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TERADYNE, INC - Quarter Report: 2012 September (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 September 30, 2012

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 November 5, 2012 was 187,852,103 shares.

 

 

 


Table of Contents

TERADYNE, INC.

INDEX

 

         Page No.  
PART I. FINANCIAL INFORMATION   

Item 1.

  Financial Statements (Unaudited):   
 

Condensed Consolidated Balance Sheets as of September 30, 2012 and December 31, 2011

     1   
 

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2012 and October 2, 2011

     2   
 

Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2012 and October 2, 2011

     3   
 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September  30, 2012 and October 2, 2011

     4   
  Notes to Condensed Consolidated Financial Statements      5   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      29   

Item 3.

  Quantitative and Qualitative Disclosures about Market Risk      42   

Item 4.

  Controls and Procedures      43   
PART II. OTHER INFORMATION   

Item 1.

  Legal Proceedings      44   

Item 1A.

  Risk Factors      44   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      44   

Item 4.

  Mine Safety Disclosures      45   

Item 6.

  Exhibits      46   


Table of Contents

PART I

 

Item 1: Financial Statements

TERADYNE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

     September 30,
2012
     December 31,
2011
 
    

(in thousands,

except per share amount)

 
ASSETS      

Current assets:

     

Cash and cash equivalents

   $ 485,692       $ 573,736   

Marketable securities

     344,850         96,502   

Accounts receivable, less allowance for doubtful accounts of $4,149 and $4,102 at September 30, 2012 and December 31, 2011, respectively

     205,464         129,330   

Inventories:

     

Raw materials

     94,833         102,307   

Assemblies in process

     25,926         24,283   

Finished goods

     13,998         33,473   
  

 

 

    

 

 

 
     134,757         160,063   

Deferred tax assets

     58,517         53,948   

Prepayments and other current assets

     81,987         86,308   
  

 

 

    

 

 

 

Total current assets

     1,311,267         1,099,887   

Property, plant and equipment

     847,711         798,194   

Less: Accumulated depreciation

     586,593         565,987   
  

 

 

    

 

 

 

Net property, plant and equipment

     261,118         232,207   

Long-term marketable securities

     178,281         84,407   

Retirement plan assets

     7,711         8,840   

Intangible assets, net

     337,688         392,975   

Goodwill

     349,373         352,778   

Other assets

     17,853         17,545   
  

 

 

    

 

 

 

Total assets

   $ 2,463,291       $ 2,188,639   
  

 

 

    

 

 

 
LIABILITIES      

Current liabilities:

     

Accounts payable

   $ 74,187       $ 69,842   

Accrued employees’ compensation and withholdings

     78,929         90,427   

Deferred revenue and customer advances

     70,968         78,670   

Contingent consideration

     16,513         68,892   

Other accrued liabilities

     61,220         62,420   

Accrued income taxes

     43,573         860   

Current debt

     3,863         2,573   
  

 

 

    

 

 

 

Total current liabilities

     349,253         373,684   

Long-term deferred revenue and customer advances

     30,592         33,541   

Retirement plan liabilities

     80,504         76,638   

Deferred tax liabilities

     30,932         16,049   

Long-term other accrued liabilities

     19,211         23,711   

Long-term debt

     167,556         159,956   
  

 

 

    

 

 

 

Total liabilities

     678,048         683,579   
  

 

 

    

 

 

 

Commitments and contingencies (Note O)

     
SHAREHOLDERS’ EQUITY      

Common stock, $0.125 par value, 1,000,000 shares authorized, 187,651 shares and 183,587 shares issued and outstanding at September 30, 2012 and December 31, 2011, respectively

     23,456         22,948   

Additional paid-in capital

     1,337,616         1,293,130   

Accumulated other comprehensive income

     6,343         4,746   

Retained earnings

     417,828         184,236   
  

 

 

    

 

 

 

Total shareholders’ equity

     1,785,243         1,505,060   
  

 

 

    

 

 

 

Total liabilities and shareholders’ equity

   $ 2,463,291       $ 2,188,639   
  

 

 

    

 

 

 

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, 2011, 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 Nine  Months
Ended
 
    September 30,
2012
    October 2,
2011
    September 30,
2012
    October 2,
2011
 
    (in thousands, except per share amount)  

Net revenues:

       

Products

  $ 393,037      $ 274,944      $ 1,204,506      $ 931,979   

Services

    70,357        69,445        203,840        200,090   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total net revenues

    463,394        344,389        1,408,346        1,132,069   

Cost of revenues:

       

Cost of products

    169,782        138,088        550,282        451,371   

Cost of services

    33,412        35,927        97,432        102,754   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenues

    203,194        174,015        647,714        554,125   
 

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    260,200        170,374        760,632        577,944   

Operating expenses:

       

Engineering and development

    63,055        45,896        189,722        141,432   

Selling and administrative

    69,921        54,775        211,064        170,386   

Acquired intangible asset amortization

    18,429        6,754        55,287        21,336   

Restructuring and other, net

    683        1,465        (7,404     3,157   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    152,088        108,890        448,669        336,311   
 

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

    108,112        61,484        311,963        241,633   

Interest income

    1,067        3,049        2,834        5,739   

Interest expense and other

    (6,154     (6,068     (18,536     (17,560
 

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

    103,025        58,465        296,261        229,812   

Income tax provision

    14,384        1,759        62,669        15,084   
 

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

    88,641        56,706        233,592        214,728   

Income from discontinued operations before income taxes

    —          —          —          1,436   

Income tax benefit

    —          —          —          (267
 

 

 

   

 

 

   

 

 

   

 

 

 

Income from discontinued operations

    —          —          —          1,703   

Gain on disposal of discontinued operations (net of income tax provision of $4,578)

    —          —          —          24,371   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 88,641      $ 56,706      $ 233,592      $ 240,802   
 

 

 

   

 

 

   

 

 

   

 

 

 

Income per common share from continuing operations:

       

Basic

  $ 0.47      $ 0.31      $ 1.25      $ 1.16   
 

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

  $ 0.39      $ 0.26      $ 1.02      $ 0.94   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income per common share:

       

Basic

  $ 0.47      $ 0.31      $ 1.25      $ 1.30   
 

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

  $ 0.39      $ 0.26      $ 1.02      $ 1.06   
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common share—basic

    187,364        185,102        186,592        185,063   
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common share—diluted

    229,210        221,892        230,003        228,141   
 

 

 

   

 

 

   

 

 

   

 

 

 

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, 2011, are an integral part of the condensed

consolidated financial statements.

 

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Table of Contents

TERADYNE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

     For the Three Months
Ended
    For the Nine Months
Ended
 
     September 30,
2012
    October 2,
2011
    September 30,
2012
    October 2,
2011
 
     (in thousands)  

Net income

   $ 88,641      $ 56,706      $ 233,592      $ 240,802   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax:

        

Foreign currency translation reclassification adjustment included in net income

     —          —          —          2,266   

Unrealized gains on marketable securities:

        

Unrealized gains on marketable securities arising during period

     1,259        436        2,455        2,058   

Less: Reclassification adjustment for gains included in net income

     (93     (1,493     (583     (1,802
  

 

 

   

 

 

   

 

 

   

 

 

 
     1,166        (1,057     1,872        256   

Defined benefit pension and post-retirement plans:

        

Amortization of prior service (benefit) cost included in net periodic pension and post-retirement costs

     (92     5        (275     17   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     1,074        (1,052     1,597        2,539   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 89,715      $ 55,654      $ 235,189      $ 243,341   
  

 

 

   

 

 

   

 

 

   

 

 

 

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, 2011, 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 Nine Months
Ended
 
     September 30,
2012
    October 2,
2011
 
     (in thousands)  

Cash flows from operating activities:

    

Net income

   $ 233,592      $ 240,802   

Less: Income from discontinued operations

     —          1,703   

Less: Gain on disposal of discontinued operations

     —          24,371   
  

 

 

   

 

 

 

Income from continuing operations

     233,592        214,728   

Adjustments to reconcile income from continuing operations to net cash provided by operating activities:

    

Depreciation

     39,812        38,426   

Amortization

     65,790        30,838   

Stock-based compensation

     30,634        22,514   

Deferred taxes

     7,076        (412

Provision for excess and obsolete inventory

     16,408        10,756   

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

     6,089        —     

Contingent consideration adjustment

     (8,406     —     

Tax benefit related to stock options and restricted stock units

     (7,600     —     

Retirement plans actuarial losses

     4,991        4,203   

Other

     (750     2,328   

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

    

Accounts receivable

     (76,134     25,233   

Inventories

     25,070        (1,034

Other assets

     7,278        (13,553

Accounts payable and other accrued expenses

     (17,600     (47,483

Deferred revenue and customer advances

     (10,651     (58,304

Retirement plans contributions

     (3,679     (6,393

Accrued income taxes

     50,313        (3,064
  

 

 

   

 

 

 

Net cash provided by continuing operations

     362,233        218,783   

Net cash used for discontinued operations

     —          (4,225
  

 

 

   

 

 

 

Net cash provided by operating activities

     362,233        214,558   

Cash flows from investing activities:

    

Purchases of property, plant and equipment

     (91,132     (66,623

Purchases of available-for-sale marketable securities

     (513,057     (593,261

Proceeds from maturities of available-for-sale marketable securities

     102,635        485,416   

Proceed from sales of available-for-sale marketable securities

     70,937        627,439   
  

 

 

   

 

 

 

Net cash (used for) provided by continuing operations

     (430,617     452,971   

Net cash provided by discontinued operations

     —          39,062   
  

 

 

   

 

 

 

Net cash (used for) provided by investing activities

     (430,617     492,033   

Cash flows from financing activities:

    

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

     17,959        17,216   

Tax benefit related to stock options and restricted stock units

     7,600        —     

Payments of long-term debt

     (1,246     (2,518

Payments of contingent consideration

     (43,973     —     

Repurchase of common stock

     —          (23,863
  

 

 

   

 

 

 

Net cash used for financing activities

     (19,660     (9,165
  

 

 

   

 

 

 

(Decrease) Increase in cash and cash equivalents

     (88,044     697,426   

Cash and cash equivalents at beginning of period

     573,736        397,737   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 485,692      $ 1,095,163   
  

 

 

   

 

 

 

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, 2011, are an integral part of the condensed

consolidated financial statements.

 

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Table of Contents

TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

A. The Company

Teradyne, Inc. (“Teradyne”) is a leading global supplier of automatic test equipment. Teradyne’s automatic test equipment products and services include:

 

   

semiconductor test (“Semiconductor Test”) systems,

 

   

military/aerospace (“Mil/Aero”) test instrumentation and systems, storage test (“Storage Test”) systems, and circuit-board test and inspection (“Commercial Board Test”) systems (collectively these products represent “Systems Test Group”), and

 

   

wireless test (“Wireless Test”) systems.

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, 2011 condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

The accompanying financial information should be read in conjunction with the consolidated financial statements and notes thereto contained in Teradyne’s Annual Report on Form 10-K, filed with the U.S. Security and Exchange Commission (“SEC”) on February 29, 2012, for the year ended December 31, 2011.

Preparation of Financial Statements and Use of Estimates

The preparation of consolidated financial statements requires management to make estimates and judgments that affect the amounts reported in the financial statements. Actual results may differ significantly from these estimates.

Income Taxes

Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The measurement of deferred tax assets is reduced by a valuation allowance if, based upon weighted available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. U.S. income taxes are not provided for on the earnings of non-U.S. subsidiaries, except Japan, which are expected to be reinvested indefinitely in operations outside the U.S. For intra-period tax allocations, Teradyne first utilizes non-equity related tax attributes, such as net operating losses and credit carryforwards and then equity-related tax attributes.

