TERADYNE, INC - Quarter Report: 2018 April (Form 10-Q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

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

For the quarterly period ended April 1, 2018

OR

 

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

For the transition period from                  to                 

Commission File No. 001-06462

 

 

TERADYNE, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Massachusetts		04-2272148
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)
600 Riverpark Drive, North Reading, Massachusetts		01864
(Address of Principal Executive Offices)		(Zip Code)

978-370-2700

(Registrant’s Telephone Number, Including Area Code)

 

 

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

Indicate by check mark whether the registrant has submitted electronically 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  ☒    No  ☐

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

 

Large accelerated filer		☒		Accelerated filer		☐
Non-accelerated filer		☐		(Do not check if a smaller reporting company)
Smaller reporting company		☐		Emerging growth company		☐

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

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

The number of shares outstanding of the registrant’s only class of Common Stock as of May 7, 2018 was 191,316,067 shares.

 

 

 

TERADYNE, INC.

INDEX

 

				Page No.
		PART I. FINANCIAL INFORMATION
Item 1.		Financial Statements (Unaudited):
		Condensed Consolidated Balance Sheets as of April  1, 2018 and December 31, 2017			1
		Condensed Consolidated Statements of Operations for the Three months ended April 1, 2018 and April 2, 2017			2
		Condensed Consolidated Statements of Comprehensive Income for the Three months ended April 1, 2018 and April 2, 2017			3
		Condensed Consolidated Statements of Cash Flows for the Three Months Ended April 1, 2018 and April 2, 2017			4
		Notes to Condensed Consolidated Financial Statements			5
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			34
Item 3.		Quantitative and Qualitative Disclosures about Market Risk			44
Item 4.		Controls and Procedures			45
		PART II. OTHER INFORMATION
Item 1.		Legal Proceedings			46
Item 1A.		Risk Factors			46
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			46
Item 4.		Mine Safety Disclosures			47
Item 6.		Exhibits			47

PART I

 

Item 1:

Financial Statements

TERADYNE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

		April 1, 2018				December 31, 2017
		(in thousands, except per share amount)
ASSETS
Current assets:
Cash and cash equivalents		$	637,873			$	429,843
Marketable securities			860,526				1,347,979
Accounts receivable, less allowance for doubtful accounts of $2,206 and $2,219 at April 1, 2018 and December 31, 2017, respectively			413,978				272,783
Inventories, net			131,857				107,525
Prepayments and other current assets			112,191				112,151
Total current assets			2,156,425				2,270,281
Property, plant and equipment, net			281,284				268,447
Marketable securities			89,259				125,926
Deferred tax assets			77,705				84,026
Retirement plans assets			17,928				17,491
Other assets			12,479				12,275
Acquired intangible assets, net			84,413				79,088
Goodwill			275,700				252,011
Total assets		$	2,995,193			$	3,109,545
LIABILITIES
Current liabilities:
Accounts payable		$	103,950			$	86,393
Accrued employees’ compensation and withholdings			86,292				141,694
Deferred revenue and customer advances			85,892				83,614
Other accrued liabilities			64,782				59,083
Contingent consideration			15,581				24,497
Income taxes payable			34,828				59,055
Total current liabilities			391,325				454,336
Retirement plans liabilities			124,689				119,776
Long-term deferred revenue and customer advances			21,726				30,127
Deferred tax liabilities			6,185				6,720
Long-term other accrued liabilities			16,683				10,273
Long-term contingent consideration			—				20,605
Long-term income taxes payable			160,181				148,075
Long-term debt			369,421				365,987
Total liabilities			1,090,210				1,155,899
Commitments and contingencies (See Note Q)
SHAREHOLDERS’ EQUITY
Common stock, $0.125 par value, 1,000,000 shares authorized; 193,808 and 195,548 shares issued and outstanding at April 1, 2018 and December 31, 2017, respectively			24,226				24,444
Additional paid-in capital			1,638,756				1,638,413
Accumulated other comprehensive income			25,881				18,776
Retained earnings			216,120				272,013
Total shareholders’ equity			1,904,983				1,953,646
Total liabilities and shareholders’ equity		$	2,995,193			$	3,109,545

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, 2017, are an integral part of the condensed

consolidated financial statements.

