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TERADYNE, INC - Quarter Report: 2010 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 4, 2010

OR

 

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

For the transition period from                      to                     

Commission File No. 001-06462

 

 

TERADYNE, INC.

(Exact name of registrant as specified in its charter)

 

 

 

 

Massachusetts    04-2272148

(State or Other Jurisdiction of

Incorporation or Organization)

  

(I.R.S. Employer

Identification No.)

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

978-370-2700

(Registrant’s Telephone Number, Including Area Code)

 

 

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

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

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

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

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

The number of shares outstanding of the registrant’s only class of Common Stock as of August 9, 2010 was 181,347,263 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 4, 2010 and December 31, 2009

   3
  

Condensed Consolidated Statements of Operations for the Three and Six Months Ended July 4, 2010 and July 5, 2009

   4
  

Condensed Consolidated Statements of Cash Flows for the Six Months Ended July 4, 2010 and July 5, 2009

   5
  

Notes to Condensed Consolidated Financial Statements

   6

Item 2.

  

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

   26

Item 3.

  

Quantitative and Qualitative Disclosures about Market Risk

   39

Item 4.

  

Controls and Procedures

   39
PART II. OTHER INFORMATION

Item 1.

  

Legal Proceedings

   41

Item 1A.

  

Risk Factors

   41

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

   41

Item 6.

  

Exhibits

   42

 

2


Table of Contents

PART I

 

Item 1: Financial Statements

TERADYNE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

     July 4,
2010
    December 31,
2009
 
     (in thousands,
except per share amounts)
 
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 403,996      $ 416,737   

Marketable securities

     161,778        46,933   

Accounts receivable, net of allowance for doubtful accounts of $3,756 and $3,770
at July 4, 2010 and December 31, 2009, respectively

     248,018        125,236   

Inventories:

    

Parts

     51,699        43,691   

Assemblies in process

     22,159        37,161   

Finished goods

     9,962        9,984   
                
     83,820        90,836   

Deferred tax assets

     19,711        18,944   

Prepayments and other current assets

     47,994        63,606   
                

Total current assets

     965,317        762,292   

Property, plant, and equipment, at cost

     777,494        782,407   

Less: accumulated depreciation

     541,802        536,045   
                

Net property, plant, and equipment

     235,692        246,362   

Long-term marketable securities

     95,487        55,130   

Intangible assets, net

     137,522        152,192   

Other assets

     15,307        19,361   
                

Total assets

   $ 1,449,325      $ 1,235,337   
                
LIABILITIES     

Current liabilities:

    

Accounts payable

   $ 96,044      $ 66,765   

Accrued employees’ compensation and withholdings

     80,592        55,356   

Deferred revenue and customer advances

     41,451        104,439   

Other accrued liabilities

     62,619        54,640   

Accrued income taxes

     11,346        —     

Current debt

     2,291        2,157   
                

Total current liabilities

     294,343        283,357   

Retirement plans liabilities

     69,757        115,101   

Deferred tax liabilities

     10,136        8,041   

Long-term other accrued liabilities

     20,836        23,159   

Long-term debt

     145,497        141,100   
                

Total liabilities

     540,569        570,758   
                

Commitments and contingencies (Note N)

    
SHAREHOLDERS’ EQUITY     

Common stock, $0.125 par value, 1,000,000 shares authorized, 181,162 shares and 174,908 shares issued and outstanding at July 4, 2010 and December 31, 2009, respectively

     22,645        21,864   

Additional paid-in capital

     1,253,098        1,202,426   

Accumulated other comprehensive loss

     (117,631     (138,105

Accumulated deficit

     (249,356     (421,606
                

Total shareholders’ equity

     908,756        664,579   
                

Total liabilities and shareholders’ equity

   $ 1,449,325      $ 1,235,337   
                

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, 2009, are an integral part of the condensed

consolidated financial statements.

 

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Table of Contents

TERADYNE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

     For the Three Months
Ended
    For the Six Months
Ended
 
     July 4,
2010
    July 5,
2009
    July 4,
2010
    July 5,
2009
 
     (in thousands, except per share amounts)  

Net revenues:

        

Products

   $ 391,148      $ 115,148      $ 659,352      $ 179,884   

Services

     63,628        54,432        125,047        110,304   
                                

Total net revenues

     454,776        169,580        784,399        290,188   

Cost of revenues:

        

Cost of products

     167,160        92,635        290,856        148,795   

Cost of services

     33,313        29,816        65,696        60,904   
                                

Total cost of revenues

     200,473        122,451        356,552        209,699   
                                

Gross profit

     254,303        47,129        427,847        80,489   

Operating expenses:

        

Engineering and development

     50,393        38,451        99,445        85,649   

Selling and administrative

     58,343        47,257        114,214        102,630   

Acquired intangible asset amortization

     7,313        8,214        14,669        16,453   

Restructuring and other, net

     1,700        15,270        2,964        31,235   
                                

Total operating expenses

     117,749        109,192        231,292        235,967   
                                

Income (loss) from operations

     136,554        (62,063     196,555        (155,478

Interest income

     3,681        1,141        4,523        1,917   

Interest expense and other

     (8,543     (8,046     (14,456     (13,875
                                

Income (loss) before income taxes

     131,692        (68,968     186,622        (167,436

Income tax provision (benefit)

     9,543        (2,200     14,373        (10,000
                                

Net income (loss)

   $ 122,149      $ (66,768   $ 172,249      $ (157,436
                                

Net income (loss) per common share:

        

Basic

   $ 0.68      $ (0.39   $ 0.97      $ (0.91
                                

Diluted

   $ 0.55      $ (0.39   $ 0.79      $ (0.91
                                

Weighted average common share—basic

     179,990        173,022        178,429        172,576   
                                

Weighted average common share—diluted

     231,541        173,022        228,909        172,576   
                                

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, 2009, are an integral part of the condensed

consolidated financial statements.

 

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TERADYNE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     For the Six Months
Ended
 
     July 4,
2010
    July 5,
2009
 
     (in thousands)  

Cash flows from operating activities:

    

Net income (loss)

   $ 172,249      $ (157,436

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

    

Depreciation

     26,940        30,251   

Amortization

     23,191        21,343   

Stock-based compensation

     15,553        12,109   

Provision for excess and obsolete inventory

     1,665        17,208   

Loss on sale and impairment of marketable securities, net

     410        2,532   

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

     —          5,163   

Revolving credit facility issue costs

     —          2,488   

Deferred taxes

     —          (5,852

Other

     1,419        955   

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

    

Accounts receivable

     (122,782     35,757   

Inventories

     25,079        29,459   

Other assets

     15,361        2,392   

Accounts payable, deferred revenue and accrued expenses

     (10,930     (39,154

Retirement plan contributions

     (24,677     (3,972

Accrued income taxes

     11,346        —     
                

Net cash provided by (used for) operating activities

     134,824        (46,757
                

Cash flows from investing activities:

    

Purchases of property, plant and equipment

     (35,706     (17,428

Purchases of available-for-sale marketable securities

     (223,820     —     

Proceeds from sales of available-for-sale marketable securities

     47,267        11,946   

Proceeds from sales of trading marketable securities

     23,700        —     

Proceeds from life insurance

     1,091        1,076   

Acquisition of businesses, net of cash acquired

     —          (3,741
                

Net cash used for investing activities

     (187,468     (8,147
                

Cash flows from financing activities:

    

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

     41,873        14,272   

Payments of long-term debt

     (1,123     —     

Proceeds from long-term debt

     —          172,914   

Repayment of revolving credit facility principal

     —          (122,500
                

Net cash provided by financing activities

     40,750        64,686   
                

Effect of exchange rate changes on cash and cash equivalents

     (847     1,594   
                

(Decrease) increase in cash and cash equivalents

     (12,741     11,376   

Cash and cash equivalents at beginning of period

     416,737        322,705   
                

Cash and cash equivalents at end of period

   $ 403,996      $ 334,081   
                

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, 2009, are an integral part of the condensed

consolidated financial statements.

 

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Table of Contents

TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

A. The Company

Teradyne, Inc. (“Teradyne”) 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, hard disk drive test (“HDD”) systems, circuit-board test and inspection (“Commercial Board Test”) systems, and automotive diagnostic and test (“Diagnostic Solutions”) systems (collectively these products represent “Systems Test Group”).

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, 2009 condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

The accompanying financial information should be read in conjunction with the consolidated financial statements and notes thereto contained in Teradyne’s Annual Report on Form 10-K, filed with the SEC on March 1, 2010 for the year ended December 31, 2009.

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.

Revenue Recognition

In October 2009, the Financial Accounting Standards Board (“FASB”) amended the accounting standards for revenue recognition to remove tangible products containing non-software and software components that function together to deliver the product’s essential functionality from the scope of industry-specific software revenue recognition guidance. In October 2009, the FASB also amended the accounting standards for arrangements with multiple deliverables. Teradyne elected to early adopt this accounting guidance at the beginning of its first quarter of 2010 on a prospective basis. Adoption had no material impact on Teradyne’s financial position or results of operations in the three and six months ended July 4, 2010.

Teradyne recognizes revenue when there is persuasive evidence of an arrangement, title and risk of loss have passed, delivery has occurred or the services have been rendered, the sales price is fixed or determinable and collection of the related receivable is reasonably assured. Title and risk of loss generally pass to Teradyne’s customers upon shipment or at delivery destination point. In circumstances where either title or risk of loss pass upon destination, acceptance or cash payment, Teradyne defers revenue recognition until such events occur.

