2 million due primarily to a decrease in accounts receivable of $4.5 million and an increase in accounts payable, deferred revenue and accrued expenses of $10.4 million. Accounts receivable decreased $4.5 million due to a decrease in days sales outstanding from 66 days as of December 31, 2007 to 61 days as of June 29, 2008 as a result of improved collections. These increases in cash were partially offset by an increase in other assets of $6.2 million and retirement plan contributions of $3.7 million.

Investing activities used cash of $275.1 million in the first six months of 2008, primarily due to $285.3 million of cash used for the acquisition of Nextest, net of cash acquired.

During the six months ended June 29, 2008, we repurchased 7.5 million shares of common stock for $91.2 million.

We believe our cash, cash equivalents and marketable securities balance of $373.1 million will be sufficient to meet 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

Discussed in “Note O: Stock Based Compensation” in our 2008 Form 10-K, we have a 1996 Employee Stock Purchase Plan and a 2006 Equity and Cash Compensation Incentive Plan (the “2006 Equity Plan”), a cash and equity compensation incentive 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.

At Teradyne’s annual meeting of stockholders held May 28, 2009, our stockholders approved an amendment to the 2006 Equity Plan to increase the number of shares issuable thereunder by 10 million, for an aggregate of 22 million shares issuable thereunder, and our stockholders also approved an amendment to Teradyne’s 1996 Employee Stock Purchase Plan to increase the number of shares issuable thereunder by 5 million, for an aggregate of 25.4 million shares issuable thereunder.

Recently Issued Accounting Pronouncements

In December 2008, the FASB issued FSP No. FAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets,” (FSP FAS 132(R)-1), which amends SFAS No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits.” This guidance is intended to ensure that an employer meets the objectives of the disclosures about plan assets in an employer’s defined benefit pension or other postretirement plan to provide users of financial statements with an understanding of the following: how investment allocation decisions are made; the major categories of plan assets; the inputs and valuation techniques used to measure the fair value of plan assets; the effect of fair value measurements using significant unobservable inputs on changes in plan assets; and significant concentrations of risk within plan assets. FSP FAS 132(R)-1 is effective for our December 31, 2009 annual financial statements. As FSP FAS 132(R)-1 only requires enhanced disclosures, we have determined that the adoption of FSP FAS 132(R)-1 will not have an impact on our financial position or results of operations.

 

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In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162” (SFAS 168). SFAS 168 replaces SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” and establishes the “FASB Accounting Standards Codification” (Codification) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with generally accepted accounting principles in the United States. All guidance contained in the Codification carries an equal level of authority. On the effective date of SFAS 168, the Codification will supersede all then-existing non-SEC accounting and reporting standards. SFAS 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. This new statement will not have an impact on our financial position or results of operations.

Certain Factors That May Affect Future Results

Our future results of operations involve a number of risks and uncertainties. These factors include, but are not, limited to the following:

 

   

Our business is impacted by worldwide economic cycles which are difficult to predict;

 

   

Our business is dependent on the current and anticipated market for electronics, which historically has been highly cyclical;

 

   

We are subject to intense competition;

 

   

Our operating results are likely to fluctuate significantly;

 

   

We are subject to risks of operating internationally;

 

   

If we fail to develop new technologies to adapt to our customers’ needs and if our customers fail to accept our new products, our revenues will be adversely affected;

 

   

If our suppliers do not meet product or delivery requirements, it could cause a reduction in our revenues and earnings;

 

   

Our operations may be adversely impacted if our outsourced service providers fail to perform;

 

   

We may not fully recognize the benefits of our acquisitions of Nextest and Eagle Test and other businesses that we acquire or strategic alliances that we form in the future;

 

   

We may need additional financing, which could be difficult to obtain;

 

   

We may be unable to perform our obligations under the indenture governing our senior convertible notes issuance;

 

   

We have increased our indebtedness;

 

   

Our convertible note hedge and warrant transactions could impact the value of our stock;

 

   

We may not be able to pay our debt and other obligations;

 

   

We have taken measures to address slowdowns in the market for our products, which could have long-term negative effects on our business or impact our ability to adequately address a rapid increase in customer demand;