C. Change in Accounting Principle

Effective January 1, 2012, Teradyne changed the method of recognizing actuarial gains and losses for its defined benefit pension plans and postretirement benefit plan and calculating the expected return on plan assets for its defined benefit pension plans. Historically, Teradyne recognized net actuarial gains and losses in accumulated other comprehensive income within shareholders’ equity on the consolidated balance sheets on an

 

5


Table of Contents

annual basis and amortized them into operating results over the average remaining years of service of the plan participants, to the extent such gains and losses were outside of a range (“corridor”). Teradyne has elected to immediately recognize net actuarial gains and losses and the change in the fair value of the plan assets in its operating results in the year in which they occur or upon any interim remeasurement of the plans. In addition, Teradyne used to calculate the expected return on plan assets using a calculated market-related value of plan assets. Teradyne has also elected to calculate the expected return on plan assets using the fair value of the plan assets.

Teradyne believes that this new method is preferable as it eliminates the delay in recognizing gains and losses in its operating results and it will improve the transparency by faster recognition of the effects of economic and interest rate trends on plan obligations and investments. These actuarial gains and losses are generally measured annually as of December 31 and, accordingly, will be recorded during the fourth quarter of each year or upon any interim remeasurement of the plans. In accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 250, Accounting Changes and Error Corrections, all prior periods presented in this Quarterly Report on Form 10-Q have been adjusted to apply the new accounting method retrospectively. This accounting change did not impact the financial position of the reportable segments.

Had these changes not been made, net income for the three and nine months ended September 30, 2012 would have been $73.2 million and $213.4 million, respectively, compared to $88.6 million and $233.6 million actually recorded. Diluted earnings per share would have been $0.32 and $0.93 compared to $0.39 and $1.02 for the three and nine months ended September 30, 2012, respectively.

The effects of the change in accounting principle on the condensed consolidated financial statements for 2011 are presented below. Teradyne has condensed the comparative financial statements for financial statement line items that were not affected by the change in accounting principle.

Condensed Consolidated Balance Sheets

 

     December 31, 2011  
     Originally
Reported
    Effect of
Accounting
Change
    As Adjusted  
     (in thousands)  

Assets:

      
  

 

 

   

 

 

   

 

 

 

Total assets

   $ 2,188,639      $ —        $ 2,188,639   
  

 

 

   

 

 

   

 

 

 

Liabilities:

      
  

 

 

   

 

 

   

 

 

 

Total liabilities

     683,579        —          683,579   
  

 

 

   

 

 

   

 

 

 

Shareholders’ Equity:

      

Common stock

     22,948        —          22,948   

Additional paid-in capital

     1,293,130        —          1,293,130   

Accumulated other comprehensive (loss) income

     (129,875     134,621        4,746   

Retained earnings

     318,857        (134,621     184,236   
  

 

 

   

 

 

   

 

 

 

Total shareholders’ equity

     1,505,060        —          1,505,060   
  

 

 

   

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 2,188,639      $ —        $ 2,188,639   
  

 

 

   

 

 

   

 

 

 

 

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Condensed Consolidated Statements of Operations

 

     For the Three Months
Ended October 2, 2011
 
     Originally
Reported
    Effect of
Accounting
Change
    As Adjusted  
     (in thousands,
except per share amounts)
 

Net revenues

   $ 344,389      $ —        $ 344,389   

Cost of revenues

     174,544        (529     174,015   
  

 

 

   

 

 

   

 

 

 

Gross profit

     169,845        529        170,374   

Operating expenses:

      

Engineering and development

     46,799        (903     45,896   

Selling and administrative

     55,304        (529     54,775   

Acquired intangible asset amortization

     6,754        —          6,754   

Restructuring and other

     1,465        —          1,465   
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     110,322        (1,432     108,890   
  

 

 

   

 

 

   

 

 

 

Income from operations

     59,523        1,961        61,484   

Interest income

     3,049        —          3,049   

Interest expense and other, net

     (6,068     —          (6,068
  

 

 

   

 

 

   

 

 

 

Income before income taxes

     56,504        1,961        58,465   

Provision for income taxes

     1,759        —          1,759   
  

 

 

   

 

 

   

 

 

 

Net income

   $ 54,745      $ 1,961      $ 56,706   
  

 

 

   

 

 

   

 

 

 

Net income per common share:

      

Basic

   $ 0.30      $ 0.01      $ 0.31   
  

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.25      $ 0.01      $ 0.26   
  

 

 

   

 

 

   

 

 

 

Weighted average common share—basic

     185,102          185,102   
  

 

 

     

 

 

 

Weighted average common share—diluted

     221,892          221,892   
  

 

 

     

 

 

 

 

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Table of Contents
     For the Nine Months
Ended October 2, 2011
 
     Originally
Reported
    Effect of
Accounting
Change
    As Adjusted  
     (in thousands,
except per share amounts)
 

Net revenues

   $ 1,132,069      $ —        $ 1,132,069   

Cost of revenues

     554,729        (604     554,125   
  

 

 

   

 

 

   

 

 

 

Gross profit

     577,340        604        577,944   

Operating expenses:

      

Engineering and development

     142,169        (737     141,432   

Selling and administrative

     171,014        (628     170,386   

Acquired intangible asset amortization

     21,336        —          21,336   

Restructuring and other

     3,157        —          3,157   
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     337,676        (1,365     336,311   
  

 

 

   

 

 

   

 

 

 

Income from operations

     239,664        1,969        241,633   

Interest income

     5,739        —          5,739   

Interest expense and other, net

     (17,560     —          (17,560
  

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     227,843        1,969        229,812   

Provision for income taxes

     15,084        —          15,084   
  

 

 

   

 

 

   

 

 

 

Income from continuing operations

     212,759        1,969        214,728   

Income from discontinued operations before income taxes

     1,278        158        1,436   

Benefit from income taxes

     (267     —          (267
  

 

 

   

 

 

   

 

 

 

Income from discontinued operations

     1,545        158        1,703   

Gain on disposal of discontinued operations (net of tax of $4,578)

     24,371        —          24,371   
  

 

 

   

 

 

   

 

 

 

Net income

   $ 238,675      $ 2,127      $ 240,802   
  

 

 

   

 

 

   

 

 

 

Net income per common share from continuing operations:

      

Basic

   $ 1.15      $ 0.01      $ 1.16   
  

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.93      $ 0.01      $ 0.94   
  

 

 

   

 

 

   

 

 

 

Net income per common share:

      

Basic

   $ 1.29      $ 0.01      $ 1.30   
  

 

 

   

 

 

   

 

 

 

Diluted

   $ 1.05      $ 0.01      $ 1.06   
  

 

 

   

 

 

   

 

 

 

Weighted average common share—basic

     185,063          185,063   
  

 

 

     

 

 

 

Weighted average common share—diluted

     228,141          228,141   
  

 

 

     

 

 

 

 

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Table of Contents

Condensed Consolidated Statements of Comprehensive Income

 

    For the Three Months
Ended October 2, 2011
 
    Originally
Reported
    Effect of
Accounting
Change
    As Adjusted  
    (in thousands)  

Net income

  $ 54,745      $ 1,961      $ 56,706   
 

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax:

     

Unrealized gains on marketable securities

    (1,057     —          (1,057

Defined benefit pension and post-retirement plans:

     

Actuarial losses arising during period, net of tax of ($0), $0

    (5     5        —     

Less: Amortization included in net periodic pension and post- retirement costs:

     

Actuarial losses, net of tax of $11, ($11)

    2,226        (2,226     —     

Prior service costs, net of tax of $0

    5        —          5   
 

 

 

   

 

 

   

 

 

 
    2,231        (2,226     5   
 

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

    1,169        (2,221     (1,052
 

 

 

   

 

 

   

 

 

 

Comprehensive income

  $ 55,914      $ (260   $ 55,654   
 

 

 

   

 

 

   

 

 

 

 

    For the Nine Months
Ended October 2, 2011
 
    Originally
Reported
    Effect of
Accounting
Change
    As Adjusted  
    (in thousands)  

Net income

  $ 238,675      $ 2,127      $ 240,802   
 

 

 

   

 

 

   

 

 

 

Other comprehensive income, net of tax:

     

Foreign currency translation reclassification adjustment included in net income

    2,266        —          2,266   

Unrealized gains on marketable securities

    256        —          256   

Defined benefit pension and post-retirement plans:

     

Actuarial losses arising during period, net of tax of ($5), $5

    (4,206     4,206        —     

Settlement loss, net of tax of $73, ($73)

    277        (277     —     

Less: Amortization included in net periodic pension and post-retirement costs:

     

Actuarial losses, net of tax of $30, ($30)

    6,681        (6,681     —     

Prior service costs, net of tax of $0

    17        —          17   
 

 

 

   

 

 

   

 

 

 
    6,698        (6,681     17   
 

 

 

   

 

 

   

 

 

 

Other comprehensive income

    5,291        (2,752     2,539   
 

 

 

   

 

 

   

 

 

 

Comprehensive income

  $ 243,966      $ (625   $ 243,341   
 

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Condensed Consolidated Statements of Cash Flows

 

     For the Nine Months
Ended October 2, 2011
 
     Originally
Reported
    Effect of
Accounting
Change
    As Adjusted  
     (in thousands)  

Cash flows from operating activities:

      

Net income

   $ 238,675      $ 2,127      $ 240,802   

Less: Income from discontinued operations

     1,545        158        1,703   

Less: Gain on disposal of discontinued operations

     24,371        —          24,371   
  

 

 

   

 

 

   

 

 

 

Income from continuing operations

     212,759        1,969        214,728   

Adjustments to reconcile income from continuing operations to net cash provided by operating activities:

      

Depreciation

     38,426        —          38,426   

Amortization

     37,547        (6,709     30,838   

Stock-based compensation

     22,514        —          22,514   

Provision for excess and obsolete inventory

     10,756        —          10,756   

Other

     1,379        4,740        6,119   

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

      

Accounts receivable

     25,233        —          25,233   

Inventories

     (1,034     —          (1,034

Other assets

     (13,553     —          (13,553

Deferred revenue and customer advances

     (58,304     —          (58,304

Accounts payable and other accrued expenses

     (47,483     —          (47,483

Retirement plan contributions

     (6,393     —          (6,393

Accrued income taxes

     (3,064     —          (3,064
  

 

 

   

 

 

   

 

 

 

Net cash provided by continuing operations

     218,783        —          218,783   

Net cash used for discontinued operations

     (4,225     —          (4,225
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     214,558        —          214,558   

Net cash provided by investing activities

     492,033        —          492,033   

Net cash used for financing activities

     (9,165     —          (9,165
  

 

 

   

 

 

   

 

 

 

Increase in cash and cash equivalents

     697,426        —          697,426   

Cash and cash equivalents at beginning of period

     397,737        —          397,737   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 1,095,163      $ —        $ 1,095,163   
  

 

 

   

 

 

   

 

 

 

D. Recently Issued Accounting Pronouncements

In December 2011, the FASB issued ASU No. 2011-11, “Disclosures about Offsetting Assets and Liabilities.” This ASU is intended to enhance the understanding of the effects of netting arrangements on an entity’s financial statements, including financial instruments and derivative instruments that are either offset or subject to a master netting arrangement. The scope of this ASU includes derivatives, sale and repurchase agreements, reverse sale and repurchase agreements, and securities borrowing and lending arrangements. The provisions of this ASU are effective for interim and annual periods beginning on or after January 1, 2013.