Teradyne’s equipment has non-software and software components that function together to deliver the equipment’s essential functionality. Revenue is recognized upon shipment or at delivery destination point, provided that customer acceptance criteria can be demonstrated prior to shipment. Certain contracts require Teradyne to perform tests of the product to ensure that performance meets the published product specifications or

 

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Table of Contents

TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

customer requested specifications, which are generally conducted prior to shipment. Where the criteria cannot be demonstrated prior to shipment, revenue is deferred until customer acceptance has been received. Teradyne also defers the portion of the sales price that is not due until acceptance, which represents deferred profit.

For multiple element arrangements, Teradyne allocates revenue to all deliverables based on their relative selling prices. In such circumstances, a hierarchy is used to determine the selling price for allocating revenue to deliverables as follows: (i) vendor-specific objective evidence of selling price (“VSOE”), (ii) third-party evidence of selling price (“TPE”), and (iii) best estimate of the selling price (“BESP”). For a delivered item to be considered a separate unit, the delivered item must have value to the customer on a standalone basis and the delivery or performance of the undelivered item must be considered probable and substantially in the control of Teradyne.

Teradyne’s post-shipment obligations include installation, training services, one-year standard warranties, and extended warranties. Installation does not alter the product capabilities, does not require specialized skills or tools and can be performed by the customers or other vendors. Installation is typically provided within five days of product shipment and is completed within one to two days thereafter. Training services are optional and do not affect the customer’s ability to use the product. Teradyne defers revenue for the selling price of installation and training.

C. Recently Issued Accounting Pronouncements

In March 2010, FASB issued an Accounting Standards Update (“ASU”) 2010-17, “Milestone Method of Revenue Recognition, to Accounting Standards Codification (“ASC”) 605, “Revenue Recognition.” The guidance in this consensus allows the milestone method as an acceptable revenue recognition methodology when an arrangement includes substantive milestones. The guidance provides a definition of substantive milestone and should be applied regardless of whether the arrangement includes single or multiple deliverables or units of accounting. The scope of this consensus is limited to the transactions involving milestones relating to research and development deliverables. The guidance includes enhanced disclosure requirements about each arrangement, individual milestones and related contingent consideration, information about substantive milestones and factors considered in the determination. The consensus is effective prospectively to milestones achieved in fiscal years, and interim periods within those years, after June 15, 2010. Early application and retrospective application are permitted. Teradyne will adopt this final consensus prospectively in January 2011 and the adoption is not expected to have a material impact on Teradyne’s financial position or results of operations.

D. Financial Instruments and Derivatives

Financial Instruments

Teradyne uses the market and income approach to value its financial instruments and there was no change in valuation techniques used by Teradyne during the six months ended July 4, 2010 and July 5, 2009. As defined in ASC 820-10, “Fair Value Measurements and Disclosures”, fair value is the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. ASC 820-10 requires that assets and liabilities are carried at fair value and are classified in one of the following three categories:

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

Level 2: Inputs other than Level 1, that are observable either directly or indirectly as of the reporting date. For example, a common approach for valuing fixed income securities is the use of matrix pricing. Matrix pricing is a mathematical technique used to value securities by relying on the securities’ relationship to other benchmark quoted prices.

 

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Table of Contents

TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

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

For the right to sell the auction rate securities, held by Teradyne, back to UBS (“UBS Put”), Teradyne elected fair value treatment under ASC 825-10, “Financial Instruments.” The UBS Put was the only instrument of this nature or type that Teradyne held and for which Teradyne has elected the fair value option under ASC 825-10. The UBS Put was exercised in June 2010.

In January 2010, FASB issued ASU 2010-6, “Improving Disclosures about Fair Value Measurement”, which requires interim disclosures regarding significant transfers in and out of Level 1 and Level 2 fair value measurements. Additionally, this ASU requires disclosure for each class of assets and liabilities and disclosures about the valuation techniques and inputs used to measure fair value for both recurring and non-recurring fair value measurements. These disclosures are required for fair value measurements that fall in either Level 2 or Level 3. Further, the ASU requires separate presentation of Level 3 activity for the fair value measurements. Teradyne adopted the interim disclosure requirements under this ASU during the quarter ended April 4, 2010, with the exception of the separate presentation in the Level 3 activity rollforward, which is not effective until fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years.

During the six months ended July 4, 2010, there were no significant transfers in and out of Level 1 and Level 2.

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 4, 2010 and December 31, 2009.

 

     July 4, 2010
     Quoted Prices
in Active
Markets for
Identical
Instruments
(Level 1)
   Significant
Other
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)
   Total
     (in thousands)

Assets

           

Available for sale securities:

           

Money market funds

   $ 292,704    $ —      $ —      $ 292,704

U.S. government agency securities

     —        102,335      —        102,335

U.S. Treasury securities

     71,240      —        —        71,240

Corporate debt securities

     —        43,486      —        43,486

Commercial paper

     —        25,182      —        25,182

Certificates of deposit and time deposits

     4,157      9,683      —        13,840

Equity and debt mutual funds

     6,950      —        —        6,950

Municipal bonds

     —        5,634      —        5,634

Non-U.S. government securities

     260      —        —        260
                           

Total

     375,311      186,320      —        561,631

Trading securities:

           

Auction rate securities

     —        —        2,836      2,836

Derivatives

     —        409      —        409
                           

Total

   $ 375,311    $ 186,729    $ 2,836    $ 564,876
                           

 

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TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Reported as follows:

 

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

Assets

           

Cash and cash equivalents

   $ 292,704    $ 14,498    $ —      $ 307,202

Marketable securities

     48,454      113,324      —        161,778

Long-term marketable securities

     34,153      58,498      2,836      95,487

Prepayments and other current assets

     —        409      —        409
                           
   $ 375,311    $ 186,729    $ 2,836    $ 564,876
                           
     December 31, 2009
     Quoted Prices
in Active
Markets for
Identical
Instruments
(Level 1)
   Significant
Other
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)
   Total
     (in thousands)

Assets

           

Available for sale securities:

           

Money market funds

   $ 284,236    $ —      $ —      $ 284,236

Corporate debt securities

     —        21,224      —        21,224

U.S. government agency securities

     —        16,418      —        16,418

Certificates of deposit and time deposits

     4,136      11,719      —        15,855

U.S. Treasury securities

     12,010      —        —        12,010

Commercial paper

     —        8,245      —        8,245

Equity and debt mutual funds

     7,499      —        —        7,499

Municipal bonds

     —        528      —        528

Non-U.S. government securities

     287      —        —        287
                           

Total

     308,168      58,134      —        366,302

Trading securities:

           

Auction rate securities

     —        —        23,649      23,649

UBS Put

     —        —        2,830      2,830
                           

Total

   $ 308,168    $ 58,134    $ 26,479    $ 392,781
                           

Liabilities

           

Derivatives

   $ —      $ 143    $ —      $ 143
                           

Total

   $ —      $ 143    $ —      $ 143
                           

 

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TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Reported as follows:

 

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

Assets

           

Cash and cash equivalents

   $ 284,237    $ 3,651    $ —      $ 287,888

Marketable securities

     12,137      34,796      —        46,933

Long-term marketable securities

     11,794      19,687      23,649      55,130

Other assets

     —           2,830      2,830
                           
   $ 308,168    $ 58,134    $ 26,479    $ 392,781
                           

Liabilities

           

Other accrued liabilities

   $ —      $ 143    $ —      $ 143
                           

The following table represents changes in the fair value of Level 3 financial assets:

 

    For the Three Months Ended  
    July 4, 2010     July 5, 2009  
    Long-Term
Auction Rate
Securities
    UBS Put     Long-Term
Auction Rate
Securities
    UBS Put  
    (in thousands)  

Balance at beginning of period

  $ 23,697      $ 2,687      $ 25,521      $ 3,277   

Sale of auction rate securities and exercise of UBS Put

    (20,863     (2,687     —          —     

Change in unrealized gain included in interest income

    2        —          665        —     

Change in unrealized loss included in interest expense and other

    —          —          —          (207
                               

Balance at end of period

  $ 2,836      $ —        $ 26,186      $ 3,070   
                               
    For the Six Months Ended  
    July 4, 2010     July 5, 2009  
    Long-Term
Auction Rate
Securities
    UBS Put     Long-Term
Auction Rate
Securities
    UBS Put  
    (in thousands)  

Balance at beginning of period

  $ 23,649      $ 2,830      $ 25,968      $ 3,330   

Sale of auction rate securities and exercise of UBS Put

    (21,013     (2,687     —          —     

Change in unrealized gain included in interest income

    200        —          665        —     

Change in unrealized loss included in interest expense and other

    —          (143     (447     (260
                               

Balance at end of period

  $ 2,836      $ —        $ 26,186      $ 3,070   
                               

During the three months ended July 4, 2010, Teradyne recorded a net loss of $0.1 million from sales of marketable securities and exercise of UBS Put. During the three months ended July 5, 2009, Teradyne recorded a gain of $0.7 million for the change in the auction rate securities fair value.

During the six months ended July 4, 2010, Teradyne recorded a net loss of $0.4 million from sales of marketable securities and exercise of UBS Put. During the six months ended July 5, 2009, Teradyne recorded a $1.9 million loss from sales of marketable securities.

 

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TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

During the three and six months ended July 5, 2009, Teradyne determined that it did 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 $0.4 million and $0.6 million, respectively.

Realized losses from sale of marketable securities, decreases in auction rate securities fair value and other-than-temporary impairment losses are included in interest expense and other. Increases in auction rate securities fair value are included in interest income.