 

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TERADYNE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

		For the Three Months Ended
		April 1, 2018				April 2, 2017
		(in thousands, except per share amount)
Revenues:
Products		$	403,925			$	373,204
Services			83,542				83,709
Total revenues			487,467				456,913
Cost of revenues:
Cost of products			180,958				154,883
Cost of services			36,677				37,014
Total cost of revenues (exclusive of acquired intangible assets amortization shown separately below)			217,635				191,897
Gross profit			269,832				265,016
Operating expenses:
Selling and administrative			90,505				84,792
Engineering and development			74,408				75,978
Acquired intangible assets amortization			7,698				7,952
Restructuring and other			(313	)			2,511
Total operating expenses			172,298				171,233
Income from operations			97,534				93,783
Non-operating (income) expense:
Interest income			(5,981	)			(3,520	)
Interest expense			6,890				5,402
Other (income) expense, net			805				(115	)
Income before income taxes			95,820				92,016
Income tax provision			8,846				6,795
Net income		$	86,974			$	85,221
Net income per common share:
Basic		$	0.45			$	0.43
Diluted		$	0.43			$	0.42
Weighted average common shares—basic			195,255				200,005
Weighted average common shares—diluted			203,484				201,936
Cash dividend declared per common share		$	0.09			$	0.07

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, 2017, are an integral part of the condensed

consolidated financial statements.

 

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TERADYNE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

		For the Three Months Ended
		April 1, 2018				April 2, 2017
		(in thousands)
Net income		$	86,974			$	85,221
Other comprehensive income, net of tax:
Foreign currency translation adjustment, net of tax of $0, $0, respectively			10,541				8,963
Available-for-sale marketable securities:
Unrealized (losses) gains on marketable securities arising during period, net of tax of $(718), $420, respectively			(2,687	)			513
Less: Reclassification adjustment for losses (gains) included in net income, net of tax of $78, $(64), respectively			1,668				(95	)
			(1,019	)			418
Defined benefit pension and post-retirement plans:
Amortization of prior service (credit) cost included in net periodic pension and post-retirement expense/income, net of tax of $(18), $(38), respectively			(61	)			(68	)
Other comprehensive income			9,461				9,313
Comprehensive income		$	96,435			$	94,534

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, 2017, are an integral part of the condensed

consolidated financial statements.

 

3

TERADYNE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		For the Three Months Ended
		April 1, 2018				April 2, 2017
		(in thousands)
Cash flows from operating activities:
Net income		$	86,974			$	85,221
Adjustments to reconcile net income to net cash used for operating activities:
Depreciation			16,336				16,143
Amortization			9,204				11,070
Stock-based compensation			9,544				8,945
Provision for excess and obsolete inventory			3,522				2,726
Deferred taxes			8,696				(3,477	)
Contingent consideration adjustment			(4,968	)			634
Other			1,393				2
Changes in operating assets and liabilities, net of business acquired:
Accounts receivable			(140,747	)			(123,792	)
Inventories			(21,017	)			(62,152	)
Prepayments and other assets			(679	)			1,104
Accounts payable and other accrued expenses			(46,706	)			(7,553	)
Deferred revenue and customer advances			9,644				(3,333	)
Retirement plans contributions			(1,020	)			(947	)
Income taxes			(12,106	)			14,288
Net cash used for operating activities			(81,930	)			(61,121	)
Cash flows from investing activities:
Purchases of property, plant and equipment			(34,797	)			(22,066	)
Purchases of marketable securities			(490,324	)			(153,317	)
Proceeds from sales of marketable securities			800,671				213,593
Proceeds from maturities of marketable securities			212,698				88,184
Acquisition of business, net of cash acquired			(25,356	)			—
Net cash provided by investing activities			462,892				126,394
Cash flows from financing activities:
Issuance of common stock under stock purchase and stock option plans			10,654				15,084
Repurchase of common stock			(134,276	)			(37,730	)
Payments related to net settlement of employee stock compensation awards			(19,629	)			(12,289	)
Dividend payments			(17,588	)			(14,021	)
Payments of contingent consideration			(13,571	)			(1,050	)
Net cash used for financing activities			(174,410	)			(50,006	)
Effects of exchange rate changes on cash and cash equivalents			1,478				1,595
Increase in cash and cash equivalents			208,030				16,862
Cash and cash equivalents at beginning of period			429,843				307,884
Cash and cash equivalents at end of period		$	637,873			$	324,746

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, 2017, are an integral part of the condensed

consolidated financial statements.