 

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Table of Contents

E. Discontinued Operations

On March 21, 2011, Teradyne completed the sale of its Diagnostic Solutions business unit, which was included in the Systems Test Group segment, to SPX Corporation for $40.2 million in cash. Teradyne sold this business as its growth potential as a stand-alone business within Teradyne was significantly less than if it was part of a larger automotive supplier. The financial information for Diagnostic Solutions has been reclassified to discontinued operations for all periods presented. Net revenues and income from discontinued operations for the three and nine months ended October 2, 2011 were as follows:

 

     For the Three Months
Ended
October 2, 2011
     For the Nine Months
Ended
October 2, 2011
 
     (in thousands)  

Net revenues

   $ —         $ 9,086   
  

 

 

    

 

 

 

Income from discontinued operations before income taxes

   $ —         $ 1,436   

Gain from disposal of discontinued operations before income taxes

     —           28,949   

Income tax provision

     —           4,311   
  

 

 

    

 

 

 

Income from discontinued operations

   $ —         $ 26,074   
  

 

 

    

 

 

 

F. 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 three and nine months ended September 30, 2012 and October 2, 2011. 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.

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.

Most of Teradyne’s fixed income securities are classified as Level 2, with the exception of U.S. Treasury securities and investments in equity and debt mutual funds, which are classified as Level 1, and contingent consideration, which is classified as Level 3. As of September 30, 2012, the majority of Level 2 securities were priced by third party pricing vendors. These pricing vendors utilize the most recent observable market information in pricing these securities or, if specific prices are not available, use other observable inputs like market transactions involving identical or comparable securities.

During the nine months ended September 30, 2012 and October 2, 2011, there were no transfers in or out of Level 1, Level 2 or Level 3 financial instruments.

 

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Table of Contents

The following table sets forth by fair value hierarchy Teradyne’s financial assets and liabilities that were measured at fair value on a recurring basis as of September 30, 2012 and December 31, 2011.

 

     September 30, 2012  
     Quoted Prices
in Active
Markets for
Identical
Instruments
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
     Total  
     (in thousands)  

Assets

           

Cash

   $ 194,724       $ —         $ —         $ 194,724   

Cash equivalents

     275,546         15,422         —           290,968   

Available for sale securities:

           

U.S. Treasury securities

     268,020         —           —           268,020   

U.S. government agency securities

     —           146,655         —           146,655   

Corporate debt securities

     —           47,490         —           47,490   

Commercial paper

     —           44,476         —           44,476   

Equity and debt mutual funds

     9,552         —           —           9,552   

Certificates of deposit and time deposits

     —           6,660         —           6,660   

Non-U.S. government securities

     278         —           —           278   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 748,120       $ 260,703       $ —         $ 1,008,823   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Contingent consideration

   $ —         $ —         $ 16,513       $ 16,513   

Derivatives

     —           106         —           106   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 106       $ 16,513       $ 16,619   
  

 

 

    

 

 

    

 

 

    

 

 

 

Reported as follows:

 

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

Assets

           

Cash and cash equivalents

   $ 470,270       $ 15,422       $ —         $ 485,692   

Marketable securities

     198,289         146,561         —           344,850   

Long-term marketable securities

     79,561         98,720         —           178,281   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 748,120       $ 260,703       $ —         $ 1,008,823   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Contingent consideration

   $ —         $ —         $ 16,513       $ 16,513   

Other accrued liabilities

     —           106         —           106   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ —         $ 106       $ 16,513       $ 16,619   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

12


Table of Contents
     December 31, 2011  
     Quoted Prices
in Active
Markets for
Identical
Instruments
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
     Total  
     (in thousands)  

Assets

           

Cash

   $ 161,243       $ —         $ —         $ 161,243   

Cash equivalents

     396,329         16,164         —           412,493   

Available for sale securities:

           

U.S. government agency securities

     —           83,197         —           83,197   

Corporate debt securities

     —           44,829         —           44,829   

Commercial paper

     —           22,075         —           22,075   

U.S. Treasury securities

     14,180         —           —           14,180   

Equity and debt mutual funds

     8,237         —           —           8,237   

Certificates of deposit and time deposits

     —           8,117         —           8,117   

Non-U.S. government securities

     274         —           —           274   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 580,263       $ 174,382       $ —         $ 754,645   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Contingent consideration

   $ —         $ —         $ 68,892       $ 68,892   

Derivatives

     —           314         —           314   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 314       $ 68,892       $ 69,206   
  

 

 

    

 

 

    

 

 

    

 

 

 

Reported as follows:

 

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

Assets

           

Cash and cash equivalents

   $ 557,572       $ 16,164       $ —         $ 573,736   

Marketable securities

     9,044         87,458         —           96,502   

Long-term marketable securities

     13,647         70,760         —           84,407   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 580,263       $ 174,382       $ —         $ 754,645   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Contingent consideration

   $ —         $ —         $ 68,892       $ 68,892   

Other accrued liabilities

     —           314         —           314   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ —         $ 314       $ 68,892       $ 69,206   
  

 

 

    

 

 

    

 

 

    

 

 

 

Contingent consideration is measured at fair value and is based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. The valuation of contingent consideration uses assumptions and estimates to forecast a range of outcomes. Teradyne assesses these assumptions and estimates on a quarterly basis as additional data impacting the assumptions is obtained. Changes in the fair value of contingent consideration related to updated assumptions and estimates are recognized within the condensed consolidated statements of operations.

 

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Table of Contents

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

 

     September 30, 2012                Weighted
Average
 

Liability

   Fair Value      Valuation Technique   

Unobservable Inputs

  
     (in thousands)                   

Contingent

consideration

   $ 16,513       Income approach—discounted
cash flow
   Discount rate for revenue earn-out      3.5
         Discount rate for new product earn-out      3.5

The following table represents changes in the fair value of Level 3 contingent consideration:

 

     Contingent consideration  
     (in thousands)  

Balance at December 31, 2011

   $ 68,892   

Fair value adjustment

     (1,858

Payment

     (5,824
  

 

 

 

Balance at April 1, 2012

     61,210   

Fair value adjustment

     (6,548
  

 

 

 

Balance at July 1, 2012

     54,662   

Payment

     (38,149
  

 

 

 

Balance at September 30, 2012

   $ 16,513   
  

 

 

 

On October 24, 2012 Teradyne paid $14.4 million of the contingent consideration.

For the nine months ended September 30, 2012 and October 2, 2011, proceeds from sales of available-for-sale marketable securities were $70.9 million and $627.4 million, respectively. The proceeds from the sales of marketable securities during the nine months ended October 2, 2011 were used to fund Teradyne’s acquisition of LitePoint.

During the three and nine months ended September 30, 2012, Teradyne recorded a net gain of $0.3 million and $0.9 million, respectively, from sales of marketable securities. During the three and nine months ended October 2, 2011, Teradyne recorded a net gain of $2.2 million from sales of marketable securities.

Realized losses from sales of marketable securities are included in interest expense and other. Realized gains from sales of marketable securities are included in interest income.

The carrying amounts and fair values of financial instruments at September 30, 2012 and December 31, 2011 were as follows:

 

     September 30, 2012      December 31, 2011  
     Carrying Value      Fair Value      Carrying Value      Fair Value  
     (in thousands)  

Cash and cash equivalents

   $ 485,692       $ 485,692       $ 573,736       $ 573,736   

Marketable securities

     523,131         523,131         180,909         180,909   

Convertible debt(1)

     166,268         499,225         156,098         485,925   

Japan loan

     5,151         5,151         6,431         6,431   

 

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

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

 

14


Table of Contents

The following tables summarize the composition of available for sale marketable securities at September 30, 2012 and December 31, 2011:

 

     September 30, 2012  
     Available-for-Sale      Fair Market
Value of
Investments
with  Unrealized
Losses
 
     Cost      Unrealized
Gain
     Unrealized
(Loss)
    Fair Market
Value
    
     (in thousands)  

U.S. Treasury securities

   $ 267,831       $ 190       $ (1   $ 268,020       $ 175   

U.S. government agency securities

     146,418         237         —          146,655         —     

Corporate debt securities

     44,858         2,689         (57     47,490         872   

Commercial paper

     44,474         6         (4     44,476         10,235   

Equity and debt mutual funds

     8,471         1,084         (3     9,552         148   

Certificates of deposit and time deposits

     6,658         2         —          6,660         —     

Non-U.S. government securities

     278         —           —          278         —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
   $ 518,988       $ 4,208       $ (65   $ 523,131       $ 11,430   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Reported as follows:

 

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

Marketable securities

   $ 344,777       $ 77       $ (4   $ 344,850       $ 10,235   

Long-term marketable securities

     174,211         4,131         (61     178,281         1,195   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
   $ 518,988       $ 4,208       $ (65   $ 523,131       $ 11,430   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

     December 31, 2011  
     Available-for-Sale      Fair Market
Value of
Investments
with  Unrealized
Losses
 
     Cost      Unrealized
Gain
     Unrealized
(Loss)
    Fair Market
Value
    
     (in thousands)  

U.S. government agency securities

   $ 83,070       $ 152       $ (25   $ 83,197       $ 28,510   

Corporate debt securities

     43,077         1,893         (141     44,829         17,033   

Commercial paper

     22,083         2         (10     22,075         9,479   

U.S. Treasury securities

     14,141         39         —          14,180         —     

Equity and debt mutual funds

     7,876         477         (116     8,237         3,749   

Certificates of deposit and time deposits

     8,122         —           (5     8,117         5,800   

Non-U.S. government securities

     256         18         —          274         —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
   $ 178,625       $ 2,581       $ (297   $ 180,909       $ 64,571   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Reported as follows:

 

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

Marketable securities

   $ 96,518       $ 24       $ (40   $ 96,502       $ 35,595   

Long-term marketable securities

     82,107         2,557         (257     84,407         28,976   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
   $ 178,625       $ 2,581       $ (297   $ 180,909       $ 64,571   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

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Table of Contents

As of September 30, 2012, the fair market value of marketable securities with unrealized losses totaled $11.4 million. There were no unrealized losses greater than one year. As of December 31, 2011, the fair market value of marketable securities with unrealized losses totaled $64.6 million. Of this value, $2.4 million had unrealized losses greater than one year and $62.2 million had unrealized losses less than one year.

The contractual maturities of available-for-sale marketable securities as of September 30, 2012 were as follows:

 

     September 30, 2012  
     Cost      Fair Market Value  

Due within one year

   $ 344,777       $ 344,850   

Due after 1 year through 5 years

     155,621         157,028   

Due after 5 years through 10 years

     2,819         3,025   

Due after 10 years

     15,771         18,228   
  

 

 

    

 

 

 

Total

   $ 518,988       $ 523,131   
  

 

 

    

 

 

 

Derivatives

Teradyne conducts business in a number of foreign countries, with certain transactions denominated in local currencies. The purpose of Teradyne’s foreign currency management is to minimize the effect of exchange rate fluctuations on certain foreign currency denominated 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 monetary assets and liabilities denominated in foreign currencies, Teradyne enters into foreign currency forward contracts. The change in fair value of these derivatives is recorded directly in earnings, and is used to offset the change in fair value of the monetary assets and liabilities denominated in foreign currencies.

The notional amount of foreign exchange contracts hedging monetary assets and liabilities denominated in foreign currencies was $84.5 million and $85.4 million at September 30, 2012 and December 31, 2011, respectively.

The following table summarizes the fair value of derivative instruments at September 30, 2012 and December 31, 2011.