The carrying amounts and fair values of financial instruments at July 4, 2010 and December 31, 2009 are as follows:

 

     July 4, 2010    December 31, 2009
     Carrying Value    Fair Value    Carrying Value    Fair Value
     (in thousands)

Cash equivalents

   $ 307,202    $ 307,202    $ 287,888    $ 287,888

Marketable securities

     257,265      257,265      102,063      102,063

UBS Put

     —        —        2,830      2,830

Convertible debt(1)

     138,627      367,183      133,554      392,113

Japan loan

     9,161      9,161      9,703      9,703

 

(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, accounts receivable, net and accounts payable approximate the carrying amount due to the short term maturities of these instruments.

The following table summarizes available-for-sale marketable securities which are recorded at fair value:

 

    July 4, 2010
    Available-for-Sale   Fair Market
Value of Investments
with Unrealized  Losses
    Cost   Unrealized
Gain
  Unrealized
(Loss)
    Fair Market
Value
 
    (in thousands)

Money market funds

  $ 292,704   $   $      $ 292,704   $ —  

U.S. government agency securities

    102,207     139     (11     102,335     7,357

U.S. Treasury securities

    71,108     133     (1     71,240     5,032

Corporate debt securities

    43,406     104     (24     43,486     17,574

Commercial paper

    25,184         (2     25,182     3,987

Certificates of deposit and time deposits

    13,841         (1     13,840     1,501

Equity and debt mutual funds

    6,947     405     (402     6,950     3,691

Municipal bonds

    5,634                5,634     —  

Non-U.S. government securities

    244     16            260     —  
                               
  $ 561,275   $ 797   $ (441   $ 561,631   $ 39,142
                               

 

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TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Reported as follows:

 

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

Cash and cash equivalents

  $ 307,202   $   $ —        $ 307,202   $ —  

Marketable securities

    161,715     84     (21     161,778     22,931

Long-term marketable securities

    92,358     713     (420     92,651     16,211
                               
  $ 561,275   $ 797   $ (441   $ 561,631   $ 39,142
                               
    December 31, 2009
    Available-for-Sale   Fair Market
Value of Investments
with Unrealized  Losses
    Cost   Unrealized
Gain
  Unrealized
(Loss)
    Fair Market
Value
 
    (in thousands)

Money market funds

  $ 284,236   $   $      $ 284,236   $ —  

Corporate debt securities

    21,243     11     (30     21,224     11,091

U.S. government agency securities

    16,418     5     (5     16,418     6,155

Certificates of deposit and time deposits

    15,854     1            15,855     —  

U.S. Treasury securities

    12,014         (4     12,010     10,508

Commercial paper

    8,246         (1     8,245     2,397

Equity and debt mutual funds

    7,430     622     (553     7,499     4,139

Municipal bonds

    532         (4     528     528

Non-U.S. government securities

    269     18            287     —  
                               
  $ 366,242   $ 657   $ (597   $ 366,302   $ 34,818
                               

Reported as follows:

 

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

Cash and cash equivalents

  $ 287,888   $   $      $ 287,888   $ —  

Short-term marketable securities

    46,928     7     (2     46,933     16,425

Long-term marketable securities

    31,426     650     (595     31,481     18,393
                               
  $ 366,242   $ 657   $ (597   $ 366,302   $ 34,818
                               

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;

 

   

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.

As of July 4, 2010 and December 31, 2009, the fair market value of investments with unrealized losses totaled $39.1 million and $34.8 million, respectively. Teradyne determined that the unrealized losses in the amount of $0.4 million and $0.6 million, respectively, related to these investments are temporary.

 

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Table of Contents

TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Derivatives

Teradyne conducts business in a number of foreign countries, with certain transactions denominated in local currencies. The purpose of Teradyne’s foreign currency management is to minimize the effect of exchange rate fluctuations on certain foreign denominated net monetary assets. 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.

The notional amount of foreign exchange contracts hedging monetary assets and liabilities denominated in foreign currencies was $59.3 million and $56.9 million at July 4, 2010 and December 31, 2009, respectively.

The following table summarizes the fair value of derivative instruments as of July 4, 2010 and December 31, 2009.

 

    

Balance Sheet Location

   July 4,
2010
   December 31,
2009
          (in thousands)

Derivatives not designated as hedging instruments:

        

Foreign exchange contracts

   Prepayments and other current assets    $ 409    $

Foreign exchange contracts

   Other accrued liabilities      —        143
                
      $ 409    $ 143
                

The following table summarizes the effect of derivative instruments in the statement of operations recognized during the three and six months ended July 4, 2010 and 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 4,
2010
    July 5,
2009
    July 4,
2010
    July 5,
2009
 
        (in thousands)  

Derivatives not designated as hedging instruments:

         

Foreign exchange contracts

  Interest expense and other   $ (538   $ (425   $ (1,263   $ (2,386
                                 
    $ (538   $ (425   $ (1,263   $ (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 $10.0 million. The loan has a term of 5 years and a fixed interest rate of 1.4%. Approximately $6.0 million of the loan is collateralized by a real estate mortgage on

 

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Table of Contents

TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Teradyne K.K.’s building and land in Kumamoto, Japan and approximately $4.0 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 $1.0 million payable on September 30 and March 30 each year. At July 4, 2010, approximately $2.3 million of the outstanding loan principal is included in current debt and approximately $6.9 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, 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.

During the three months ended July 4, 2010, the following circumstance that allows holders to convert their Notes at their option prior to December 15, 2013 occurred: 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 exceeded 130% of the conversion price in effect on the last trading day of the immediately preceding calendar quarter. As of August 12, 2010, no holders have exercised their option to convert their Notes.

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 (which include, among others, the liquidation or dissolution of Teradyne, the acquisition of 50% or more of the total voting shares of Teradyne, certain mergers and consolidations, and the delisting of Teradyne’s stock).

 

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TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

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 warrants.

The convertible notes 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.

The notes are classified as long-term debt in the balance sheet at July 4, 2010 and December 31, 2009. The below tables represent the components of Teradyne’s convertible senior notes:

 

     July 4,
2010
   December 31,
2009
     (in thousands)

Debt principal

   $ 190,000    $ 190,000

Unamortized debt discount

     51,373      56,446
             

Net carrying amount of the convertible debt

   $ 138,627    $ 133,554
             

 

     For the Three Months
Ended
   For the Six Months
Ended
     July 4,
    2010    
   July 5,
    2009    
   July 4,
    2010    
   July 5,
    2009    
     (in thousands)

Contractual interest expense on the coupon

   $ 2,138    $ 2,161    $ 4,371    $ 2,161

Amortization of the discount component and debt issue fees

     2,783      2,455      5,480      2,455
                           

Total interest expense on the convertible debt

   $ 4,921    $ 4,616    $ 9,851    $ 4,616
                           

As of July 4, 2010, the unamortized discount was $51.4 million, which will be amortized over approximately 3.75 years, and the carrying amount of the equity component was $63.4 million. As of July 4, 2010, 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 $329.0 million.

Revolving Credit Facility

On April 7, 2009, Teradyne terminated its revolving credit facility agreement. Teradyne used approximately $123.3 million of the net proceeds of the Notes offering to repay $122.5 million of principal and $0.8 million of accrued interest outstanding under the revolving credit facility agreement.

 

15


Table of Contents

TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

F. Deferred Revenue and Customer Advances

Deferred revenue and customer advances consist of:

 

     July 4,
2010
   December 31,
2009
     (in thousands)

Customer advances

   $ 6,420    $ 72,569

Maintenance and training

     29,468      22,616

Undelivered elements

     2,273      5,551

Acceptance

     1,306      530

Other

     1,984      3,173
             

Total deferred revenue and customer advances

   $ 41,451    $ 104,439
             

G. 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 balance below is included in other accrued liabilities.

 

     For the Three Months
Ended
    For the Six Months
Ended
 
     July 4,
    2010    
    July 5,
    2009    
    July 4,
    2010    
    July 5,
    2009    
 
     (in thousands)  

Balance at beginning of period

   $ 8,851      $ 6,013      $ 7,086      $ 8,372   

Accruals for warranties issued during the period

     5,276        1,777        8,974        3,174   

Accruals related to pre-existing warranties

     (241     (212     337        (997

Settlements made during the period

     (2,824     (2,567     (5,335     (5,538
                                

Balance at end of period

   $ 11,062      $ 5,011      $ 11,062      $ 5,011   
                                

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

 

    For the Three Months
Ended
    For the Six Months
Ended
 
    July 4,
    2010    
    July 5,
    2009    
    July 4,
    2010    
    July 5,
    2009    
 
    (in thousands)  

Balance at beginning of period

  $ 4,470      $ 5,317      $ 4,055      $ 6,369   

Deferral of new extended warranty revenue

    1,581        600        3,215        877   

Recognition of extended warranty deferred revenue

    (408     (1,270     (1,627     (2,599
                               

Balance at end of period

  $ 5,643      $ 4,647      $ 5,643      $ 4,647   
                               

 

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Table of Contents

TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

H. Stock-Based Compensation

During the six months ended July 4, 2010, Teradyne granted service-based restricted stock units to employees, and service-based stock options and service and performance-based restricted stock units to executive officers. The total number of restricted stock units granted was 2.6 million at the weighted average grant date fair value of $9.42. Service-based restricted stock units granted to employees and executive officers vest in equal installments over four years. The percentage level of performance satisfied for performance-based grants is assessed on or near the anniversary of the grant date and, in turn, that percentage level determines the number of performance-based restricted stock units available for vesting over the vesting period; portions of the performance-based grants not available for vesting are forfeited. The total number of stock options granted to executive officers was 0.3 million at the weighted average grant date fair value of $4.10. These stock options vest in equal installments over four years, and have a term of seven years from the date of grant.