 

   

We may incur significant liabilities if we fail to comply with environmental regulations;

 

   

We currently are and in the future may be subject to litigation that could have an adverse effect on our business;

 

   

Third parties may claim we are infringing their intellectual property and we could suffer significant litigation cost, licensing expenses, or be prevented from selling our products;

 

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We have significant guarantees and indemnification obligations;

 

   

If we are unable to protect our intellectual property, we may lose a valuable asset or may incur costly litigation to protect our rights;

 

   

Our business may suffer if we are unable to attract and retain key employees;

 

   

Acts of war, terrorist attacks and the threat of domestic and international terrorist attacks may adversely impact our business; and

 

   

Provisions of our charter and by-laws and Massachusetts law make our takeover more difficult.

 

Item 3: Quantitative and Qualitative Disclosures about Market Risk

For “Quantitative and Qualitative Disclosures about Market Risk” affecting Teradyne, see Item 7a. “Quantitative and Qualitative Disclosures About Market Risks,” in our Annual Report on Form 10-K filed with the SEC on March 2, 2009. There were no material changes in our exposure to market risk from those set forth in our Annual Report for the fiscal year ended December 31, 2008.

 

Item 4: Controls and Procedures

As of the end of the period covered by this report, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15(b) promulgated under the Exchange Act. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective in ensuring that material information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, including ensuring that such material information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

During the period covered by this report, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.

 

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PART II. OTHER INFORMATION

 

Item 1: Legal Proceedings

On July 11, 2008, Xyratex Technology, Ltd (“Xyratex”) filed a complaint against us in the United States District Court in Los Angeles, California alleging that certain of our disk drive test products infringe one of Xyratex’s patents. The suit seeks temporary, preliminary and permanent injunctive relief as well as unspecified monetary damages, including treble damages, for patent infringement. On December 17, 2008, we filed an answer and counterclaims, denying that our disk drive test products infringe the asserted Xyratex patent and asking the court to declare such patent invalid. The case is currently in the discovery phase and trial is scheduled to begin in November 2009. On April 14, 2009, we filed a separate complaint in the United States District Court in Los Angeles alleging that Xyratex’s disk drive test products infringe two of our patents. We intend to vigorously defend against the Xyratex claim and to vigorously pursue our claims against Xyratex.

On September 5, 2001, after our August 2000 acquisition of Herco Technology Corp. and Perception Laminates, Inc., the former owners of those companies filed a complaint against us and two of our then executive officers in the United States District Court in San Diego, California, asserting securities fraud and breach of contract related to the acquisition. The District Court dismissed certain of the plaintiffs’ claims, granted partial summary judgment against them with respect to their breach of contract claim and denied their motion for reconsideration. In July 2007, after an appeal by the plaintiffs, the U.S. Court of Appeals for the Ninth Circuit affirmed in part and reversed in part the District Court rulings. We petitioned the Ninth Circuit for rehearing, which was denied, and the case was remanded back to the District Court. On August 29, 2008, the District Court granted our motion for judgment on the pleadings. On September 11, 2008, the plaintiffs filed their notice of appeal. No hearing date has been scheduled for the appeal.

In 2001, we were designated as a Potentially Responsible Party (“PRP”) at a clean-up site in Los Angeles, California. This claim arose out of our acquisition of Perception Laminates in August 2000. Prior to that date, Perception Laminates had itself acquired certain assets of Alco Industries Inc. under an asset purchase agreement in 1992. Neither we nor Perception Laminates have ever conducted any operations at the Los Angeles site. We have asked the State of California to drop the PRP designation, but California has not yet agreed to do so.

In November 2008, we received a general notice letter from the California Department of Toxic Substances Control (“DTSC”) that informed us of potential liability with respect to contamination at the BKK Corporation Landfill Facility Site in West Covina, California. Similar to the PRP claim discussed above, this claim arose out of our acquisition of Perception Laminates in August 2000. Neither we nor Perception Laminates have ever conducted any operations at the West Covina site. We have asked the DTSC and the group of settling defendants to remove us as a PRP for this site.