 

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TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

A. THE COMPANY

Teradyne, Inc. (“Teradyne”) is a leading global supplier of automation equipment for test and industrial applications. Teradyne designs, develops, manufactures and sells automatic test systems used to test semiconductors, wireless products, data storage and complex electronics systems in the consumer electronics, wireless, automotive, industrial, computing, communications, and aerospace and defense industries. Teradyne’s industrial automation products include collaborative robotic arms, and advanced robotic control software used by global manufacturing and light industrial customers to improve quality, increase manufacturing and material handling efficiency and decrease manufacturing costs. Teradyne’s automatic test equipment and industrial automation products and services include:

 

•

semiconductor test (“Semiconductor Test”) systems;

 

•

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

 

•

industrial automation (“Industrial Automation”) products; and

 

•

wireless test (“Wireless Test”) systems.

B. ACCOUNTING POLICIES

Basis of Presentation

The consolidated interim financial statements include the accounts of Teradyne and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated. These interim financial statements are unaudited and reflect all normal recurring adjustments that are, in the opinion of management, necessary for the fair statement of such interim financial statements. Certain prior year amounts were reclassified to conform to the current year presentation. The December 31, 2017 condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

The accompanying financial information should be read in conjunction with the consolidated financial statements and notes thereto contained in Teradyne’s Annual Report on Form 10-K, filed with the U.S. Securities and Exchange Commission (“SEC”) on March 1, 2018, for the year ended December 31, 2017.

Preparation of Financial Statements and Use of Estimates

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

Revenue from Contracts with Customers

Teradyne adopted Accounting Standards Update (ASU) 2014-09, “Revenue from Contracts with Customers” (“ASC 606”) on January 1, 2018 using the modified retrospective method for all contracts not completed as of the date of adoption. The reported results for 2018 reflect the application of ASC 606 while the reported results for 2017 were prepared under the guidance of ASC 605, “Revenue Recognition” (“ASC 605”), which is also referred to herein as “Legacy GAAP” or the “previous guidance.” Teradyne recorded a net increase

 

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to retained earnings of $12.7 million as of January 1, 2018 due to the cumulative impact of adopting ASC 606. Refer to Note B: “Accounting Policies” in Teradyne’s 2017 Annual Report on Form 10-K for the policies in effect for revenue prior to January 1, 2018. The adoption of ASC 606 represents a change in accounting principle that will more closely align revenue recognition with the delivery of Teradyne’s hardware and services and will provide financial statement readers with enhanced disclosures. In accordance with ASC 606, revenue is recognized when or as a customer obtains control of promised goods or services. The amount of revenue recognized reflects the consideration to which Teradyne expects to be entitled to receive in exchange for fulfillment of the performance obligation. Teradyne’s primary source of revenue will continue to be from the sale of systems, instruments, robots, and the delivery of services.

In accordance with ASC 606, Teradyne recognizes revenues, when or as control is transferred to a customer. Teradyne’s determination of revenue is dependent upon a five step process outlined below.

Step 1: Identify the contract with the customer

Teradyne accounts for a contract with a customer when there is written approval, the contract is committed, the rights of the parties, including payment terms, are identified, the contract has commercial substance and consideration is probable of collection.

Step 2: Identify the performance obligations in the contract

Teradyne periodically enters into contracts with its customers in which a customer may purchase a combination of goods and or services, such as products with extended warranty obligations. Teradyne determines performance obligations by assessing whether the products or services are distinct from the other elements of the contract. In order to be distinct the product or service must perform either on its own or with readily available resources and must be separate within the context of the contract.

Step 3: Determine the transaction price

Teradyne considers the amount stated on the face of the purchase order to be the transaction price. Teradyne does not have material variable consideration which could impact the stated purchase price agreed to by Teradyne and the customer.

Step 4: Allocate the transaction price to the performance obligations in the contract

Transaction price is allocated to each individual performance obligation based on the standalone selling price of that performance obligation. Teradyne uses standalone transactions when available to value each performance obligation. If standalone transactions are not available, Teradyne will estimate the standalone selling price through market assessments or cost plus a reasonable margin analysis. Any discounts from standalone selling price are spread proportionally to each performance obligation.

Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation

In order to determine the appropriate timing for revenue recognition, Teradyne first determines if the transaction meets any of three criteria for over time recognition. If the transaction meets the criteria for over time recognition, Teradyne recognizes revenue as the good or service is delivered. Teradyne uses input variables such as hours or months utilized or costs incurred to determine the amount of revenue to recognize in a given period. Input variables are used as they best align consumption with benefit to the customer. For transactions which do not meet the criteria for over time recognition, Teradyne will recognize revenue at a point in time based on an assessment of the five criteria for transfer of control. Teradyne has concluded that revenue should be recognized when shipped or delivered based on contractual terms. Typically acceptance of Teradyne’s products and services is a formality as Teradyne delivers similar systems, instruments and robots to standard specifications. In cases where acceptance is not deemed a formality, Teradyne will defer revenue recognition until customer acceptance.

 

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Revenue recognized in accordance with ASC 606 was $483.2 million for the period ended April 1, 2018. Teradyne also recognized $4.3 million in revenue on leases of Teradyne systems which are accounted for outside of ASC 606.

Disaggregation of Revenue

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

 

		Semiconductor Test								System Test												Industrial Automation				Wireless Test				Corporate and Other				Consolidated
		SOC(1)				Memory				Defense/ Aerospace				Storage Test				Production Board Test
		(in thousands)
Three Months Ended April 1, 2018
Americas
Point in Time		$	9,600			$	2,862			$	11,597			$	279			$	1,760			$	14,373			$	4,979			$	(221	)		$	45,229
Over Time			8,791				696				6,188				—				757				89				112				—				16,633
Europe, Middle East and Africa
Point in Time			12,125				139				1,497				—				4,037				22,573				1,041				—				41,412
Over Time			5,214				269				551				—				1,559				143				227				—				7,963
Asia Pacific
Point in Time			224,851				66,273				101				10,122				1,861				11,583				13,664				—				328,455
Over Time			36,338				2,323				208				1,533				735				73				2,296				—				43,506
Lease Revenue			3,847				—				—				—				234				—				188				—				4,269
Total		$	300,766			$	72,562			$	20,142			$	11,934			$	10,943			$	48,834			$	22,507			$	(221	)		$	487,467

 

(1)	System on a chip (“SOC”)

Performance Obligations

Hardware

Teradyne hardware consists primarily of semiconductor test systems and instruments, defense/aerospace test instrumentation and systems, storage test systems and instruments, circuit-board test and inspection systems and instruments, collaborative robots, and wireless test systems. The hardware includes a standard 12 month warranty. This warranty is not considered a distinct performance obligation because it does not obligate Teradyne to provide a separate service to the customer and it cannot be purchased separately. Teradyne’s hardware is recognized at a point in time upon transfer of control to the customer.

Extended Warranty

Customers have the option to purchase an extended warranty, which extends the warranty period for systems and robots beyond the one year standard warranty. The extended warranty is purchased in the same transaction as the system or robot purchase and is classified as a separate performance obligation which meets the criteria for over time recognition. The relative standalone selling price of the extended warranty is recognized ratably over the course of the extended warranty based on months completed.

Training and Applications Support

Teradyne sells training and applications support to customers either in standalone transactions or included with system purchases. The training and support allow the customer to use Teradyne’s systems efficiently and

 

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effectively. Training and applications support included in system orders are valued based on their standalone selling price and all training and applications support is recognized over time as the customer receives and consumes the benefit associated with each. Both are recognized using an input method of hours consumed as this best depicts the transfer of services to the customer.

Service Agreements

Service agreements are recognized ratably over the period of agreement based on months completed.

Post-Contract Customer Support (“PCS”)

Teradyne provides support services for certain systems and robots outside of warranty. These services include telephone support, bug fixes, and when-and-if available upgrades. Standalone selling price for PCS is not directly observable as Teradyne does not sell these services separately. Teradyne has estimated the standalone selling price for these services based on adjusted market assessments. Revenue for PCS is recognized ratably over the performance period.

Teradyne does not allow customer returns or provide refunds to customers for any products or services.

Contract Balances

The following table provides information about contract liabilities. Teradyne does not have material contract assets on the balance sheet.

 

		April 1, 2018				January 1, 2018 (as adjusted)				Increase
		(in thousands)
Deferred revenue and customer advances		$	85,892			$	76,638			$	9,254
Long-term deferred revenue and customer advances			21,726				20,848				878

The amount of revenue recognized during the quarter ended April 1, 2018 that was included within the deferred revenue and customer advances balance at January 1, 2018 was $21.8 million and primarily relates to extended warranties, training, application support, and PCS. Each of these represents a distinct performance obligation. Customers typically pay for these services net 30 to 60 days from the date that transfer of control of the associated system or product occurs.