During the six months ended July 5, 2009, Teradyne granted service-based restricted stock units to employees, 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. Restricted stock units and stock options vest in equal installments over four years. These 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 4,
2010
    July 5,
2009
 

Expected life (years)

   4.75      4.75   

Interest rate

   2.4   1.6

Volatility-historical

   48.8   44.9

Dividend yield

   0.0   0.0

Teradyne determined the stock options’ expected life based upon historical exercise data for executive officers, the age of the executive officers and the terms of the stock option grant. Volatility was determined using historical volatility for a period equal to the expected life. The risk-free rate was determined using the U.S. Treasury yield curve in effect at the time of grant.

 

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Table of Contents

TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

I. Comprehensive Income (Loss)

Comprehensive income (loss) is calculated as follows:

 

    For the Three Months
Ended
    For the Six Months
Ended
 
    July 4,
2010
    July 5,
2009
    July 4,
2010
    July 5,
2009
 
    (in thousands)  

Net income (loss)

  $ 122,149      $ (66,768   $ 172,249      $ (157,436

Foreign currency translation adjustment

    210        1,214        (363     1,594   

Unrealized (loss) gain on investments, net of tax of $0

    (401     12        296        1,707   

Actuarial gains (losses) arising during period, net of tax of $1,121, $(984), $1,247 and $(984)

    17,202        (1,458     17,587        (10,095

Amortization included in net periodic pension and post-retirements costs:

       

Actuarial losses, net of tax of $45, $55, $90 and $102

    952        1,017        2,707        2,100   

Prior service costs, net of tax of $0

    122        138        246        287   
                               

Comprehensive income (loss)

  $ 140,234      $ (65,845   $ 192,722      $ (161,843
                               

J. Intangible Assets

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

 

     July 4, 2010
     Gross
Carrying
Amount
   Accumulated
Amortization
   Net
Carrying
Amount
   Weighted
Average
Useful Life
     (in thousands)

Developed technology

   $ 121,055    $ 56,722    $ 64,333    6.1 years

Customer relationships and service and software maintenance contracts

     91,271      27,468      63,803    8.6 years

Trade names and trademarks

     14,840      5,454      9,386    11.5 years
                       

Total intangible assets

   $ 227,166    $ 89,644    $ 137,522    7.6 years
                       
     December 31, 2009
     Gross
Carrying
Amount
   Accumulated
Amortization
   Net
Carrying
Amount
   Weighted
Average
Useful Life
     (in thousands)

Developed technology

   $ 121,055    $ 47,746    $ 73,309    6.1 years

Customer relationships and service and software maintenance contracts

     91,271      22,187      69,084    8.6 years

Trade names and trademarks

     14,840      5,041      9,799    11.5 years
                       

Total intangible assets

   $ 227,166    $ 74,974    $ 152,192    7.6 years
                       

 

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Table of Contents

TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Aggregate intangible asset amortization expense was $7.3 million and $14.7 million, respectively, for the three and six months ended July 4, 2010 and $8.2 million and $16.5 million, respectively, for the three and six months ended July 5, 2009. Estimated intangible asset amortization expense for each of the five succeeding fiscal years is as follows:

 

Year

   Amount
(in thousands)

2010 (remainder)

   $ 14,583

2011

     27,821

2012

     25,732

2013

     24,683

2014

     21,598

K. Net Income (Loss) per Common Share

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

 

     For the Three Months
Ended
    For the Six Months
Ended
 
     July 4,
2010
   July 5,
2009
    July 4,
2010
   July 5,
2009
 
     (in thousands, except per share amounts)  

Net income (loss) for basic net income (loss) per share

   $ 122,149    $ (66,768   $ 172,249    $ (157,436

Income impact of assumed conversion of convertible notes

     4,379      —          8,766      —     
                              

Net income (loss) for diluted net income (loss) per share

   $ 126,528    $ (66,768   $ 181,015    $ (157,436

Shares used in net income (loss) per common share-basic

     179,990      173,022        178,429      172,576   

Effect of dilutive potential common shares:

          

Incremental shares from assumed conversion of convertible note

     34,703      —          34,703      —     

Warrants

     11,225      —          10,174      —     

Restricted stock units

     2,924      —          2,896      —     

Stock options

     2,571      —          2,635      —     

Stock purchase rights

     128      —          72      —     
                              

Dilutive potential common shares

     51,551      —          50,480      —     
                              

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

     231,541      173,022        228,909      172,576   
                              

Net income (loss) per common share-basic

   $ 0.68    $ (0.39   $ 0.97    $ (0.91
                              

Net income (loss) per common share-diluted

   $ 0.55    $ (0.39   $ 0.79    $ (0.91
                              

The computation of diluted net income per common share for the three and six months ended July 4, 2010 excludes the effect of the potential exercise of options to purchase approximately 4.5 million and 6.0 million shares and restricted stock units of 0.1 million and 0.4 million shares, respectively, because the effect would have been anti-dilutive.

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 because Teradyne had a net loss and inclusion would be anti-dilutive.

 

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TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Teradyne’s call option on its common stock (convertible note hedge transaction) is excluded from the calculation of diluted shares because the effect would be anti-dilutive. See Debt footnote E regarding convertible note hedge transaction.

L. Restructuring and Other, Net

Restructuring

In response to a downturn in the industry, Teradyne initiated restructuring activities across all segments to reduce costs, principally through headcount reductions and facility consolidations. The tables below represent activity related to these actions. The remaining accrual for severance and benefits is reflected in the accrued employees’ compensation and withholdings account on the balance sheet and is expected to be paid by the end of 2010. The remaining accrual for lease payments on vacated facilities is reflected in the other accrued liabilities account and the long-term other accrued liabilities account and is expected to be paid over the lease terms, the latest of which expires in 2013. Teradyne expects to pay approximately $3.7 million against the lease accruals over the next twelve months. Teradyne’s future lease commitments are net of expected sublease income of $4.5 million as of July 4, 2010.

Severance and Benefits:

 

     Pre-2009
Actions
    Q1 2009
Actions
    Q2 2009
Actions
    Q1 2010
Actions
    Q2 2010
Actions
    Total  
     (in thousands)  

Balance at December 31, 2008

   $ 5,423      $ —        $ —        $ —        $ —        $ 5,423   

Provision

     —          17,630       15,940        —          —          33,570  

Cash payments

     (5,423     (17,630     (13,035     —            (36,088
                                                

Balance at December 31, 2009

     —          —          2,905       —          —          2,905  

Provision

     —          —          —          766        —          766  

Change in estimate

     —          —          498       —          —          498   

Cash payments

     —          —          (2,079 )     (573 )     —          (2,652 )
                                                

Balance at April 4, 2010

     —          —          1,324       193       —          1,517  

Provision

     —          —          —          —          845       845  

Change in estimate

     —          —          (96 )     (5 )     —          (101

Cash payments

     —          —          (695 )     (188     (387 )     (1,270 )
                                                

Balance at July 4, 2010

   $ —        $ —        $ 533     $ —        $ 458      $ 991  
                                                

 

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TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Facility Exit Costs:

 

     Pre-2009
Actions
    Q3 2009
Actions
    Q2 2010
Actions
   Total  
     (in thousands)  

Balance at December 31, 2008

   $ 9,303      $ —        $ —      $ 9,303   

Provision

     —          4,420        —        4,420   

Change in estimate

     (417     —          —        (417

Cash payments

     (2,645     (285        (2,930

Other

     —          100        —        100   
                               

Balance at December 31, 2009

     6,241        4,235        —        10,476   

Cash payments

     (468     (272     —        (740
                               

Balance at April 4, 2010

     5,773        3,963        —        9,736   

Provision

     —          —          815      815   

Cash payments

     (553     (264     —        (817
                               

Balance at July 4, 2010

   $ 5,220      $ 3,699     $ 815    $ 9,734   
                               

During the six months ended July 4, 2010, Teradyne recorded restructuring charges related to ongoing efforts to lower expenses and its cost structure and an additional charge due to a change in estimated severance benefits related to a prior period activity. The restructuring charges consisted of the following activities:

Q1 2010 Actions:

 

   

$0.8 million of severance charges related to headcount reductions of approximately 14 people, of which $0.4 million and 10 people were in Systems Test Group and $0.4 million and 4 people were in Semiconductor Test.

Q2 2010 Actions:

 

   

$0.8 million of severance charges related to headcount reductions of approximately 10 people in Systems Test Group; and

 

   

$0.8 million of facility charges in Systems Test Group related to the early exit of leased facilities in Kontich, Belgium and Stockport, United Kingdom.

Q2 2009 Actions:

 

   

$0.4 million related to a change in the estimated severance benefits related to headcount reduction activities across both segments.

During the six months ended July 5, 2009, Teradyne recorded restructuring charges related to ongoing efforts to lower expenses and its cost structure in light of the industry wide decline in orders for semiconductor equipment. The restructuring charges consisted of the following activities:

Q2 2009 Actions:

 

   

$14.1 million of severance charges related to headcount reductions of approximately 316 people, of which $9.7 million and 267 people were in Semiconductor Test, $2.7 million and 25 people were in Corporate, and $1.7 million and 24 people were in Systems Test Group.