 

     Balance Sheet Location      September 30,
2012
     December 31,
2011
 
            (in thousands)  

Derivatives not designated as hedging instruments:

        

Foreign exchange contracts

     Other accrued liabilities       $ 106       $ 314   
     

 

 

    

 

 

 
      $ 106       $ 314   
     

 

 

    

 

 

 

 

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Table of Contents

The following table summarizes the effect of derivative instruments in the statement of operations recognized during the three and nine months ended September 30, 2012 and October 2, 2011. The table does not reflect the corresponding gains (losses) from the remeasurement of the monetary assets and liabilities denominated in foreign currencies.

 

    Location of Gains (Losses)
Recognized in Statement
of Operations
    For the Three  Months
Ended
    For the Nine  Months
Ended
 
    September 30,
2012
    October 2,
2011
    September 30,
2012
    October 2,
2011
 
          (in thousands)  

Derivatives not designated as hedging instruments:

         

Foreign exchange contracts

    Interest expense and other      $ (1,197   $ (1,429   $ (677   $ (858
   

 

 

   

 

 

   

 

 

   

 

 

 
    $ (1,197   $ (1,429   $ (677   $ (858
   

 

 

   

 

 

   

 

 

   

 

 

 

See Note G “Debt” regarding derivatives related to convertible senior notes.

G. 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 0.81%. Approximately $6.0 million of the loan is collateralized by a real estate mortgage on Teradyne K.K.’s building and land in Kumamoto, Japan and approximately $4.0 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 September 30, 2012, approximately $3.9 million of the outstanding loan principal is included in current debt and approximately $1.3 million is classified as long-term debt.

Convertible Senior Notes

In April 2009, Teradyne issued 4.50% convertible senior notes (the “Notes”) at an aggregate principal amount of $190 million. 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, at the option of the holder, 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 including but not limited to Teradyne issuing a cash or stock dividend or effecting a stock split.

During the three months ended September 30, 2012, the following circumstance occurred that allows holders to convert their Notes at their option prior to December 15, 2013: 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 November 9, 2012, no holders have exercised their option to convert their Notes into shares of common stock.

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

 

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Table of Contents

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.

On March 31, 2009, Teradyne entered into a warrant transaction with a strike price of approximately $7.67 per share, which was 75% higher than the closing price of Teradyne’s common stock. Teradyne received approximately $43.0 million for the warrants.

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

The Notes are classified as long-term debt in the balance sheet at September 30, 2012 and December 31, 2011. The tables below represent the components of Teradyne’s convertible senior notes:

 

     September 30,
2012
     December 31,
2011
 
     (in thousands)  

Debt principal

   $ 190,000       $ 190,000   

Unamortized debt discount

     23,732         33,902   
  

 

 

    

 

 

 

Net carrying amount of the convertible debt

   $ 166,268       $ 156,098   
  

 

 

    

 

 

 

 

    For the Three Months
Ended
    For the Nine Months
Ended
 
    September 30, 
         2012          
    October 2, 
2011
    September 30, 
         2012          
    October 2, 
2011
 
    (in thousands)  

Contractual interest expense

  $ 2,114      $ 2,114      $ 6,413      $ 6,460   

Amortization of the discount component and debt issue fees

    3,710        3,263        10,781        9,484   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense on the convertible debt

  $ 5,824      $ 5,377      $ 17,194      $ 15,944   
 

 

 

   

 

 

   

 

 

   

 

 

 

As of September 30, 2012, the unamortized discount was $23.7 million, which will be amortized over approximately 1.50 years, and the carrying amount of the equity component was $63.4 million. As of September 30, 2012, 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 $493.5 million.

H. Deferred Revenue and Customer Advances

Deferred revenue and customer advances consist of the following and are included in short and long-term deferred revenue and customer advances.

 

     September 30,
2012
     December 31,
2011
 
     (in thousands)  

Customer advances

   $ 44,152       $ 70,001   

Maintenance, training and extended warranty

     50,208         33,953   

Undelivered elements

     7,200         7,939   

Acceptance

     —           318   
  

 

 

    

 

 

 

Total deferred revenue and customer advances

   $ 101,560       $ 112,211   
  

 

 

    

 

 

 

 

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Table of Contents

I. 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 Nine Months
Ended
 
     September 30,
         2012          
    October 2,
2011
    September 30,
         2012          
    October 2,
2011
 
     (in thousands)  

Balance at beginning of period

   $ 11,047      $ 9,262      $ 8,154      $ 9,886   

Accruals for warranties issued during the period

     4,118        3,502        13,543        11,056   

Adjustments related to pre-existing warranties

     1,226        (491     1,369        (2,563

Settlements made during the period

     (3,813     (3,220     (10,488     (9,326
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 12,578      $ 9,053      $ 12,578      $ 9,053   
  

 

 

   

 

 

   

 

 

   

 

 

 

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 Nine Months
Ended
 
     September 30,
         2012          
    October 2,
2011
    September 30,
         2012          
    October 2,
2011
 
     (in thousands)  

Balance at beginning of period

   $ 20,754      $ 10,308      $ 12,742      $ 8,972   

Deferral of new extended warranty revenue

     8,733        1,324        21,015        5,123   

Recognition of extended warranty deferred revenue

     (2,007     (2,194     (6,277     (4,657
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 27,480      $ 9,438      $ 27,480      $ 9,438   
  

 

 

   

 

 

   

 

 

   

 

 

 

J. Stock-Based Compensation

Restricted stock unit awards granted to employees vest in equal installments over four years. A portion of restricted stock unit awards granted to executive officers is subject to service-based vesting and a portion of the awards is subject to performance-based vesting. 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. Service-based stock options vest in equal installments over four years, and have a term of seven years from the date of grant.

During the nine months ended September 30, 2012, Teradyne granted 1.7 million of restricted stock unit awards to employees at a weighted average grant date fair value of $16.73 and 0.2 million of service-based stock options to executive officers at a weighted average grant date fair value of $6.85.

During the nine months ended October 2, 2011, Teradyne granted 1.7 million of restricted stock unit awards to employees at a weighted average grant date fair value of $16.20 and 0.1 million of service-based stock options to executive officers at a weighted average grant date fair value of $6.74.

 

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Table of Contents

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

 

     For the Nine Months
Ended
 
     September 30,
2012
    October 2,
2011
 

Expected life (years)

     3.50        4.00   

Interest rate

     0.4     1.5

Volatility-historical

     56.0     52.1

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.

The weighted-average fair value of employee stock purchase rights granted in the nine months ended September 30, 2012 and October 2, 2011 was $3.75 and $3.66, respectively. The fair value of the employees’ purchase rights was estimated using the Black-Scholes option-pricing model with the following assumptions:

 

     For the Nine Months
Ended
 
     September 30,
2012
    October 2,
2011
 

Expected life (years)

     0.5        0.5   

Interest rate

     0.11     0.14

Volatility-historical

     42.7     41.0

Dividend yield

     0.0     0.0

K. Goodwill and Intangible Assets

Goodwill

On October 5, 2011, Teradyne completed its acquisition of LitePoint Corporation (“LitePoint”) located in Sunnyvale, California. During the three months ended September 30, 2012, Teradyne recorded a decrease in goodwill by $3.4 million and recorded a $3.4 million income tax receivable.

 

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Table of Contents

The changes in the carrying amount of goodwill by reporting units are as follows:

 

     Semiconductor
Test
    Systems
Test
Group
    Wireless
Test
    Total  
     (in thousands)  

Balance at December 31, 2010:

        

Goodwill

   $ 260,540      $ 148,183      $ —        $ 408,723   

Accumulated impairment losses

     (260,540     (148,183     —          (408,723
  

 

 

   

 

 

   

 

 

   

 

 

 
     —          —          —          —     

Activity during the year

     —          —          352,778        352,778   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2011:

        

Goodwill

     260,540        148,183        352,778        761,501   

Accumulated impairment losses

     (260,540     (148,183     —          (408,723
  

 

 

   

 

 

   

 

 

   

 

 

 
     —          —          352,778        352,778   

Activity during the year

     —          —          (3,405     (3,405
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2012:

        

Goodwill

     260,540        148,183        349,373        758,096   

Accumulated impairment losses

     (260,540     (148,183     —          (408,723
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ —        $ —        $ 349,373      $ 349,373   
  

 

 

   

 

 

   

 

 

   

 

 

 

Intangible Assets

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

 

     September 30, 2012  
     Gross
Carrying
Amount
     Accumulated
Amortization
     Net
Carrying
Amount
     Weighted
Average
Useful Life
 
     (in thousands)  

Developed technology

   $ 358,155       $ 130,349       $ 227,806         6.3 years   

Customer relationships and service and software maintenance contracts

     144,971         58,905         86,066         8.0 years   

Trade names and trademarks

     33,840         10,024         23,816         9.0 years   

Customer backlog

     1,000         1,000         —           0.4 years   
  

 

 

    

 

 

    

 

 

    

Total intangible assets

   $ 537,966       $ 200,278       $ 337,688         7.0 years   
  

 

 

    

 

 

    

 

 

    

 

     December 31, 2011  
     Gross
Carrying
Amount
     Accumulated
Amortization
     Net
Carrying
Amount
     Weighted
Average
Useful Life
 
     (in thousands)  

Developed technology

   $ 358,155       $ 91,391       $ 266,764         6.3 years   

Customer relationships and service and software maintenance contracts

     144,971         45,230         99,741         8.0 years   

Trade names and trademarks

     33,840         7,370         26,470         9.0 years   

Customer backlog

     1,000         1,000         —           0.4 years   
  

 

 

    

 

 

    

 

 

    

Total intangible assets

   $ 537,966       $ 144,991       $ 392,975         7.0 years   
  

 

 

    

 

 

    

 

 

    

 

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Table of Contents

Aggregate intangible asset amortization expense was $18.4 million and $55.3 million, respectively, for the three and nine months ended September 30, 2012 and $6.8 million and $21.3 million, respectively, for the three and nine months ended October 2, 2011. Estimated intangible asset amortization expense for each of the five succeeding fiscal years is as follows:

 

Year

   Amortization Expense  
     (in thousands)  

2012 (remainder)

   $ 18,221   

2013

     72,459   

2014

     69,374   

2015

     52,351   

2016

     52,351   

L. Net Income per Common Share

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

 

     For the Three Months
Ended
     For the Nine Months
Ended
 
     September 30,
2012
     October 2,
2011
     September 30,
2012
     October 2,
2011
 
     (in thousands, except per share amounts)  

Income from continuing operations

   $ 88,641       $ 56,706       $ 233,592       $ 214,728   

Income from discontinued operations

     —           —           —           1,703   

Gain on disposal of discontinued operations

     —           —           —           24,371   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income for basic net income per share

   $ 88,641       $ 56,706       $ 233,592       $ 240,802   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares-basic

     187,364         185,102         186,592         185,063   

Effect of dilutive potential common shares:

           

Incremental shares from assumed conversion of convertible Note(1)

     21,890         19,540         22,397         21,870   

Convertible note hedge warrant shares(2)

     16,765         13,475         17,474         16,737   

Restricted stock units

     1,423         3,377         1,413         3,942   

Stock options

     1,735         346         2,075         454   

Employee stock purchase rights

     33         52         52         75   
  

 

 

    

 

 

    

 

 

    

 

 

 

Dilutive potential common shares

     41,846         36,790         43,411         43,078   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares-diluted

     229,210         221,892         230,003         228,141   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income per common share-basic

           

Continuing operations

   $ 0.47       $ 0.31       $ 1.25       $ 1.16   

Discontinued operations

     —           —           —           0.14   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 0.47       $ 0.31       $ 1.25       $ 1.30   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income per common share-diluted

           

Continuing operations

   $ 0.39       $ 0.26       $ 1.02       $ 0.94   

Discontinued operations

     —           —           —           0.12   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 0.39       $ 0.26       $ 1.02       $ 1.06   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Incremental shares from assumed conversion of the convertible notes for the three and nine months ended September 30, 2012 and October 2, 2011 are calculated using the difference between the average Teradyne stock price for the period and the conversion price of $5.48, multiplied by the 34.7 million shares that would be issued upon conversion. The result of this calculation, representing the total intrinsic value of the convertible debt, is divided by the average Teradyne stock price for the period.