Remaining Performance Obligations

Teradyne does not have material remaining performance obligations from contracts with an original expected duration of greater than one year.

Significant Judgments

Teradyne makes no significant judgements in determining the amount or timing of revenue recognition.

Practical Expedients

Teradyne has adopted the practical expedients available within ASC 340 “Other Assets and Deferred Costs” for contract assets, specifically in relation to incremental costs of obtaining a contract. Teradyne generally expenses sales commissions when incurred because the amortization period would be less than one year. Teradyne records these costs within selling and administrative expenses.

 

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Teradyne has adopted the practical expedient which states an entity need not adjust the promised amount of consideration for the effects of a significant financing component if the entity expects, at contract inception, that the period between when the entity transfers a promised good or service to the customer and when the customer pays for that good or service will be one year or less. Teradyne does not have material payments associated with performance obligations outside this one year time frame.

Impacts

The following tables summarize the impact of ASC 606 to Teradyne’s consolidated financial statements. Differences are the result of timing differences between the recognition of revenue under ASC 606 and ASC 605 primarily with respect to software transactions deferred due to lack of vendor specific objective evidence of price under ASC 605 and Teradyne’s assessment of acceptance under ASC 606. Under Legacy GAAP Teradyne did not recognize revenue prior to acceptance if payment, title, or risk of loss was tied to acceptance. Under ASC 606, Teradyne recognizes revenue prior to receipt of acceptance if acceptance is deemed a formality.

Condensed Consolidated Balance Sheet:

 

		April 1, 2018
		As reported				Adjustments to Recognize under Legacy GAAP				Legacy GAAP
		(in thousands)
ASSETS
Accounts receivable, less allowance for doubtful accounts		$	413,978			$	(67,728	)		$	346,250
Inventories, net			131,857				27,749				159,606
Deferred tax assets			77,705				2,923				80,628
LIABILITIES
Deferred revenue and customer advances		$	85,892			$	4,990			$	90,882
Income taxes payable			34,828				(5,167	)			29,661
Long-term deferred revenue and customer advances			21,726				9,178				30,904
SHAREHOLDERS’ EQUITY
Retained earnings		$	216,120			$	(46,057	)		$	170,063

Condensed Consolidated Statement of Operation:

 

		Three months ended April 1, 2018
		As Reported				Adjustments to Recognize under Legacy GAAP				Legacy GAAP
		(in thousands except per share amounts)
Total revenues		$	487,467			$	(65,642	)		$	421,825
Total cost of revenues			217,635				(27,749	)			189,886
Income tax provision			8,846				(4,515	)			4,331
Net income			86,974				(33,378	)			53,596
Net income per common share:
Basic		$	0.45			$	(0.17	)		$	0.27
Diluted		$	0.43			$	(0.16	)		$	0.26

Retirement Benefits

In March 2017, the FASB issued ASU 2017-07, “Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit

 

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Cost.” Teradyne retrospectively adopted the new accounting guidance on presentation of net periodic pension costs and net periodic postretirement benefit costs in the first quarter of 2018. This guidance requires the service cost component of net benefit costs to be reported in the same line item in the consolidated statement of operations as other employee compensation costs. The non-service components of net benefit costs such as interest cost, expected return on assets, amortization of prior service cost, and actuarial gains or losses, are required to be reported separately outside of income or loss from operations. Following the adoption of this guidance, Teradyne continues to record the service cost component in the same line item as other employee compensation costs and the non-service components of net benefit costs such as interest cost, expected return on assets, amortization of prior service cost, and actuarial gains or losses are reported within other (income) expense, net. The retrospective adoption of this standard increased the first quarter of 2017 income from operations by $0.4 million due to the removal of the non-service component of pension expense and decreased other income (expense), net by the same amount with no impact to net income.

Financial Assets and Financial Liabilities

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” Teradyne adopted the new accounting guidance in the first quarter of 2018 using the modified retrospective approach. This guidance requires that changes in fair value of equity securities be accounted for directly in earnings. Previously, the changes in fair value were recorded in accumulated other comprehensive income on the balance sheet. Teradyne continues to record realized gains in interest income and realized losses in interest expense. The adoption of this new accounting guidance increased the January 1, 2018 retained earnings balance by $3.1 million and decreased the accumulated other comprehensive income balance by the same amount.