 

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TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Q1 2009 Actions:

 

   

$17.6 million of severance charges related to headcount reductions of approximately 518 people, of which $14.9 million and 460 people were in Semiconductor Test, $1.9 million and 42 people were in Systems Test Group, and $0.8 million and 16 people were in Corporate.

Other

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

 

   

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

 

   

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

M. 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 these plans in accordance with local laws and to the extent that such contributions are tax deductible. The assets of these plans consist primarily of 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.

Components of net periodic pension cost for all plans for the three and six months ended July 4, 2010 and July 5, 2009 were as follows:

 

     For the Three Months
Ended
    For the Six Months
Ended
 
         July 4,    
2010
        July 5,    
2009
    July 4,
2010
    July 5,
2009
 
     (in thousands)  

Service cost

   $ 953      $ 877      $ 2,015      $ 1,995   

Interest cost

     4,280        4,688        8,840        9,176   

Expected return on plan assets

     (5,273     (4,836     (10,140     (9,706

Amortization of unrecognized:

        

Prior service cost

     181        197        363        404   

Net loss

     1,022        1,013        2,768        2,088   

Curtailment gain

     —          —          —          (111

Settlement loss

     —          1,550        —          1,550   
                                

Total net periodic pension cost

   $ 1,163      $ 3,489      $ 3,846      $ 5,396   
                                

In the six months ended July 4, 2010, Teradyne made a $20.0 million discretionary contribution to the U.S. Qualified Pension Plan. On August 4, 2010 Teradyne made an additional $15.0 million discretionary contribution to the U.S. Qualified Pension Plan.

 

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TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Post-Retirement Benefit Plans

In addition to receiving pension benefits, U.S. Teradyne employees who meet early retirement eligibility requirements as of their termination dates may participate in Teradyne’s Welfare Plan, which includes death, and medical and dental benefits up to age 65. Death benefits provide a fixed sum to retirees’ survivors and are available to all retirees. Substantially all of Teradyne’s current U.S. employees (including executive officers) could become eligible for these benefits, and the existing benefit obligation relates primarily to those employees.

Components of net periodic post-retirement cost were as follows:

 

     For the Three Months
Ended
    For the Six Months
Ended
 
     July 4,
2010
    July 5,
2009
      July 4,  
2010
      July 5,  
2009
 
     (in thousands)  

Service cost

   $ 7      $ 15      $ 27      $ 55   

Interest cost

     174        268        392        546   

Amortization of unrecognized:

        

Prior service benefit

     (59     (59     (117     (117

Net (gain) loss

     (25     59        29        114   
                                

Total net periodic post-retirement cost

   $ 97      $ 283      $ 331      $ 598   
                                

N. Commitments and Contingencies

Purchase Commitments

As of July 4, 2010, Teradyne had entered into purchase commitments for certain components and materials. The purchase commitments are for less than one year and aggregate to approximately $277.3 million.

Legal Claims

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

 

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TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

O. 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, hard disk drive test, circuit-board test and inspection, and automotive diagnostic and test.

Teradyne evaluates performance based on several factors, of which the primary financial measure is business segment income before income taxes. The accounting policies of the business segments 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, 2009. Segment information is as follows:

 

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

Three months ended July 4, 2010:

       

Net revenues

  $ 413,059      $ 41,717      $ —        $ 454,776   

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

    143,469        (6,994     (4,783     131,692   

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

Six months ended July 4, 2010:

       

Net revenues

  $ 702,736      $ 81,663      $ —        $ 784,399   

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

    209,558        (12,593     (10,343     186,622   

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

 

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

 

(2) Included in the income before income taxes for each of the segments are charges for the three and six months ended July 4, 2010 and July 5, 2009 that include restructuring and other, net, inventory step-up amortization and provision for excess and obsolete inventory, as follows:

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

 

     For the Three Months
Ended
   For the Six Months
Ended
     July 4,
    2010    
    July 5,
    2009    
   July 4,
    2010    
    July 5,
    2009    
     (in thousands)

Cost of revenues—provision for excess and obsolete inventory

   $ —        $ 8,984    $ 496      $ 14,614

Cost of revenues—sale of previously written down inventory

     (4,639     —        (4,639     —  

Cost of revenues—inventory step-up

     —          3,924      —          5,163

Restructuring and other, net

     —          11,324      1,082        24,671
                             

Total

   $ (4,639   $ 24,232    $ (3,061   $ 44,448
                             

 

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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 4,
    2010    
    July 5,
    2009    
   July 4,
    2010    
    July 5,
    2009    
     (in thousands)

Cost of revenues—provision for excess and obsolete inventory

   $ 301      $ 2,507    $ 1,169      $ 5,474

Cost of revenues—sale of previously written down inventory

     (593     —        (593     —  

Restructuring and other, net

     1,737        1,486      1,919        3,463
                             

Total

   $ 1,445      $ 3,993    $ 2,495      $ 8,937
                             

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

 

     For the Three Months
Ended
   For the Six Months
Ended
     July 4,
    2010    
    July 5,
    2009    
   July 4,
    2010    
    July 5,
    2009    
     (in thousands)

Restructuring and other, net

   $ (37 )   $ 2,460    $ (37   $ 3,101
                             

Total

   $ (37   $ 2,460    $ (37   $ 3,101
                             

 

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

Statements in this Quarterly Report on Form 10-Q which are not historical facts, so called “forward looking statements,” are made pursuant to the safe harbor provisions of Section 21E of the Securities Exchange Act of 1934, as amended. Investors are cautioned that all forward looking statements involve risks and uncertainties, including those detailed in Teradyne’s filings with the Securities and Exchange Commission. See also Part II, Item 1A of this Quarterly Report on Form 10-Q and Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2009. Readers are cautioned not to place undue reliance on these forward-looking statements which reflect management’s analysis only as of the date hereof. Teradyne assumes no obligation to update these forward-looking statements to reflect actual results or changes in factors or assumptions affecting forward-looking statements, except as may be required by law.

Overview

Teradyne is a leading global supplier of automatic test equipment. We design, develop, manufacture, and sell automatic test systems and solutions used to test complex electronics in the consumer electronics, automotive, computing, telecommunications, and aerospace and defense industries. Our automatic test equipment products and services include:

 

   

semiconductor test (“Semiconductor Test”) systems; and

 

   

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

We have a broad customer base which includes integrated device manufacturers (“IDMs”), outsourced sub-assembly and test providers (“OSATs”), wafer foundries, fabless companies that design, but contract with others for the manufacture of integrated circuits (“ICs”), manufacturers of circuit boards, automotive companies, HDD manufacturers, aerospace and military contractors as well as the United States Department of Defense.

The sales of our products and services are dependent, to a large degree, on customers who are subject to cyclical trends in the demand for their products. These cyclical periods have had, and will continue to have, a significant effect on our business since our customers often delay or accelerate purchases in reaction to changes in their businesses and to demand fluctuations in the semiconductor industry. Historically, these demand fluctuations have resulted in significant variations in our results of operations. This was particularly relevant beginning in the fourth quarter of fiscal year 2008 where we saw a significant decrease in revenue in our Semiconductor Test business which was impacted by the deteriorating global economy, which negatively impacted the entire semiconductor industry. The sharp swings in the semiconductor industry in recent years have generally affected the semiconductor test equipment and services industry more significantly than the overall capital equipment sector.

In response to the business downturn, we implemented significant permanent and temporary cost reduction measures. We reduced headcount worldwide, cut capital spending, and imposed temporary salary reductions and furloughs on our workforce. Due to the continued improvement in our business, we removed the temporary salary reductions and furloughs by the end of last year. We believe the permanent cost-cutting measures we took in the last two years will be of long term value.

In the last three quarters, we have experienced improvement in our semiconductor test business. We believe our acquisitions of Nextest and Eagle Test and our entry into the high speed memory and HDD markets have enhanced our opportunities for growth. We will continue to invest in our business in anticipation of a broader recovery in our markets and to expand further our addressable markets while tightly managing our costs. As the last three quarters have demonstrated, with our current cost structure, we can achieve significantly higher profitability than we achieved at comparable revenue levels in the past.

 

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Table of Contents

Critical Accounting Policies and Estimates

We have identified the policies which are critical to understanding our business and our results of operations. Except as stated below, management believes that there have been no significant changes during the six months ended July 4, 2010 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, 2009.

Revenue Recognition

In October 2009, the Financial Accounting Standards Board (“FASB”) amended the accounting standards for revenue recognition to remove tangible products containing non-software and software components that function together to deliver the product’s essential functionality from the scope of industry-specific software revenue recognition guidance. In October 2009, the FASB also amended the accounting standards for arrangements with multiple deliverables. We elected to early adopt this accounting guidance at the beginning of our first quarter of 2010 on a prospective basis. Adoption had no material impact on our financial position or results of operations in the three and six months ended July 4, 2010.

We recognize revenue when there is persuasive evidence of an arrangement, title and risk of loss have passed, delivery has occurred or the services have been rendered, the sales price is fixed or determinable and collection of the related receivable is reasonably assured. Title and risk of loss generally pass to our customers upon shipment or at delivery destination point. In circumstances where either title or risk of loss pass upon destination, acceptance or cash payment, we defer revenue recognition until such events occur.

Our equipment has non-software and software components that function together to deliver the equipment’s essential functionality. Revenue is recognized upon shipment or at delivery destination point, provided that customer acceptance criteria can be demonstrated prior to shipment. Certain contracts require us to perform tests of the product to ensure that performance meets the published product specifications or customer requested specifications, which are generally conducted prior to shipment. Where the criteria cannot be demonstrated prior to shipment, revenue is deferred until customer acceptance has been received. We also defer the portion of the sales price that is not due until acceptance, which represents deferred profit.