 

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Table of Contents
(2) Convertible note hedge warrant shares for the three and nine months ended September 30, 2012 and October 2, 2011 are calculated using the difference between the average Teradyne stock price for the period and the warrant price of $7.67, multiplied by the 34.7 million shares that would be issued upon conversion. The result of this calculation, representing the total intrinsic value of the warrant, is divided by the average Teradyne stock price for the period.

The computation of diluted net income per common share for the three and nine months ended September 30, 2012 excludes the effect of the potential exercise of stock options to purchase approximately 0.3 million shares, and the computation of the three and nine months ended September 30, 2012 excludes the effect of the potential exercise of restricted stock units of 0.1 million and 0.4 million, because the effect would have been anti-dilutive.

The computation of diluted net income per common share for the three and nine months ended October 2, 2011 excludes the effect of the potential exercise of stock options to purchase approximately 0.5 million and 0.8 million shares and restricted stock units of 1.4 million and 0.5 million, respectively, because the effect would have been anti-dilutive.

With respect to Teradyne’s convertible debt, Teradyne intends to settle its conversion spread (i.e., the intrinsic value of the embedded option feature contained in the convertible debt) in shares. Teradyne accounts for its conversion spread using the treasury stock method.

M. Restructuring and Other, Net

Other

During the nine months ended September 30, 2012, due to a decrease in specified new product revenue through the December 31, 2012 earn-out period end date, Teradyne recorded an $8.4 million fair value adjustment to decrease the LitePoint acquisition contingent consideration. As of September 30, 2012, the estimated undiscounted range of outcomes for the contingent consideration is $16.0 million to $17.0 million. The decrease in the range from December 31, 2011 is due to $44.0 million of contingent consideration payments and the $8.4 million fair value decrease.

During the nine months ended October 2, 2011, Teradyne recorded $1.3 million of acquisition costs related to its LitePoint acquisition and a $0.7 million charge related to a non-U.S. pension settlement.

 

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Restructuring

In response to a downturn in the industry in 2008 and 2009, Teradyne initiated restructuring activities across its Semiconductor Test and Systems Test Group segments to reduce costs, principally through headcount reductions and facility consolidations. The remaining accrual for lease payments on vacated facilities of $1.3 million is reflected in the other accrued liabilities and is expected to be paid over the next twelve months, which expires in 2013. Teradyne’s future lease commitments are net of expected sublease income of $0.2 million as of September 30, 2012. The table below represents activity related to these actions.

 

     Severance
and
Benefits
    Facility
Exit
Costs
    Total  
     (in thousands)  
Pre-2011 Activities       

Balance at December 31, 2010

   $ 712      $ 3,263      $ 3,975   

Provision

     117        —          117   

Change in estimate

     155        (485     (330

Cash payments

     (984     (916     (1,900
  

 

 

   

 

 

   

 

 

 

Balance at December 31, 2011

     —          1,862        1,862   

Cash payments

     —          (189     (189
  

 

 

   

 

 

   

 

 

 

Balance at April 1, 2012

     —          1,673        1,673   

Cash payments

     —          (209     (209
  

 

 

   

 

 

   

 

 

 

Balance at July 1, 2012

     —          1,464        1,464   

Cash payments

     —          (175     (175
  

 

 

   

 

 

   

 

 

 

Balance at September 30, 2012

   $ —        $ 1,289      $ 1,289   
  

 

 

   

 

 

   

 

 

 
2011 Activities       

Q1 2011 Activity:

      

Provision

   $ 572      $ —        $ 572   

Cash payments

     (476     —          (476
  

 

 

   

 

 

   

 

 

 

Balance at December 31, 2011

     96        —          96   

Cash payments

     (96     —          (96
  

 

 

   

 

 

   

 

 

 

Balance at April 1, 2012

   $ —        $ —        $ —     
  

 

 

   

 

 

   

 

 

 

Q2 2011 Activity:

      

Provision

   $ 344      $ —        $ 344   

Cash payments

     (115     —          (115
  

 

 

   

 

 

   

 

 

 

Balance at December 31, 2011

     229        —          229   

Cash payments

     (229     —          (229
  

 

 

   

 

 

   

 

 

 

Balance at April 1, 2012

   $ —        $ —        $ —     
  

 

 

   

 

 

   

 

 

 
2012 Activities       

Q2 2012 Activity:

      

Provision

   $ 286      $ —        $ 286   
  

 

 

   

 

 

   

 

 

 

Balance at July 1, 2012

     286        —          286   

Change in estimate

     (4     —          (4

Cash payments

     (282     —          (282
  

 

 

   

 

 

   

 

 

 

Balance at September 30, 2012

   $ —        $ —        $ —     
  

 

 

   

 

 

   

 

 

 

Q3 2012 Activity:

      

Provision

   $ 687      $ —        $ 687   

Cash payments

     (327     —          (327
  

 

 

   

 

 

   

 

 

 

Balance at September 30, 2012

   $ 360      $ —        $ 360   
  

 

 

   

 

 

   

 

 

 

Balance at September 30, 2012

   $ 360      $ 1,289      $ 1,649   
  

 

 

   

 

 

   

 

 

 

 

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Table of Contents

During the nine months ended September 30, 2012, Teradyne recorded the following restructuring charges:

Q3 2012 Action:

 

   

$0.7 million of severance charges related to headcount reductions of 9 people, of which $0.5 million and 7 people were in Systems Test Group, $0.2 million and 2 people in Wireless Test.

N. 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 fixed income and equity securities. In addition, Teradyne has an unfunded supplemental executive defined benefit plan in the United States to provide retirement benefits in excess of levels allowed by the Employment Retirement Income Security Act (“ERISA”) and the Internal Revenue Code (“IRC”), as well as unfunded foreign plans.

Components of net periodic pension cost for all plans were as follows:

 

     For the Three Months
Ended
    For the Nine Months
Ended
 
     September 30, 
2012
    October 2, 
2011
    September 30, 
2012
    October 2, 
2011
 
     (in thousands)  

Service cost

   $ 685      $ 656      $ 2,054      $ 2,092   

Interest cost

     4,111        4,380        12,333        13,164   

Expected return on plan assets

     (4,090     (3,902     (12,269     (11,720

Amortization of unrecognized prior service cost

     58        155        174        466   

Settlement loss

     —          —          —          680   

Actuarial loss

     1,937        —          5,083        4,279   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net periodic pension cost

   $ 2,701      $ 1,289      $ 7,375      $ 8,961   
  

 

 

   

 

 

   

 

 

   

 

 

 

In the nine months ended September 30, 2012, Teradyne contributed $2.6 million to its defined benefit pension plans.

During the three months ended September 30, 2012, Teradyne offered to certain U.S. employees the option to receive their vested pension benefit as a one-time lump sum payment. Approximately 2,000 former employees selected to receive a one-time lump sum payment. Total one-time lump sum payments are expected to be approximately $52.0 million, of which $39.5 million was paid in the three months ended September 30, 2012, and the remainder is expected to be paid before December 31, 2012.

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 could become eligible for these benefits, and the existing benefit obligation relates primarily to those employees.

 

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Table of Contents

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

 

     For the Three Months
Ended
    For the Nine Months
Ended
 
     September 30,
2012
    October 2,
2011
    September 30,
2012
    October 2,
2011
 
     (in thousands)  

Service cost

   $ 17      $ 15      $ 50      $ 45   

Interest cost

     109        135        328        405   

Amortization of unrecognized prior service benefit

     (150     (150     (449     (449

Actuarial gain

     —          —          (92     (76
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net periodic post-retirement cost

   $ (24   $ —        $ (163   $ (75
  

 

 

   

 

 

   

 

 

   

 

 

 

O. Commitments and Contingencies

Purchase Commitments

As of September 30, 2012, Teradyne had entered into purchase commitments for certain components and materials. The purchase commitments aggregate to approximately $217.6 million, of which $214.4 million is for less than one year.

Legal Claims

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

P. Income Taxes

Teradyne’s effective tax rate for the three and nine months ended September 30, 2012 was 13.96% and 21.15%, respectively. Teradyne’s effective tax rate for the three and nine months ended October 2, 2011 was 3.01% and 6.56%, respectively. Teradyne’s effective tax rate is usually less than the 35 percent U.S. statutory tax rate primarily due to the geographic mix of income and profits earned by Teradyne’s international subsidiaries being taxed at rates lower than the U.S. statutory rate. The effective tax rate for the three and nine months ended September 30, 2012, and the related income tax expense included approximately $13 million of a deferred income tax benefit recorded in connection with Teradyne’s plan to repatriate unremitted earnings of its Japanese subsidiary. The effective tax rate for the three and nine months ended October 2, 2011, included the effect of a full valuation allowance on Teradyne’s deferred tax assets in the U.S. and Singapore.

Q. Segment Information

Teradyne has three operating segments (Semiconductor Test, Systems Test Group and Wireless Test), which are its reportable segments. The Semiconductor Test segment includes operations related to the design, manufacturing and marketing of semiconductor test products and services. The Systems Test Group segment includes operations related to design, manufacturing and marketing of products and services for military/aerospace instrumentation test, storage test and circuit-board test. The Wireless Test segment includes operations related to design, manufacturing and marketing of wireless test products and services. Each operating segment has a segment manager who is directly accountable to and maintains regular contact with Teradyne’s chief operating decision maker (Teradyne’s chief executive officer) to discuss operating activities, financial results, forecasts, and plans for the segment.