Contingencies and Litigation

Teradyne may be subject to certain legal proceedings, lawsuits and other claims as discussed in Note Q: “Commitments and Contingencies.” Teradyne accrues for a loss contingency, including legal proceedings, lawsuits, pending claims and other legal matters, when the likelihood of a loss is probable and the amount of the loss can be reasonably estimated. When the reasonable estimate of the loss is within a range of amounts, and no amount in the range constitutes a better estimate than any other amount, Teradyne accrues the amount at the low end of the range. Teradyne adjusts the accruals from time to time as additional information is received, but the loss incurred may be significantly greater than or less than the amount accrued. Loss contingencies are disclosed when they are material and there is at least a reasonable possibility that a loss has been incurred. Attorney fees related to legal matters are expensed as incurred.

C. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

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

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” The guidance in this ASU supersedes the lease recognition requirements in Accounting Standards Codification (“ASC”) Topic 840,

 

10

“Leases.” The new standard establishes a right- of-use (“ROU”) model that requires a lessee to record an ROU asset and a lease liability on the balance sheet for all leases with terms longer than twelve months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the statements of operations. The new standard is effective for annual periods beginning after December 15, 2018 with early adoption permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. Teradyne is currently evaluating the impact of this ASU on its financial position and results of operations.

D. ACQUISITIONS

Energid Technologies Corporation

On February 26, 2018, Teradyne acquired all the issued and outstanding shares of Energid Technologies Corporation (“Energid”) for a total preliminary purchase price of approximately $27.6 million. Energid’s technology enables and simplifies the programming of complex robotic motions used in a wide variety of end markets, ranging from heavy industry to healthcare; utilizing both traditional robots and collaborative robots. The Energid acquisition was accounted for as a business combination and, accordingly, Energid’s results have been included in Teradyne’s Industrial Automation segment from the date of acquisition. As of the acquisition date, Teradyne’s preliminary purchase price allocation was goodwill of $15.7 million, acquired intangible assets of $10.9 million with an average estimated useful life of 6.1 years, and $1.0 million of net tangible assets. The acquisition was not material to our condensed consolidated financial statements.

E. INVENTORIES

Inventories, net consisted of the following at April 1, 2018 and December 31, 2017:

 

		April 1, 2018				December 31, 2017
		(in thousands)
Raw material		$	74,762			$	62,668
Work-in-process			21,256				19,464
Finished Goods			35,839				25,393
		$	131,857			$	107,525

Inventory reserves for the periods ending April 1, 2018 and December 31, 2017 were $103.4 million and $102.9 million, respectively.

F. FINANCIAL INSTRUMENTS

Cash Equivalents

Teradyne considers all highly liquid investments with maturities of three months or less at the date of acquisition to be cash equivalents.

Marketable Securities

Effective January 1, 2018, Teradyne adopted ASU 2016-01, “Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” using the modified retrospective approach. This guidance requires that changes in fair value of equity securities be accounted for directly in earnings. Prior to 2018, the changes in fair value of equity securities were recorded in accumulated other comprehensive income on the balance sheet.

 

11

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

 

•

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

 

•

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

 

•

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

Teradyne uses the market and income approach techniques to value its financial instruments and there were no changes in valuation techniques during the three months ended April 1, 2018 and April 2, 2017. As defined in ASC 820-10, “Fair Value Measurements and Disclosures,” fair value is the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. ASC 820-10 requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:

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

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

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

Teradyne’s available-for-sale debt securities are classified as Level 2, and equity securities are classified as Level 1. Acquisition-related contingent consideration is classified as Level 3. Teradyne determines the fair value of acquisition-related contingent consideration using a Monte Carlo simulation model. Assumptions utilized in the model include forecasted revenues, revenue volatility and discount rate. The vast majority of Level 2 securities are fixed income securities priced by third party pricing vendors. These pricing vendors utilize the most recent observable market information in pricing these securities or, if specific prices are not available, use other observable inputs like market transactions involving identical or comparable securities.

Realized gains recorded in the three months ended April 1, 2018 and April 2, 2017 were $0.3 million and $0.3 million, respectively. Realized losses recorded in the three months ended April 1, 2018 and April 2, 2017 were $1.5 million and $0.2 million, respectively. Realized gains are included in interest income and realized losses are included in interest expense.

Unrealized gains and losses on available-for-sale debt securities are included in accumulated other comprehensive income (loss). Changes in fair value of equity securities are included in other (income) expense, net. The cost of securities sold is based on the specific identification method.