For multiple element arrangements, we allocate revenue to all deliverables based on their relative selling prices. In such circumstances, a hierarchy is used to determine the selling price for allocating revenue to deliverables as follows: (i) vendor-specific objective evidence of selling price (“VSOE”), (ii) third-party evidence of selling price (“TPE”), and (iii) best estimate of the selling price (“BESP”). For a delivered item to be considered a separate unit, the delivered item must have value to the customer on a standalone basis and the delivery or performance of the undelivered item must be considered probable and substantially in our control.

Our post-shipment obligations include installation, training services, one-year standard warranties, and extended warranties. Installation does not alter the product capabilities, does not require specialized skills or tools and can be performed by the customers or other vendors. Installation is typically provided within five days of product shipment and is completed within one to two days thereafter. Training services are optional and do not affect the customer’s ability to use the product. We defer revenue for the selling price of installation and training.

 

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Table of Contents

SELECTED RELATIONSHIPS WITHIN THE CONDENSED CONSOLIDATED

STATEMENTS OF OPERATIONS

 

     For the Three Months
Ended
    For the Six Months
Ended
 
     July 4,
    2010    
    July 5,
    2009    
    July 4,
    2010    
    July 5,
    2009    
 

Percentage of total net revenues:

        

Net revenue:

        

Products

   86   68   84   62

Services

   14      32      16      38   
                        

Total net revenues

   100      100      100      100   

Cost of revenues:

        

Cost of products

   37      55      37      51   

Cost of services

   7      17      8      21   
                        

Total cost of revenues

   44      72      45      72   
                        

Gross profit

   56      28      55      28   

Operating expenses:

        

Engineering and development

   11      23      13      30   

Selling and administrative

   13      28      15      35   

Acquired intangible asset amortization

   2      5      2      5   

Restructuring and other, net

   0      8      0      11   
                        

Total operating expenses

   26      64      30      81   
                        

Income (loss) from operations

   30      (36   25      (53

Interest & other

   (1   (4   (1   (4
                        

Income (loss) before income taxes

   29      (40   24      (57

Provision (benefit) for income taxes

   2      (1   2      (3
                        

Net income (loss)

   27   (39 )%    22   (54 )% 
                        

Provision/benefit for income taxes as percentage of income (loss) before income taxes

   7   3   8   6

Results of Operations

Second Quarter 2010 Compared to Second Quarter 2009

Book to Bill Ratio

Book to bill ratio is calculated as net bookings divided by net sales. Book to bill ratio by reportable segment was as follows:

 

     For the Three Months
Ended
     July 4,
    2010    
   July 5,
    2009    

Semiconductor Test

   1.1    1.3

Systems Test Group

   1.1    1.3

Total Company

   1.1    1.3

 

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Table of Contents

Revenue

Net revenues for our two reportable segments were as follows:

 

     For the Three Months
Ended
   Dollar
Change
 
     July 4,
    2010    
   July 5,
    2009    
  
     (in millions)  

Semiconductor Test

   $ 413.1    $ 102.8    $ 310.3   

Systems Test Group

     41.7      66.8      (25.1
                      
   $ 454.8    $ 169.6    $ 285.2   
                      

Net revenues increased by $285.2 million or 168%, primarily due to the increase in Semiconductor Test revenue of $310.3 million or 302%, as a result of higher sales across all System on a Chip products with power management, microcontroller and mobile/wireless being the strongest. Systems Test Group revenue was down by $25.1 million or 38%, primarily due to the decrease in sales of HDD test systems, Mil/Aero test instrumentation and Diagnostic Solutions systems.

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

 

     For the Three Months
Ended
 
     July 4,
2010
    July 5,
2009
 

Taiwan

   23   11

United States

   14      27   

Singapore

   10      10   

Philippines

   10      7   

Malaysia

   10      3   

China

   9      4   

Korea

   8      3   

Europe

   6      11   

Thailand

   5      17   

Japan

   4      5   

Rest of World

   1      2   
            
   100   100
            

Gross Profit

Our gross profit was as follows:

 

     For the Three Months
Ended
    Dollar/Point
Change
         July 4,    
2010
        July 5,    
2009
   
     (in millions)

Gross Profit

   $ 254.3      $ 47.1      $ 207.2

Percent of Total Revenue

     55.9     27.8     28.1

Gross profit as a percentage of revenue increased 28.1 percentage points. This increase in gross profit was the result of an increase of 18.8 points from higher sales volume, an increase of 11.6 points related to mix and an increase of 2.9 points from lower inventory provisions. These increases were partially offset by a decrease of 1.1 points primarily due to higher variable compensation.

 

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We assess the carrying value of our inventory on a quarterly basis by estimating future demand and comparing that demand against on-hand and on-order inventory positions. Forecasted revenue information is obtained from the sales and marketing groups and incorporates factors such as backlog and future revenue demand. This quarterly process identifies obsolete and excess inventory. Obsolete inventory, which represents items for which there is no demand, is fully reserved. Excess inventory, which represents inventory items that are not expected to be consumed during the next four quarters, is written-down to estimated net realizable value.

During the three months ended July 4, 2010, we recorded an inventory provision of $0.3 million included in cost of revenues in the Systems Test Group.

During the three months ended July 5, 2009, we recorded an inventory provision of $8.6 million included in cost of revenues, due to the following factors:

 

   

Downward revisions to previously forecasted demand levels as a result of worsening economic conditions experienced in the semiconductor and automotive industries in the second quarter of 2009 resulted in an inventory provision of $5.2 million for inventory not expected to be consumed; and

 

   

A decline in demand versus forecast for our Liquid Crystal Display (“LCD”) test product due to the global economic downturn, lower product pricing by competitors, the introduction of a new product by a competitor and consolidation among a number of the expected buyers of the product, resulted in an inventory provision of $3.4 million.

During the three months ended July 4, 2010 and July 5, 2009, we scrapped $1.1 million and $0.9 million of inventory, respectively. During the three months ended July 4, 2010, we sold $5.2 million of previously written-down or written-off inventory. As of July 4, 2010, we had inventory related reserves for amounts which had been written-down or written-off totaling $126.3 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 4,
2010
    July 5,
2009
   
     (in millions)

Engineering and Development

   $ 50.4      $ 38.5      $ 11.9

Percent of Total Revenue

     11.1     22.7  

The increase of $11.9 million in engineering and development expenses is due primarily to a $7.2 million increase in variable compensation and $1.5 million due to the restoration of temporary pay cuts.

Selling and Administrative

Selling and administrative expenses were as follows:

 

     For the Three Months
Ended
    Dollar
Change
     July 4,
2010
    July 5,
2009
   
     (in millions)

Selling and Administrative

   $ 58.3      $ 47.3      $ 11.0

Percent of Total Revenue

     12.8     27.9  

 

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The increase of $11.0 million in selling and administrative expenses is due primarily to a $10.7 million increase in variable compensation, and $3.0 million due to the restoration of temporary pay cuts, partially offset by a $2.7 million decrease in spending related to workforce reductions and other cost reduction initiatives taken in 2009.

Restructuring and Other, Net

Restructuring

In response to a downturn in the industry, we initiated restructuring activities across all segments to reduce costs, principally through headcount reductions and facility consolidations. The table below represents activity related to these actions. The remaining accrual for severance and benefits is reflected in the accrued employees’ compensation and withholdings account on the balance sheet and is expected to be paid by the end of 2010. The remaining accrual for lease payments on vacated facilities is reflected in the other accrued liabilities account and the long-term other accrued liabilities account and is expected to be paid over the lease terms, the latest of which expires in 2013. We expect to pay approximately $3.7 million against the lease accruals over the next twelve months. Our future lease commitments are net of expected sublease income of $4.5 million as of July 4, 2010.

Severance and Benefits:

 

     Pre-2009
Actions
    Q1 2009
Actions
    Q2 2009
Actions
    Q1 2010
Actions
    Q2 2010
Actions
    Total  
     (in thousands)  

Balance at December 31, 2008

   $ 5,423      $ —        $ —        $ —        $ —        $ 5,423   

Provision

     —          17,630       15,940        —          —          33,570  

Cash payments

     (5,423     (17,630     (13,035     —            (36,088
                                                

Balance at December 31, 2009

     —          —          2,905       —          —          2,905  

Provision

     —          —          —          766        —          766  

Change in estimate

     —          —          498       —          —          498   

Cash payments

     —          —          (2,079 )     (573 )     —          (2,652 )
                                                

Balance at April 4, 2010

     —          —          1,324       193       —          1,517  

Provision

     —          —          —          —          845       845  

Change in estimate

     —          —          (96 )     (5 )     —          (101

Cash payments

     —          —          (695 )     (188     (387 )     (1,270 )
                                                

Balance at July 4, 2010

   $ —        $ —        $ 533     $ —        $ 458      $ 991  
                                                

Facility Exit Costs:

 

     Pre-2009
Actions
    Q3 2009
Actions
    Q2 2010
Actions
   Total  
     (in thousands)  

Balance at December 31, 2008

   $ 9,303      $ —        $ —      $ 9,303   

Provision

     —          4,420        —        4,420   

Change in estimate

     (417     —          —        (417

Cash payments

     (2,645     (285        (2,930

Other

     —          100        —        100   
                               

Balance at December 31, 2009

     6,241        4,235        —        10,476   

Cash payments

     (468     (272     —        (740
                               

Balance at April 4, 2010

     5,773        3,963        —        9,736   

Provision

     —          —          815      815   

Cash payments

     (553     (264     —        (817
                               

Balance at July 4, 2010

   $ 5,220      $ 3,699     $ 815    $ 9,734   
                               

 

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During the three months ended July 4, 2010, we recorded restructuring charges related to ongoing efforts to lower expenses and our cost structure. The restructuring charges consisted of the following activities:

Q2 2010 Actions:

 

   

$0.8 million of severance charges related to headcount reductions of approximately 10 people in Systems Test Group; and

 

   

$0.8 million of facility charges in Systems Test Group related to the early exit of leased facilities in Kontich, Belgium and Stockport, United Kingdom.