 

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Table of Contents

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, 2011. Segment information is as follows:

 

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

Three months ended September 30, 2012:

            

Net revenues

   $ 310,979       $ 33,844      $ 118,571       $ —        $ 463,394   

Income (loss) from continuing operations before income taxes(1)(2)

     55,348         (2,642     58,902         (8,583     103,025   

Three months ended October 2, 2011:

            

Net revenues

   $ 241,394       $ 102,995      $ —         $ —        $ 344,389   

Income (loss) from continuing operations before income taxes(1)(2)

     37,244         25,563        —           (4,342     58,465   

Nine months ended September 30, 2012:

            

Net revenues

   $ 943,625       $ 202,894      $ 261,827       $ —        $ 1,408,346   

Income (loss) from continuing operations before income taxes(1)(2)

     181,594         30,964        97,729         (14,026     296,261   

Nine months ended October 2, 2011:

            

Net revenues

   $ 903,740       $ 228,329      $ —         $ —        $ 1,132,069   

Income (loss) from continuing operations before income taxes(1)(2)

     205,144         39,877        —           (15,209     229,812   

 

(1) Pension and post retirement actuarial gains and losses, interest income, and interest expense and other are included in Corporate and Eliminations.
(2) Included in the income (loss) from continuing operations before income taxes for each of the segments are charges and credits for the three and nine months ended September 30, 2012 and October 2, 2011 that include restructuring and other, net, 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 Nine Months
Ended
 
     September 30, 
2012
    October 2, 
2011
     September 30, 
2012
     October 2, 
2011
 
     (in thousands)  

Cost of revenues—provision for excess and obsolete inventory

   $ 3,085      $ 4,202       $ 9,254       $ 10,144   

Restructuring and other, net

     (4     137         315         2,307   
  

 

 

   

 

 

    

 

 

    

 

 

 

Total

   $ 3,081      $ 4,339       $ 9,569       $ 12,451   
  

 

 

   

 

 

    

 

 

    

 

 

 

 

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Table of Contents

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

 

     For the Three Months
Ended
     For the Nine Months
Ended
 
     September 30, 
2012
     October 2, 
2011
     September 30, 
2012
     October 2, 
2011
 
     (in thousands)  

Cost of revenues—provision for excess and obsolete inventory

   $ 378       $ 211       $ 3,020       $ 612   

Restructuring and other, net

     451         —           451         (246
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 829       $ 211       $ 3,471       $ 366   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     For the Three Months
Ended
     For the Nine Months
Ended
 
     September 30, 
2012
     October 2, 
2011
     September 30, 
2012
     October 2, 
2011
 
     (in thousands)  

Cost of revenues—inventory step-up

   $ —         $ —         $ 6,089       $ —     

Cost of revenues—provision for excess and obsolete inventory

     2,018         —           4,134         —     

Restructuring and other, net

     236         —           236         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,254       $ —         $ 10,459       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     For the Three Months
Ended
     For the Nine Months
Ended
 
     September 30, 
2012
     October 2, 
2011
     September 30, 
2012
    October 2, 
2011
 
     (in thousands)  

Restructuring and other, net

   $ —         $ 1,328       $ (8,406   $ 1,096   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ —         $ 1,328       $ (8,406   $ 1,096   
  

 

 

    

 

 

    

 

 

   

 

 

 

R. Stock Repurchase Program

In November 2010, Teradyne’s board of directors authorized a stock repurchase program for up to $200 million. In the three and nine months ended September 30, 2012, Teradyne did not repurchase any shares. In the three and nine months ended October 2, 2011, Teradyne repurchased 2.0 million shares of common stock for $23.9 million at an average price of $12.06. Cumulatively, as of September 30, 2012, Teradyne has repurchased 2.6 million shares of common stock for $31.2 million at an average price of $11.84.

 

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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 our filings with the Securities and Exchange Commission. See also Part II, Item 1A of this Quarterly Report on Form 10-Q and Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2011. Readers are cautioned not to place undue reliance on these forward-looking statements which reflect management’s analysis only as of the date hereof. We assume no obligation to update these forward-looking statements to reflect actual results or changes in factors or assumptions affecting forward-looking statements, except as may be required by law.

Overview

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

 

   

semiconductor test (“Semiconductor Test”) systems,

 

   

military/aerospace (“Mil/Aero”) test instrumentation and systems, storage test (“Storage Test”) systems, and circuit-board test and inspection (“Commercial Board Test”) systems (collectively these products represent “Systems Test Group”), and

 

   

wireless test (“Wireless Test”) systems.

We have a broad customer base which includes integrated device manufacturers (“IDMs”), outsourced semiconductor assembly and test providers (“OSATs”), wafer foundries, fabless companies that design, but contract with others for the manufacture of integrated circuits (“ICs”), developers of wireless devices and consumer electronics, manufacturers of circuit boards, automotive suppliers, wireless product manufacturers, storage device manufacturers, aerospace and military contractors 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 fluctuating and seasonal demand for their products. This market dynamic has 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 and electronics industries.

We believe our acquisitions of Nextest, Eagle Test and LitePoint, and our entry into the storage test market have enhanced our opportunities for growth. We will continue to invest in our businesses to expand further our addressable markets while tightly managing our costs.

Critical Accounting Policies and Estimates

We have identified the policies which are critical to understanding our business and our results of operations. Except as noted below, there have been no significant changes during the nine months ended September 30, 2012 to the items disclosed as our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

 

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Table of Contents

Effective January 1, 2012, we changed the method of recognizing actuarial gains and losses for our defined benefit pension plans and postretirement benefit plan and calculating the expected return on plan assets for our defined benefit pension plans. Historically, we recognized net actuarial gains and losses in accumulated other comprehensive income within shareholders’ equity on our consolidated balance sheets on an annual basis and amortized them into operating results over the average remaining years of service of the plan participants, to the extent such gains and losses were outside of a range (“corridor”). We have elected to immediately recognize net actuarial gains and losses and the change in the fair value of the plan assets in our operating results in the year in which they occur or upon any interim remeasurement of the plans. In addition, we used to calculate the expected return on plan assets using a calculated market-related value of plan assets. We have also elected to calculate the expected return on plan assets using the fair value of the plan assets.

We believe that this new method is preferable as it eliminates the delay in recognizing gains and losses in our operating results and it will improve the transparency by faster recognition of the effects of economic and interest rate trends on plan obligations and investments. These actuarial gains and losses are generally measured annually as of December 31 and, accordingly, will be recorded during the fourth quarter of each year or upon any interim remeasurement of the plans. In accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 250, Accounting Changes and Error Corrections, all prior periods presented in this Quarterly Report on Form 10-Q have been adjusted to apply the new accounting method retrospectively. This accounting change did not impact the financial position of the reportable segments.

 

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Table of Contents

SELECTED RELATIONSHIPS WITHIN THE CONDENSED CONSOLIDATED

STATEMENTS OF OPERATIONS

 

     For the Three  Months
Ended
    For the Nine  Months
Ended
 
     September 30,
2012
    October 2,
2011
    September 30,
2012
    October 2,
2011
 

Percentage of total net revenues:

        

Net revenues:

        

Products

     85     80     86     82

Services

     15        20        14        18   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net revenues

     100        100        100        100   

Cost of revenues:

        

Cost of products

     37        40        39        40   

Cost of services

     7        10        7        9   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenues

     44        51        46        49   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     56        49        54        51   

Operating expenses:

        

Engineering and development

     14        13        13        12   

Selling and administrative

     15        16        15        15   

Acquired intangible asset amortization

     4        2        4        2   

Restructuring and other, net

     —          —          (1     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     33        32        32        30   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     23        18        22        21   

Interest income

     —          1        —          1   

Interest expense and other

     (1     (2     (1     (2
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     22        17        21        20   

Income tax provision

     3        1        4        1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     19        16        17        19   

Income from discontinued operations before income taxes

     —          —          —          —     

Income tax benefit

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from discontinued operations

     —          —          —          —     

Gain on disposal of discontinued operations

     —          —          —          2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     19     16     17     21
  

 

 

   

 

 

   

 

 

   

 

 

 

Results of Operations

Third Quarter 2012 Compared to Third Quarter 2011

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
 
     September 30,
2012
     October 2,
2011
 

Semiconductor Test

     0.5         0.8   

Systems Test Group

     0.7         0.4   

Wireless Test

     0.4         —     

Total Company

     0.5         0.7   

 

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Table of Contents

Revenues

Net revenues by reportable segments were as follows:

 

     For the Three  Months
Ended
     Dollar
Change
 
     September 30,
2012
     October 2,
2011
    
     (in millions)  

Semiconductor Test

   $ 311.0       $ 241.4       $ 69.6   

Systems Test Group

     33.8         103.0         (69.2

Wireless Test

     118.6         —           118.6   
  

 

 

    

 

 

    

 

 

 
   $ 463.4       $ 344.4       $ 119.0   
  

 

 

    

 

 

    

 

 

 

The increase of $69.6 million or 29% in Semiconductor Test revenues was due to an increase in System-on-a-Chip product revenue partially offset by a decrease in memory product revenue. The decrease in Systems Test Group revenue of $69.2 million or 67% was primarily due to a decrease in sales of Storage Test systems. The acquisition of LitePoint, which is our Wireless Test segment, completed in October of 2011, added $118.6 million of revenue in the three months ended September 30, 2012.

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

 

     For the Three  Months
Ended
 
     September 30,
2012
    October 2,
2011
 

China

     29     13

Korea

     19        8   

Taiwan

     17        10   

United States

     12        16   

Japan

     7        12   

Europe

     5        7   

Malaysia

     3        11   

Singapore

     3        8   

Philippines

     3        6   

Thailand

     1        8   

Rest of World

     1        1   
  

 

 

   

 

 

 
     100     100
  

 

 

   

 

 

 

Gross Profit

Our gross profit was as follows:

 

     For the Three  Months
Ended
    Dollar/Point
Change
 
     September  30,
2012
    October  2,
2011
   
     (in millions)  

Gross Profit

   $ 260.2      $ 170.4      $ 89.8   

Percent of Total Revenue

     56.2     49.5     6.7   

Gross profit as a percent of revenue increased by 6.7 percentage points primarily due to the addition of LitePoint, which had its highest quarterly revenue in its history.

 

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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 three months ended September 30, 2012, we recorded an inventory provision of $5.5 million included in cost of revenues, due to the following factors:

 

   

A $3.1 million inventory write-down as a result of product transition related to the Flex Test Platform in Semiconductor Test.

 

   

A $2.0 million inventory write-down as a result of product transition in Wireless Test.

 

   

The remainder of the charge of $0.4 million reflects downward revisions to previously forecasted demand levels in Systems Test Group.

During the three months ended October 2, 2011, we recorded an inventory provision of $4.4 million included in cost of revenues, due to the downward revisions to previously forecasted demand levels. Of the $4.4 million of total excess and obsolete provisions recorded in the three months ended October 2, 2011, $4.2 million was related to Semiconductor Test and $0.2 million was related to Systems Test Group.

During the three months ended September 30, 2012 and October 2, 2011, we scrapped $1.1 million and $4.2 million of inventory, respectively. During the three months ended September 30, 2012 and October 2, 2011, we sold $0.7 million and 1.5 million, respectively, of previously written-down or written-off inventory. As of September 30, 2012, we had inventory related reserves for amounts which had been written-down or written-off totaling $132.4 million. We have no pre-determined timeline to scrap the remaining inventory.

Engineering and Development

Engineering and development expenses were as follows:

 

     For the Three  Months
Ended
    Dollar
Change
 
     September 30,
2012
    October 2,
2011
   
     (in millions)  

Engineering and Development

   $ 63.1      $ 45.9      $ 17.2   

Percent of Total Revenue

     13.6     13.3  

The increase of $17.2 million in engineering and development expenses is due primarily to additional costs of $9.6 million related to LitePoint which was acquired in October 2011 and increased spending on engineering projects.

Selling and Administrative

Selling and administrative expenses were as follows:

 

     For the Three  Months
Ended
    Dollar
Change
 
     September 30,
2012
    October 2,
2011
   
     (in millions)  

Selling and Administrative

   $ 69.9      $ 54.8      $ 15.1   

Percent of Total Revenue

     15.1     15.9  

 

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Table of Contents

The increase of $15.1 million in selling and administrative expenses is due primarily to additional costs of $13.2 million related to LitePoint.

Restructuring and Other, Net

Other

As of September 30, 2012, the estimated undiscounted range of outcomes for the contingent consideration is $16.0 million to $17.0 million. The decrease in the range from July 1, 2012 is due to the $38.1 million contingent consideration payment during the three months ended September 30, 2012.

During the three months ended October 2, 2011, we recorded $1.3 million of acquisition costs.

Restructuring

In response to a downturn in the industry in 2008 and 2009, we initiated restructuring activities across all segments to reduce costs, principally through headcount reductions and facility consolidations. The remaining accrual for lease payments on vacated facilities of $1.3 million is reflected in the other accrued liabilities and is expected to be paid over the next twelve months, which expires in 2013. Our future lease commitments are net of expected sublease income of $0.2 million as of September 30, 2012. The table below represents activity related to these actions.