During the three months ended April 1, 2018 and April 2, 2017, there were no transfers in or out of Level 1, Level 2 or Level 3 financial instruments.

 

12

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 April 1, 2018 and December 31, 2017.

 

		April 1, 2018
		Quoted Prices in Active Markets for Identical Instruments (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)				Total
		(in thousands)
Assets
Cash		$	155,543			$	—			$	—			$	155,543
Cash equivalents			306,710				175,620				—				482,330
Available-for-sale debt securities:
U.S. Treasury securities			—				611,946				—				611,946
Commercial paper			—				252,158				—				252,158
Corporate debt securities			—				44,218				—				44,218
U.S. government agency securities			—				10,726				—				10,726
Certificates of deposit and time deposits			—				4,824				—				4,824
Debt mutual funds			2,741				—				—				2,741
Non-U.S. government securities			—				559				—				559
Equity securities:
Mutual funds			22,613				—				—				22,613
		$	487,607			$	1,100,051			$	—			$	1,587,658
Derivative assets			—				12				—				12
Total		$	487,607			$	1,100,063			$	—			$	1,587,670
Liabilities
Contingent consideration		$	—			$	—			$	15,581			$	15,581
Derivative liabilities			—				224				—				224
Total		$	—			$	224			$	15,581			$	15,805

Reported as follows:

 

		(Level 1)				(Level 2)				(Level 3)				Total
		(in thousands)
Assets
Cash and cash equivalents		$	462,253			$	175,620			$	—			$	637,873
Marketable securities			—				860,526				—				860,526
Long-term marketable securities			25,354				63,905				—				89,259
Prepayments			—				12				—				12
Total		$	487,607			$	1,100,063			$	—			$	1,587,670
Liabilities			.
Other current liabilities		$	—			$	224			$	—			$	224
Contingent consideration			—				—				15,581				15,581
Total		$	—			$	224			$	15,581			$	15,805

 

13

		December 31, 2017
		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		$	197,955			$	—			$	—			$	197,955
Cash equivalents			206,335				25,553				—				231,888
Available-for-sale securities:
U.S. Treasury securities			—				855,795				—				855,795
Commercial paper			—				282,840				—				282,840
Certificates of deposit and time deposits			—				167,342				—				167,342
Corporate debt securities			—				133,186				—				133,186
Equity and debt mutual funds			23,430				—				—				23,430
U.S. government agency securities			—				10,726				—				10,726
Non-U.S. government securities			—				586				—				586
		$	427,720			$	1,476,028			$	—			$	1,903,748
Derivative assets			—				389				—				389
Total		$	427,720			$	1,476,417			$	—			$	1,904,137
Liabilities
Contingent consideration		$	—			$	—			$	45,102			$	45,102
Derivative liabilities			—				446				—				446
Total		$	—			$	446			$	45,102			$	45,548

Reported as follows:

 

		(Level 1)				(Level 2)				(Level 3)				Total
		(in thousands)
Assets
Cash and cash equivalents		$	404,290			$	25,553			$	—			$	429,843
Marketable securities			—				1,347,979				—				1,347,979
Long-term marketable securities			23,430				102,496				—				125,926
Prepayments			—				389				—				389
Total		$	427,720			$	1,476,417			$	—			$	1,904,137
Liabilities
Other accrued liabilities		$	—			$	446			$	—			$	446
Contingent consideration			—				—				24,497				24,497
Long-term contingent consideration			—				—				20,605				20,605
Total		$	—			$	446			$	45,102			$	45,548

 

14

Changes in the fair value of Level 3 contingent consideration for the three months ended April 1, 2018 and April 2, 2017 were as follows:

 

		For the Three Months Ended
		April 1, 2018				April 2, 2017
		(in thousands)
Balance at beginning of period		$	45,102			$	38,332
Payments (a)			(24,553	)			(1,050	)
Fair value adjustment (b)			(4,968	)			634
Balance at end of period		$	15,581			$	37,916

 

(a)

In the three months ended April 1, 2018, Teradyne paid $24.6 million of contingent consideration for the earn-out in connection with the acquisition of Universal Robots A/S (“Universal Robots”). In the three months ended April 2, 2017, Teradyne paid $1.1 million of contingent consideration for the earn-out in connection with the acquisition of Avionics Interface Technology, LLC (“AIT”).