We believe that we have meritorious defenses against the above unsettled claims and intend to vigorously contest them. While it is not possible to predict or determine the outcomes of the unsettled claims or to provide possible ranges of losses that may arise, we believe the potential losses associated with all of these actions are unlikely to have a material adverse effect on our consolidated financial position, but could possibly be material to our consolidated results of operations and of cash flows of any one period.

 

Item 1A: Risk Factors

In addition to the 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, 2008, and in Part II, “Item 1A: Risk Factors” in our Quarterly Report on Form 10-Q for the quarter ended April 5, 2009, which could materially affect our business, financial condition or future results. The risk factors described in our Annual Report on Form 10-K and Quarterly Report on Form 10-Q remain applicable to our business. The risks described in our Annual Report on Form 10-K and Quarterly Report on Form 10-Q 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.

 

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Item 2: Unregistered Sales of Equity Securities and Use of Proceeds

In November 2007, Teradyne’s Board of Directors (the “Board”) authorized a $400 million stock repurchase program. During the three months ended July 5, 2009, Teradyne did not repurchase any shares of common stock. The cumulative repurchases as of July 5, 2009 total 8.5 million shares of common stock for $102.6 million at an average price of $12.14 per share. As of November 4, 2008, the Board temporarily suspended the implementation of the stock repurchase program.

The following table includes information with respect to repurchases we made of our common stock during the quarter ended July 5, 2009 (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

April 6, 2009 – May 3, 2009

   —      $ —      —      $ 297,375

May 4, 2009 – May 31, 2009

   —      $ —      —      $ 297,375

June 1, 2009 – July 5, 2009

   —      $ —      —      $ 297,375

 

Item 4: Submission of Matters to a Vote of Security Holders

 

(a) Our annual meeting of shareholders was held on May 28, 2009.

 

(b) The following nominees were elected as directors to serve until the 2010 annual meeting of shareholders:

 

Nominee

 

    Total Votes    

“FOR”

 

    Total Votes    

“AGAINST”

 

    Total Votes    

“ABSTAINING”

James W. Bagley   148,647,127   7,345,794   950,376
Michael A. Bradley   148,955,743   6,886,507   1,101,047
Albert Carnesale   148,973,983   7,007,362   961,952
Edwin J. Gillis   153,623,855   2,360,216   959,226
Vincent M. O’Reilly   149,387,171   6,604,768   951,358
Paul J. Tufano   149,918,214   6,049,762   975,321
Roy A. Vallee   148,820,635   6,849,502   1,273,160
Patricia S. Wolpert   148,776,924   7,246,881   919,492

 

(c) The other proposals voted upon at the annual meeting were:

1. To approve an amendment to the 2006 Equity and Cash Compensation Incentive Plan to increase the aggregate number of shares of common stock that may be issued pursuant to the plan by 10,000,000 shares.

 

Total Votes For

 

Total Votes

Against

 

Total Votes

Abstaining

 

Total Broker

Non-Votes

88,285,955   43,520,160   214,443   24,922,739

2. To approve an amendment to the 1996 Employee Stock Purchase Plan to increase the aggregate number of shares of common stock that may be issued pursuant to the plan by 5,000,000 shares.

 

Total Votes For

 

Total Votes

Against

 

Total Votes

Abstaining

 

Total Broker

Non-Votes

102,801,032   29,034,729   184,797   24,922,739

3. To ratify the selection of PricewaterhouseCoopers LLP as independent auditors for fiscal year ending December 31, 2009.

 

Total Votes For

 

Total Votes

Against

 

Total Votes

Abstaining

 

Total Broker

Non-Votes

151,794,725   4,818,184   330,388   0

 

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Item 6: Exhibits

 

Exhibit
Number

  

Description

31.1    Certification of Principal Executive Officer, pursuant to Rule 13a-14(a) of Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
31.2    Certification of Principal Financial Officer, pursuant to Rule 13a-14(a) of Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
32.1    Certification 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 pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)

 

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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/    GREGORY R. BEECHER        
Gregory R. Beecher
Vice President,
Chief Financial Officer and Treasurer
(Duly Authorized Officer
and Principal Financial Officer)
August 13, 2009

 

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