 

     Severance
and
Benefits
    Facility
Exit
Costs
    Total  
     (in thousands)  
Pre-2011 Activities       

Balance at December 31, 2010

   $ 712      $ 3,263      $ 3,975   

Provision

     117        —          117   

Change in estimate

     155        (485     (330

Cash payments

     (984     (916     (1,900
  

 

 

   

 

 

   

 

 

 

Balance at December 31, 2011

     —          1,862        1,862   

Cash payments

     —          (189     (189
  

 

 

   

 

 

   

 

 

 

Balance at April 1, 2012

     —          1,673        1,673   

Cash payments

     —          (209     (209
  

 

 

   

 

 

   

 

 

 

Balance at July 1, 2012

     —          1,464        1,464   

Cash payments

     —          (175     (175
  

 

 

   

 

 

   

 

 

 

Balance at September 30, 2012

   $ —        $ 1,289      $ 1,289   
  

 

 

   

 

 

   

 

 

 
2011 Activities       

Q1 2011 Activity:

      

Provision

   $ 572      $ —        $ 572   

Cash payments

     (476     —          (476
  

 

 

   

 

 

   

 

 

 

Balance at December 31, 2011

     96        —          96   

Cash payments

     (96     —          (96
  

 

 

   

 

 

   

 

 

 

Balance at April 1, 2012

   $ —        $ —        $ —     
  

 

 

   

 

 

   

 

 

 

Q2 2011 Activity:

      

Provision

   $ 344      $ —        $ 344   

Cash payments

     (115     —          (115
  

 

 

   

 

 

   

 

 

 

Balance at December 31, 2011

     229        —          229   

Cash payments

     (229     —          (229
  

 

 

   

 

 

   

 

 

 

Balance at April 1, 2012

   $ —        $ —        $ —     
  

 

 

   

 

 

   

 

 

 

 

34


Table of Contents
     Severance
and
Benefits
    Facility
Exit
Costs
     Total  
     (in thousands)  
2012 Activities        

Q2 2012 Activity:

       

Provision

   $ 286      $ —         $ 286   
  

 

 

   

 

 

    

 

 

 

Balance at July 1, 2012

     286        —           286   

Change in estimate

     (4     —           (4

Cash payments

     (282     —           (282
  

 

 

   

 

 

    

 

 

 

Balance at September 30, 2012

   $ —        $ —         $ —     
  

 

 

   

 

 

    

 

 

 

Q3 2012 Activity:

       

Provision

   $ 687      $ —         $ 687   

Cash payments

     (327     —           (327
  

 

 

   

 

 

    

 

 

 

Balance at September 30, 2012

   $ 360      $ —         $ 360   
  

 

 

   

 

 

    

 

 

 

Balance at September 30, 2012

   $ 360      $ 1,289       $ 1,649   
  

 

 

   

 

 

    

 

 

 

During the three months ended September 30, 2012, we recorded the following restructuring charges:

Q3 2012 Action:

 

   

$0.7 million of severance charges related to headcount reductions of 9 people, of which $0.5 million and 7 people were in Systems Test Group, $0.2 million and 2 people were in Wireless Test.

During the three months ended October 2, 2011, we did not record any restructuring charges.

Interest and Other

Interest income decreased by $2.0 million from the three months ended October 2, 2011 to the three months ended September 30, 2012, due to a decrease in marketable securities as a result of the LitePoint acquisition.

Income Taxes

For the three months ended September 30, 2012, we recorded a tax provision of $14.4 million which consisted of foreign taxes and U.S. deferred tax provision. The tax provision of $14.4 million is net of a deferred income tax benefit of approximately $13 million recorded in connection with our plan to repatriate unremitted earnings of our Japanese subsidiary. For the three months ended October 2, 2011, we recorded a tax provision of $1.8 million, which consisted primarily of foreign taxes.

On a quarterly basis, we evaluate the realizability of our deferred tax assets by jurisdiction and assess the need for a valuation allowance. At September 30, 2012, we believe that we will ultimately realize the deferred tax assets recorded on our condensed consolidated balance sheet. However, should we believe that it is more likely than not that our deferred tax assets would not be realized, our tax provision would increase in the period in which we determined that the realizability was not likely. We consider the probability of future taxable income and our historical profitability, among other factors, in assessing the realizability of our deferred tax assets.

 

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Table of Contents

Nine Months of 2012 Compared to Nine Months of 2011

Revenues

Net revenues by reportable segments were as follows:

 

     For the Nine Months
Ended
     Dollar
Change
 
     September 30,
2012
     October 2,
2011
    
     (in millions)  

Semiconductor Test

   $ 943.6       $ 903.8       $ 39.8   

Systems Test Group

     202.9         228.3         (25.4

Wireless Test

     261.8         —           261.8   
  

 

 

    

 

 

    

 

 

 
   $ 1,408.3       $ 1,132.1       $ 276.2   
  

 

 

    

 

 

    

 

 

 

The increase of $39.8 million or 4% in Semiconductor Test revenue was primarily due to an increase in System-on-a-Chip product revenue, partially offset by a decrease in memory product revenue. The decrease in Systems Test Group revenue of $25.4 million or 11% was primarily due to a decrease in sales of Storage Test systems. The acquisition of LitePoint, which is our Wireless Test segment, completed in October of 2011, added $261.8 million of revenue in the nine months ended September 30, 2012.

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

 

     For the Nine Months
Ended
 
     September 30,
2012
    October 2,
2011
 

China

     23     11

Taiwan

     18        12   

Korea

     15        12   

United States

     12        15   

Philippines

     6        10   

Japan

     6        8   

Thailand

     5        7   

Europe

     5        7   

Malaysia

     4        11   

Singapore

     4        6   

Rest of World

     2        1   
  

 

 

   

 

 

 
     100     100
  

 

 

   

 

 

 

Gross Profit

Our gross profit was as follows:

 

     For the Nine Months
Ended
    Dollar/Point
Change
 
     September 30,
2012
    October 2,
2011
   
     (in millions)  

Gross Profit

   $ 760.6      $ 577.9      $ 182.7   

Percent of Total Revenue

     54.0     51.1     2.9   

 

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Table of Contents

Gross profit as a percent of revenue increased by 2.9 percentage points a result of an increase of 5.0 points related to the addition of LitePoint, which had its highest nine month revenue in its history, partially offset by a decrease of 1.5 points due to System-on-a-Chip product mix.

We assess the carrying value of our inventory on a quarterly basis by estimating future demand and comparing that demand against on-hand and on-order inventory positions. Forecasted revenue information is obtained from 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 nine months ended September 30, 2012, we recorded an inventory provision of $16.4 million included in cost of revenues, due to the following factors:

 

   

A $5.7 million inventory write-down as a result of product transition related to the Flex Test Platform in Semiconductor Test.

 

   

A decline in demand versus previously forecasted demand levels for a prior generation Nextest Magnum resulted in an inventory provision of $3.2 million.

 

   

A $2.0 million inventory write-down as a result of product transition in Wireless Test.

 

   

The remainder of the charge of $5.5 million primarily reflects downward revisions to previously forecasted demand levels, of which $3.0 million was related to Systems Test Group, $2.1 million was related to Wireless Test and $0.4 million was related to Semiconductor Test.

During the nine months ended October 2, 2011, we recorded an inventory provision of $10.8 million included in cost of revenues, due to the downward revisions to previously forecasted demand levels. Of the $10.8 million of total excess and obsolete provisions recorded, $10.2 million was related to Semiconductor Test and $0.6 million was related to Systems Test Group.

During the nine months ended September 30, 2012 and October 2, 2011, we scrapped $8.0 million and $6.8 million of inventory, respectively. During the nine months ended September 30, 2012 and October 2, 2011, we sold $3.2 million and $5.2 million, respectively, of previously written-down or written-off inventory. As of September 30, 2012, we had inventory related reserves for amounts which had been written-down or written-off totaling $132.4 million. We have no pre-determined timeline to scrap the remaining inventory.

Engineering and Development

Engineering and development expenses were as follows:

 

     For the Nine Months
Ended
    Dollar
Change
 
     September 30,
2012
    October 2,
2011
   
     (in millions)  

Engineering and Development

   $ 189.7      $ 141.4      $ 48.3   

Percent of Total Revenue

     13.5     12.5  

The increase of $48.3 million in engineering and development expenses is due primarily to additional costs of $27.8 million related to LitePoint which was acquired in October 2011 and increased spending on engineering projects.

 

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Table of Contents

Selling and Administrative

Selling and administrative expenses were as follows:

 

     For the Nine Months
Ended
    Dollar
Change
 
     September 30,
2012
    October 2,
2011
   
     (in millions)  

Selling and Administrative

   $ 211.1      $ 170.4      $ 40.7   

Percent of Total Revenue

     15.0     15.1  

The increase of $40.7 million in selling and administrative expenses is due primarily to additional costs of $36.2 million related to LitePoint.

Restructuring and Other, Net

Other

During the nine months ended September 30, 2012, due to a decrease in specified new product revenue through the December 31, 2012 earn-out period end date, we recorded an $8.4 million of fair value adjustment to decrease the LitePoint acquisition contingent consideration. As of September 30, 2012, the estimated undiscounted range of outcomes for the contingent consideration is $16.0 million to $17.0 million. The decrease in the range from December 31, 2011 is due to $44.0 million of contingent consideration payments and the $8.4 million fair value decrease.

During the nine months ended October 2, 2011, we recorded $1.3 million of acquisition costs related to our LitePoint acquisition, and $0.7 million charge related to a non-U.S. pension settlement.

Restructuring

In response to a downturn in the industry in 2008 and 2009, we initiated restructuring activities across our Semiconductor Test and Systems Test Group segments to reduce costs, principally through headcount reductions and facility consolidations. The remaining accrual for lease payments on vacated facilities of $1.3 million is reflected in the other accrued liabilities and is expected to be paid over the next twelve months, which expires in 2013. Our future lease commitments are net of expected sublease income of $0.2 million as of September 30, 2012. The table below represents activity related to these actions.

 

     Severance
and
Benefits
    Facility
Exit
Costs
    Total  
     (in thousands)  
Pre-2011 Activities     

Balance at December 31, 2010

   $ 712      $ 3,263      $ 3,975   

Provision

     117        —          117   

Change in estimate

     155        (485     (330

Cash payments

     (984     (916     (1,900
  

 

 

   

 

 

   

 

 

 

Balance at December 31, 2011

     —          1,862        1,862   

Cash payments

     —          (189     (189
  

 

 

   

 

 

   

 

 

 

Balance at April 1, 2012

     —          1,673        1,673   

Cash payments

     —          (209     (209
  

 

 

   

 

 

   

 

 

 

Balance at July 1, 2012

     —          1,464        1,464   

Cash payments

     —          (175     (175
  

 

 

   

 

 

   

 

 

 

Balance at September 30, 2012

   $ —        $ 1,289      $ 1,289   
  

 

 

   

 

 

   

 

 

 

 

38


Table of Contents
     Severance
and
Benefits
    Facility
Exit
Costs
     Total  
     (in thousands)  
2011 Activities        

Q1 2011 Activity:

       

Provision

   $ 572      $ —         $ 572   

Cash payments

     (476     —           (476
  

 

 

   

 

 

    

 

 

 

Balance at December 31, 2011

     96        —           96   

Cash payments

     (96     —           (96
  

 

 

   

 

 

    

 

 

 

Balance at April 1, 2012

   $ —        $ —         $ —     
  

 

 

   

 

 

    

 

 

 

Q2 2011 Activity:

       

Provision

   $ 344      $ —         $ 344   

Cash payments

     (115     —           (115
  

 

 

   

 

 

    

 

 

 

Balance at December 31, 2011

     229        —           229   

Cash payments

     (229     —           (229
  

 

 

   

 

 

    

 

 

 

Balance at April 1, 2012

   $ —        $ —         $ —     
  

 

 

   

 

 

    

 

 

 
2012 Activities        

Q2 2012 Activity:

       

Provision

   $ 286      $ —         $ 286   
  

 

 

   

 

 

    

 

 

 

Balance at July 1, 2012

     286        —           286   

Change in estimate

     (4     —           (4

Cash payments

     (282     —           (282
  

 

 

   

 

 

    

 

 

 

Balance at September 30, 2012

   $ —        $ —           —     
  

 

 

   

 

 

    

 

 

 

Q3 2012 Activity:

       

Provision

   $ 687      $ —         $ 687   

Cash payments

     (327     —           (327
  

 

 

   

 

 

    

 

 

 

Balance at September 30, 2012

   $ 360      $ —         $ 360   
  

 

 

   

 

 

    

 

 

 

Balance at September 30, 2012

   $ 360      $ 1,289       $ 1,649   
  

 

 

   

 

 

    

 

 

 

During the nine months ended September 30, 2012, we recorded the following restructuring charges:

Q3 2012 Action:

 

   

$0.7 million of severance charges related to headcount reductions of 9 people, of which $0.5 million and 7 people were in Systems Test Group and $0.2 million and 2 people in Wireless Test.