During the three months ended July 5, 2009, we recorded restructuring charges related to ongoing efforts to lower expenses and our cost structure in light of the industry wide decline in orders for semiconductor equipment. The restructuring charges consisted of the following activities:

Q2 2009 Actions:

 

   

$14.1 million of severance charges related to headcount reductions of approximately 316 people, of which $9.7 million and 267 people were in Semiconductor Test, $2.7 million and 25 people were in Corporate, and $1.7 million and 24 people were in Systems Test Group.

Q1 2009 Actions:

 

   

$0.9 million for a change in the estimated severance benefits related to headcount reduction activities in Semiconductor Test.

Other

During the three months ended July 5, 2009, we recorded the following activity:

 

   

$1.1 million of long-lived asset impairment charges across both segments primarily related to disposal of fixed assets as a result of the consolidation of our facilities in North Reading, Massachusetts; and

 

   

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

Interest and Other

Interest income increased by $2.5 million from the second quarter of 2009 to 2010 due primarily to a gain from the sale of auction rate securities. Interest expense and other increased by $0.5 million from the second quarter of 2009 to 2010. Interest expense and other for the second quarter of 2010 included $4.9 million of interest expense related to our convertible debt and a loss of $2.7 million on the exercise of the auction rate securities related UBS Put. Interest expense and other for the second quarter of 2009 included $4.6 million of interest expense related to our convertible debt and a loss of $2.5 million related to the write off of the remaining debt issue costs due to the termination of our revolving credit facility agreement.

Income Taxes

For the three months ended July 4, 2010, we recorded a tax provision of $9.5 million, which consisted primarily of foreign 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. Due to the continued uncertainty of realization, we have maintained our valuation allowance at July 4, 2010 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.

 

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Six Months of 2010 Compared to Six Months of 2009

Revenue

Net revenues for our two reportable segments were as follows:

 

     For the Six Months
Ended
   Dollar
Change
 
     July 4,
    2010    
   July 5,
    2009    
  
     (in millions)  

Semiconductor Test

   $ 702.7    $ 181.4    $ 521.3   

Systems Test Group

     81.7      108.8      (27.1
                      
   $ 784.4    $ 290.2    $ 494.2   
                      

Net revenues increased by $494.2 million or 170%, primarily due to the increase in Semiconductor Test revenue of $521.3 million or 287%, as a result of higher sales across all System on a Chip products with power management, microcontroller and mobile/wireless being the strongest. System Test Group revenue was down by $27.1 million or 25%, primarily due to the decrease in sales of HDD test systems and Mil/Aero test instrumentation.

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

 

     For the Six Months
Ended
 
     July 4,
    2010    
    July 5,
    2009    
 

Taiwan

   24   10

United States

   16      32   

Singapore

   11      8   

Philippines

   10      5   

Malaysia

   9      4   

China

   8      5   

Europe

   6      13   

Thailand

   6      10   

Korea

   5      3   

Japan

   4      7   

Rest of World

   1      3   
            
   100   100
            

Gross Profit

Our gross profit was as follows:

 

     For the Six Months
Ended
    Dollar/Point
Change
     July 4,
2010
    July 5,
2009
   
     (in millions)

Gross Profit

   $ 427.8      $ 80.5      $ 347.3

Percent of Total Revenue

     54.5     27.7     26.8

Gross profit as a percentage of revenue increased 26.8 percentage points. This increase in gross profit was the result of an increase of 19.3 points from higher sales volume, an increase of 8.6 points related to mix and an increase of 2.6 points from lower inventory provisions. These increases were partially offset by a decrease of 1.3 points primarily due to higher variable compensation.

 

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Table of Contents

We assess the carrying value of our inventory on a quarterly basis by estimating future demand and comparing that demand against on-hand and on-order inventory positions. Forecasted revenue information is obtained from the sales and marketing groups and incorporates factors such as backlog and future revenue demand. This quarterly process identifies obsolete and excess inventory. Obsolete inventory, which represents items for which there is no demand, is fully reserved. Excess inventory, which represents inventory items that are not expected to be consumed during the next four quarters, is written-down to estimated net realizable value.

During the six months ended July 4, 2010, we recorded an inventory provision of $1.7 million included in cost of revenues, of which $1.2 million was related to Systems Test Group and $0.5 million was related to Semiconductor Test.

During the six months ended July 5, 2009, we recorded an inventory provision of $17.2 million included in cost of revenues, due to the following factors:

 

   

Downward revisions to previously forecasted demand levels as a result of worsening economic conditions experienced in the semiconductor and automotive industries in the second quarter of 2009 resulted in an inventory provision of $11.1 million for inventory not expected to be consumed; and

 

   

A decline in demand versus forecast for our Liquid Crystal Display (“LCD”) test product due to the global economic downturn, lower product pricing by competitors, the introduction of a new product by a competitor and consolidation among a number of the expected buyers of the product, resulted in an inventory provision of $3.4 million; and

 

   

During late 2008, we introduced the next versions of our Nextest Magnum memory test product. At that time, it was anticipated that demand would continue for the existing version of the product within its installed base of customers. An overall decline in the memory market combined with a portion of our customers accelerating their purchasing of the newer version of the product resulted in an inventory provision of $2.7 million.

During the six months ended July 4, 2010 and July 5, 2009, we scrapped $2.1 million and $2.0 million of inventory, respectively. During the six months ended July 4, 2010 we sold $5.2 million of previously written-down or written-off inventory. As of July 4, 2010, we had inventory related reserves for amounts which had been written-down or written-off totaling $126.3 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 4,
2010
    July 5,
2009
   
     (in millions)

Engineering and Development

   $ 99.4      $ 85.6      $ 13.8

Percent of Total Revenue

     12.7     29.5  

The increase of $13.8 million in engineering and development expenses is due primarily to an $11.9 million increase in variable compensation and $2.5 million increase due to the restoration of temporary pay cuts.

 

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Table of Contents

Selling and Administrative

Selling and administrative expenses were as follows:

 

     For the Six Months
Ended
    Dollar
Change
     July 4,
2010
    July 5,
2009
   
     (in millions)

Selling and Administrative

   $ 114.2      $ 102.6      $ 11.6

Percent of Total Revenue

     14.6     35.4  

The increase of $11.6 million in selling and administrative expenses is due primarily to a $17.6 million increase in variable compensation and $5.1 million due to the restoration of temporary pay cuts, offset by an $11.1 million decrease in other spending related to workforce reductions and other cost reduction initiatives taken in 2009.

Restructuring and Other, Net

Restructuring

In response to a downturn in the industry, we initiated restructuring activities across all segments to reduce costs, principally through headcount reductions and facility consolidations. The tables below represent activity related to these actions. The remaining accrual for severance and benefits is reflected in the accrued employees’ compensation and withholdings account on the balance sheet and is expected to be paid by the end of 2010. The remaining accrual for lease payments on vacated facilities is reflected in the other accrued liabilities account and the long-term other accrued liabilities account and is expected to be paid over the lease terms, the latest of which expires in 2013. We expect to pay approximately $3.7 million against the lease accruals over the next twelve months. Our future lease commitments are net of expected sublease income of $4.5 million as of July 4, 2010.

Severance and Benefits:

 

     Pre-2009
Actions
    Q1 2009
Actions
    Q2 2009
Actions
    Q1 2010
Actions
    Q2 2010
Actions
    Total  
     (in thousands)  

Balance at December 31, 2008

   $ 5,423      $ —        $ —        $ —        $ —        $ 5,423   

Provision

     —          17,630       15,940        —          —          33,570  

Cash payments

     (5,423     (17,630     (13,035     —            (36,088
                                                

Balance at December 31, 2009

     —          —          2,905       —          —          2,905  

Provision

     —          —          —          766        —          766  

Change in estimate

     —          —          498       —          —          498   

Cash payments

     —          —          (2,079 )     (573 )     —          (2,652 )
                                                

Balance at April 4, 2010

     —          —          1,324       193       —          1,517  

Provision

     —          —          —          —          845       845  

Change in estimate

     —          —          (96 )     (5 )     —          (101

Cash payments

     —          —          (695 )     (188     (387 )     (1,270 )
                                                

Balance at July 4, 2010

   $ —        $ —        $ 533     $ —        $ 458      $ 991  
                                                

 

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Table of Contents

Facility Exit Costs:

 

     Pre-2009
Actions
    Q3 2009
Actions
    Q2 2010
Actions
   Total  
     (in thousands)  

Balance at December 31, 2008

   $ 9,303      $ —        $ —      $ 9,303   

Provision

     —          4,420        —        4,420   

Change in estimate

     (417     —          —        (417

Cash payments

     (2,645     (285        (2,930

Other

     —          100        —        100   
                               

Balance at December 31, 2009

     6,241        4,235        —        10,476   

Cash payments

     (468     (272     —        (740
                               

Balance at April 4, 2010

     5,773        3,963        —        9,736   

Provision

     —          —          815      815   

Cash payments

     (553     (264     —        (817
                               

Balance at July 4, 2010

   $ 5,220      $ 3,699     $ 815    $ 9,734   
                               

During the six months ended July 4, 2010, we recorded restructuring charges related to ongoing efforts to lower expenses and our cost structure and an additional charge due to a change in estimated severance benefits related to a prior period activity. The restructuring charges consisted of the following activities:

Q1 2010 Actions:

 

   

$0.8 million of severance charges related to headcount reductions of approximately 14 people, of which $0.4 million and 10 people were in Systems Test Group and $0.4 million and 4 people were in Semiconductor Test.