Interest and Other

Interest income decreased by $2.9 million from the nine months ended October 2, 2011 to the nine months ended September 30, 2012, due to a decrease in marketable securities due to the LitePoint acquisition. Interest expense and other increased by $1.0 million from the nine months ended October 2, 2011 to the nine months ended September 30, 2012, due primarily to an increase in interest expense related to our convertible note.

Income Taxes

For the nine months ended September 30, 2012, we recorded a tax provision of $62.7 million, from continuing operations, which consisted of foreign taxes and U.S. deferred tax provision. The tax provision of $62.7 million is net of a deferred income tax benefit of approximately $13 million recorded in connection with our plan to repatriate unremitted earnings of our Japanese subsidiary. For the nine months ended October 2, 2011, we recorded a tax provision of $15.1 million from continuing operations, which consisted primarily of foreign taxes.

 

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Table of Contents

On a quarterly basis, we evaluate the realizability of our deferred tax assets by jurisdiction and assess the need for a valuation allowance. At September 30, 2012, we believe that we will ultimately realize the deferred tax assets recorded on our condensed consolidated balance sheet. However, should we believe that it is more likely than not that our deferred tax assets would not be realized, our tax provision would increase in the period in which we determined that the realizability was not likely. We consider the probability of future taxable income and our historical profitability, among other factors, in assessing the realizability of our deferred tax assets.

Contractual Obligations

The following table reflects our contractual obligations as of September 30, 2012:

 

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

Long-Term Debt Obligations(1)

   $ 195,151       $ 3,863       $ 191,288       $ —         $ —         $ —     

Interest on Debt

     12,938         8,631         4,307         —           —           —     

Contingent Acquisition Payments

     16,513         16,513         —           —           —           —     

Operating Lease Obligations

     51,393         13,689         19,560         9,837         8,307         —     

Purchase Obligations

     217,622         214,429         3,193         —           —           —     

Retirement Plan Contributions

     51,680         5,265         10,609         11,271         24,535         —     

Other Long-Term Liabilities Reflected on the Balance Sheet under GAAP(2)

     80,735         —           30,592         —           —           50,143   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 626,032       $ 262,390       $ 259,549       $ 21,108       $ 32,842       $ 50,143   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Long-Term Debt Obligations include current maturities.
(2) Included in Other Long-Term Liabilities are liabilities for customer advances, extended warranty, uncertain tax positions and other obligations. For certain long-term obligations, we are unable to provide a reasonably reliable estimate of the timing of future payments relating to these obligations and therefore we included these amounts in the column marked “Other”.

 

40


Table of Contents

Liquidity and Capital Resources

Our cash, cash equivalents and marketable securities balances increased by $254.2 million in the nine months ended September 30, 2012, to $1.0 billion. Cash activity for the nine months ended September 30, 2012 and October 2, 2011 was as follows:

 

     For the Nine Months
Ended
 
     September 30,
2012
    October 2,
2011
 
     (in millions)  

Cash provided by operating activities:

    

Income from continuing operations, adjusted for non-cash items

   $ 387.6      $ 323.4   

Change in operating assets and liabilities, net of businesses sold

     (25.4     (104.6

Cash used for discontinued operations

     —          (4.2
  

 

 

   

 

 

 

Total cash provided by operating activities

     362.2        214.6   
  

 

 

   

 

 

 

Cash (used for) provided by investing activities from continuing operations

     (430.6     452.9   

Cash provided by investing activities from discontinued operations

     —          39.1   
  

 

 

   

 

 

 

Total cash (used for) provided by investing activities

     (430.6     492.0   
  

 

 

   

 

 

 

Total cash used for financing activities

     (19.7     (9.2
  

 

 

   

 

 

 

(Decrease) Increase in cash and cash equivalents

   $ (88.0   $ 697.4   
  

 

 

   

 

 

 

In the nine months ended September 30, 2012, changes in operating assets and liabilities, net of businesses sold, used cash of $25.4 million. This was due to a $43.8 million increase in operating assets, partially offset by an $18.4 million increase in operating liabilities.

The increase in operating assets was due to a $76.1 million increase in accounts receivable due to higher sales volume, partially offset by a $25.1 million decrease in inventories, and a $7.3 million decrease in other assets mainly due to a decrease in prepayments.

The increase in operating liabilities was due to a $50.3 million increase in accrued income taxes, a $4.3 million increase in accounts payable due to increased sales volume, and a $0.8 million increase in other accrued liabilities, partially offset by a $22.7 million decrease in accrued employee compensation due primarily to variable compensation payments, a $10.7 million decrease in customer advance payments and deferred revenue and $3.7 million of retirement plan contributions.

Investing activities during the nine months ended September 30, 2012 used cash of $430.6 million, due to $513.0 million used for purchases of marketable securities and $91.1 million used for purchases of property, plant and equipment, partially offset by proceeds from sales and maturities of marketable securities that provided cash of $70.9 million and $102.6 million, respectively.

Financing activities during the nine months ended September 30, 2012 used cash of $19.7 million, $17.9 million was from the issuance of common stock under stock option and stock purchase plans, and $7.6 million from the tax benefit related to stock options and restricted stock units, partially offset by $44.0 million of cash used for payments related to LitePoint acquisition contingent consideration and $1.2 million of cash used for a payment on long-term debt.

In the nine months ended October 2, 2011, changes in operating assets and liabilities, net of businesses sold, used cash of $104.6 million. This was due to a $10.6 million decrease in operating assets and a $115.2 million decrease in operating liabilities.

 

 

41


Table of Contents

The increase in operating assets was due to a $25.2 million decrease in accounts receivable resulting from increased collections, partially offset by $13.6 million increase in prepayments due primarily to supplier prepayments and a $1.0 million increase in inventories. The decrease in operating liabilities was due to a $53.3. million decrease in customer advance payments due to shipments of systems prepaid by customers, a $43.9 million decrease in accrued employee compensation due primarily to variable compensation payments, $6.4 million of retirement plan contributions, and a $5.0 million decrease in deferred revenue, a $3.4 million decrease in accounts payable due to decreased sales volume, and $3.1 million decrease in accrued income taxes.

Investing activities during the nine months ended October 2, 2011 provided cash of $452.9 million, due to $593.3 million used for purchases of marketable securities and $66.6 million used for purchases of property, plant and equipment, partially offset by proceeds from sales and maturities of marketable securities that provided cash of $627.4 million and $485.4 million, respectively.

Financing activities during the nine months ended October 2, 2011 used cash of $9.2 million, due to repurchase of 2.0 million shares of common stock for $23.9 million at an average price of $12.06 per share, $2.5 million for payment on long-term debt, partially offset by $17.2 million from the issuance of common stock under stock option and stock purchase plans.

We believe our cash, cash equivalents and marketable securities balance will be sufficient to meet working capital and expenditure needs for at least the next twelve months. The amount of cash, cash equivalents and marketable securities in the U.S. and our operations in the U.S. provide sufficient liquidity to fund our business activities in the U.S. We have approximately $300 million of cash outside the U.S. that if repatriated would incur additional taxes. Inflation has not had a significant long-term impact on earnings.

Equity Compensation Plans

As discussed in Note N “Stock Based Compensation” in our 2011 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 December 2011, the FASB issued ASU No. 2011-11, “Disclosures about Offsetting Assets and Liabilities.” This ASU is intended to enhance the understanding of the effects of netting arrangements on an entity’s financial statements, including financial instruments and derivative instruments that are either offset or subject to a master netting arrangement. The scope of this ASU includes derivatives, sale and repurchase agreements, reverse sale and repurchase agreements, and securities borrowing and lending arrangements. The provisions of this ASU are effective for interim and annual periods beginning on or after January 1, 2013.

 

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 February 29, 2012. 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, 2011.

 

42


Table of Contents
Item 4: Controls and Procedures

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

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

 

43


Table of Contents

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

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, 2011, 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 2010, Teradyne’s board of directors authorized a stock repurchase program for up to $200 million. Cumulatively, as of September 30, 2012, we have repurchased 2.6 million shares of common stock for $31.2 million at an average price of $11.84.

The following table includes information with respect to repurchases we made of our common stock during the three months ended September 30, 2012 (in thousands except per share price):

 

Period

  (a) Total
Number of
Shares
(or Units)
Purchased
    (b) Average
Price Paid per
Share (or Unit)
    (c) Total Number of
Shares (or Units)
Purchased as Part of
Publicly Announced
Plans or Programs
    (d) Maximum Number
(or Approximate Dollar
Value) of Shares (or
Units) that may Yet Be
Purchased Under the
Plans or Programs
 

July 2, 2012 – July 29, 2012

    —        $ —          —        $ 168,825   

July 30, 2012 – August 26, 2012

    —        $ —          —        $ 168,825   

August 27, 2012 – September 30, 2012

    —        $ —          —        $ 168,825   
 

 

 

   

 

 

   

 

 

   

 

 

 
    —        $ —          —        $ 168,825   
 

 

 

   

 

 

   

 

 

   

 

 

 

We satisfy the minimum withholding tax obligation due upon the vesting and the conversion of restricted stock units into shares of our common stock, by automatically withholding from the shares being issued a number of shares with an aggregate fair market value on the date of such vesting and conversion that would satisfy the withholding amount due.

 

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The following table includes information with respect to our common stock shares withheld to satisfy withholding tax obligations during the three months ended September 30, 2012 (in thousands except per share price):

 

Period

  (a) Total
Number of
Shares
(or Units)
Purchased
    (b) Average
Price Paid per
Share (or Unit)
    (c) Total Number of
Shares (or Units)
Purchased as Part of
Publicly Announced
Plans or Programs
    (d) Maximum Number
(or Approximate Dollar
Value) of Shares (or
Units) that may Yet Be
Purchased Under the
Plans or Programs
 

July 2, 2012 – July 29, 2012

    2      $ 14.01        —          —     

July 30, 2012 – August 26, 2012

    4      $ 15.41        —          —     

August 27, 2012 – September 30, 2012

    2      $ 15.63        —          —     
 

 

 

   

 

 

   

 

 

   

 

 

 
    8      $ 15.15        —          —     
 

 

 

   

 

 

   

 

 

   

 

 

 

 

Item 4: Mine Safety Disclosures

Not Applicable

 

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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)

November 9, 2012

 

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