Q2 2010 Actions:

 

   

$0.8 million of severance charges related to headcount reductions of approximately 10 people in Systems Test Group; and

 

   

$0.8 million of facility charges in Systems Test Group related to the early exit of leased facilities in Kontich, Belgium and Stockport, United Kingdom.

Q2 2009 Actions:

 

   

$0.4 million related to a change in the estimated severance benefits related to headcount reduction activities across both segments.

During the six months ended July 5, 2009, we recorded restructuring charges related to ongoing efforts to lower expenses and our cost structure in light of the industry wide decline in orders for semiconductor equipment. The restructuring charges consisted of the following activities:

Q2 2009 Actions:

 

   

$14.1 million of severance charges related to headcount reductions of approximately 316 people, of which $9.7 million and 267 people were in Semiconductor Test, $2.7 million and 25 people were in Corporate, and $1.7 million and 24 people were in Systems Test Group.

Q1 2009 Actions:

 

   

$17.6 million of severance charges related to headcount reductions of approximately 518 people, of which $14.9 million and 460 people were in Semiconductor Test, $1.9 million and 42 people were in Systems Test Group, and $0.8 million and 16 people were in Corporate.

 

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Table of Contents

Other

During the six months ended July 5, 2009, we recorded the following activity:

 

   

$1.1 million of long-lived asset impairment charges across both segments primarily related to disposal of fixed assets as a result of the consolidation of our facilities in North Reading, Massachusetts; and

 

   

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

Interest and Other

Interest income increased by $2.6 million from the first six months of 2009 to 2010 due primarily to a gain from the sale of auction rate securities. Interest expense and other increased by $0.6 million from the first six months of 2009 to 2010 due primarily to a loss of $2.7 million on the exercise of the auction rate securities related UBS Put and $5.2 million increase in interest expense related to our convertible note, partially offset by a $1.8 million decrease in realized and other–than-temporary impairment losses on our marketable securities and $1.2 million decrease in foreign exchange losses. In addition, the first six months of 2009 included $2.1 million of interest expense related to the revolving credit facility and $2.5 million other expense related to the write off of the remaining debt issue costs due to the termination of our revolving credit facility agreement.

Income Taxes

For the six months ended July 4, 2010, we recorded a tax provision of $14.4 million, which consisted primarily of foreign taxes. For the six months ended July 5, 2009, we recorded a tax benefit of $10.0 million primarily due to benefiting operating losses in foreign jurisdictions. Due to the continued uncertainty of realization, we have maintained our valuation allowance at July 4, 2010 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.

Contractual Obligations

The following table reflects our contractual obligations as of July 4, 2010:

 

Payments Due by Period

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

2010

   $ 277,332    $ 9,220    $ 1,145    $ 4,339    $ 2,426    $ 294,462

2011

     —        16,227      2,290      8,653      —        27,170

2012

     —        12,594      2,290      8,622      —        23,506

2013

     —        7,279      2,290      8,590      —        18,159

2014

     —        5,087      191,145      4,306      —        200,538

Beyond 2014

     —        5,789      —        —        —        5,789
                                         

Total

   $ 277,332    $ 56,196    $ 199,160    $ 34,510    $ 2,426    $ 569,624
                                         

 

(1) Non-cancelable lease payments have not been reduced by sublease income of $4.5 million due in the future under non-cancelable sublease agreements.

As of July 4, 2010, the total amount of unrecognized tax benefit for uncertain tax positions and the accrual for the related interest, net of the federal benefit, was $9.1 million and $1.3 million, respectively, and was included in current and long-term other accrued liabilities. We are unable to make a reasonably reliable estimate of when a cash settlement will occur with tax authorities as the timing of examinations and ultimate resolutions of those examinations is uncertain.

 

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Table of Contents

Liquidity and Capital Resources

Our cash, cash equivalents and marketable securities balance increased $142.5 million in the first six months of 2010 to $661.3 million. Cash activity for the first six months of 2010 and 2009 was as follows:

 

     For the six Months
Ended
 
     July 4,
2010
    July 5,
2009
 
     (in millions)  

Cash provided by (used for) operating activities:

    

Net income (loss), adjusted for non-cash items

   $ 241.4      $ (71.3

Change in operating assets and liabilities, net of businesses acquired

     (106.6     24.5   
                

Total cash provided by (used for) operating activities

     134.8        (46.8
                

Total cash (used for) provided by investing activities

     (187.5     (8.1
                

Total cash provided by financing activities

     40.8        64.7   
                

Effects on exchange rate changes on cash and cash equivalents

     (0.8     1.6   
                

(Decrease) increase in cash and cash equivalents

   $ (12.7   $ 11.4   
                

In the six months ended July 4, 2010, changes in operating assets and liabilities, net of businesses acquired, used cash of $106.6 million. This was due to an $82.3 million increase in operating assets and a $24.3 million decrease in operating liabilities. The increase in operating assets was due to an increase in accounts receivable of $122.8 million partially offset by a $25.1 million decrease in inventories due to higher sales volume, and a decrease in other current assets of $15.4 million. The decrease in operating liabilities consisted mainly of a $63.0 million decrease in deferred revenue due to shipments of systems prepaid by customers in 2009, a $24.7 million decrease in pension liabilities due to pension contributions, a $4.3 million decrease in other accrued expenses due to convertible note interest payment, partially offset by a $29.3 million increase in accounts payable, a $19.3 million increase in accrued employee compensation, an $11.3 million increase in accrued income taxes, and an $8.0 million increase in other accrued liabilities.

Investing activities during the six months ended July 4, 2010 used cash of $187.5 million, due to $223.8 million used for purchases of marketable securities and $35.7 million used for purchases of property, plant and equipment, partially offset by proceeds from sales of marketable securities that provided cash of $71.0 million, and proceeds from life insurance that provided cash of $1.1 million.

Financing activities during the six months ended July 4, 2010 provided cash of $40.8 million, $41.9 million was from the issuance of common stock under stock option and stock purchase plans which was offset by $1.1 million of cash used for a payment on a long-term debt related to the Japan loan.

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, $17.4 million for purchases of property, plant and equipment and $3.7 million for payment of transaction fees related to the Eagle Test acquisition, 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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Financing activities during the six months ended July 5, 2009 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.

We believe our cash, cash equivalents and marketable securities balance of $661.3 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

As discussed in “Note N: Stock Based Compensation” in our 2009 Form 10-K, we have a 1996 Employee Stock Purchase Plan and a 2006 Equity and Cash Compensation Incentive Plan (the “2006 Equity Plan”).

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

Recently Issued Accounting Pronouncements

In March 2010, FASB issued an Accounting Standards Update 2010-17, “Milestone Method of Revenue Recognition”, to Accounting Standards Codification 605, “Revenue Recognition.” The guidance in this consensus allows the milestone method as an acceptable revenue recognition methodology when an arrangement includes substantive milestones. The guidance provides a definition of substantive milestone and should be applied regardless of whether the arrangement includes single or multiple deliverables or units of accounting. The scope of this consensus is limited to the transactions involving milestones relating to research and development deliverables. The guidance includes enhanced disclosure requirements about each arrangement, individual milestones and related contingent consideration, information about substantive milestones and factors considered in the determination. The consensus is effective prospectively to milestones achieved in fiscal years, and interim periods within those years, after June 15, 2010. Early application and retrospective application are permitted. We will adopt this final consensus prospectively in January 2011 and the adoption is not expected to have a material impact on our financial position or results of operations.

 

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 1, 2010. 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, 2009.

 

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.

 

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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

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

 

Item 1A: Risk Factors

In addition to 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, 2009, which could materially affect our business, financial condition or future results. The risk factors described in our Annual Report on Form 10-K remain applicable to our business. The risks described in our Annual Report on Form 10-K are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

 

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

In November 2007, Teradyne’s Board of Directors (the “Board”) authorized a $400 million stock repurchase program. During the three months ended July 4, 2010, Teradyne did not repurchase any shares of common stock. The cumulative repurchases as of July 4, 2010 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 suspended the stock repurchase program.

The following table includes information with respect to repurchases we made of our common stock during the quarter ended July 4, 2010 (in thousands):

 

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 5, 2010 – May 2, 2010

   —      $ —      —      $ 297,375

May 3, 2010 – May 30, 2010

   —      $ —      —      $ 297,375

May 31, 2010 – July 4, 2010

   —      $ —      —      $ 297,375

 

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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)
101.INS*    XBRL Instance Document
101.SCH*    XBRL Taxonomy Extension Schema Document
101.CAL*    XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*    XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*    XBRL Taxonomy Extension Label Linkbase Document
101.PRE*    XBRL Taxonomy Extension Presentation Linkbase Document

 

* XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.

 

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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 12, 2010

 

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