(b)

In the three months ended April 1, 2018, the fair value of contingent consideration for the earn-out in connection with the acquisition of Universal Robots was decreased by $5.0 million, primarily due to a decrease in forecasted revenue. In the three months ended April 2, 2017, the fair value of contingent consideration for the earn-out in connection with the acquisition of Universal Robots was increased by $0.6 million primarily due to an increase in forecasted revenue and a decrease in the discount rate.

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

 

Liability

April 1, 2018 Fair Value

Valuation Technique

Unobservable Inputs

Weighted Average

(in thousands)

Contingent consideration (Universal Robots)

$

15,581

Monte Carlo Simulation

Revenue for the period July 1,     2015—December 31, 2018 volatility

13.0

%

Discount Rate

3.8

%

As of April 1, 2018, the significant unobservable inputs used in the Monte Carlo simulation to fair value the Universal Robots contingent consideration include forecasted revenue, revenue volatility and discount rate. Increases or decreases in the inputs would result in a higher or lower fair value measurement. The maximum payment for the remaining Universal Robots revenue earn-out is $25.0 million.

The carrying amounts and fair values of Teradyne’s financial instruments at April 1, 2018 and December 31, 2017 were as follows:

 

		April 1, 2018								December 31, 2017
		Carrying Value				Fair Value				Carrying Value				Fair Value
		(in thousands)
Assets
Cash and cash equivalents		$	637,873			$	637,873			$	429,843			$	429,843
Marketable securities			949,785				949,785				1,473,905				1,473,905
Derivative assets			12				12				389				389
Liabilities
Contingent consideration			15,581				15,581				45,102				45,102
Derivative liabilities			224				224				446				446
Convertible debt (1)			369,421				700,626				365,987				659,525

 

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

 

15

The fair values of accounts receivable, net and accounts payable approximate the carrying value due to the short-term nature of these instruments.

The following table summarize the composition of available-for-sale marketable securities at April 1, 2018:

 

		April 1, 2018
		Cost				Unrealized Gain				Unrealized (Loss)				Fair Market Value				Fair Market Value of Investments with Unrealized Losses
		(in thousands)
U.S. Treasury securities		$	614,365			$	19			$	(2,438	)		$	611,946			$	610,938
Commercial paper			252,579				17				(438	)			252,158				249,871
Corporate debt securities			43,472				1,200				(454	)			44,218				17,742
U.S. government agency securities			10,791				—				(65	)			10,726				10,726
Certificates of deposit and time deposits			4,820				4				—				4,824				—
Debt mutual funds			2,799				—				(58	)			2,741				1,679
Non-U.S. government securities			559				—				—				559				—
		$	929,385			$	1,240			$	(3,453	)		$	927,172			$	890,956

Reported as follows:

 

		Cost				Unrealized Gain				Unrealized (Loss)				Fair Market Value				Fair Market Value of Investments with Unrealized Losses
		(in thousands)
Marketable securities		$	861,794			$	54			$	(1,322	)		$	860,526			$	847,446
Long-term marketable securities			67,591				1,186				(2,131	)			66,646				43,510
		$	929,385			$	1,240			$	(3,453	)		$	927,172			$	890,956

The following table summarize the composition of available-for-sale marketable securities at December 31, 2017:

 

		December 31, 2017
		Cost				Unrealized Gain				Unrealized (Loss)				Fair Market Value				Fair Market Value of Investments with Unrealized Losses
		(in thousands)
U.S. Treasury securities		$	858,258			$	72			$	(2,535	)		$	855,795			$	850,163
Commercial paper			283,009				18				(187	)			282,840				258,933
Certificates of deposit and time deposits			167,523				6				(187	)			167,342				138,340
Corporate debt securities			131,179				2,380				(373	)			133,186				91,010
Equity and debt mutual funds			19,403				4,102				(75	)			23,430				1,723
U.S. government agency securities			10,775				—				(49	)			10,726				10,726
Non-U.S. government securities			582				4				—				586				—
		$	1,470,729			$	6,582			$	(3,406	)		$	1,473,905			$	1,350,896

 

16

Reported as follows:

 

		Cost				Unrealized Gain				Unrealized (Loss)				Fair Market Value				Fair Market Value of Investments with Unrealized Losses
		(in thousands)
Marketable securities		$	1,349,970			$	38			$	(2,029	)		$	1,347,979			$	1,288,844
Long-term marketable securities			120,759				6,544				(1,377	)			125,926				62,052
		$	1,470,729			$	6,582			$	(3,406	)		$	1,473,905			$	1,350,896

As of April 1, 2018, the fair market value of investments in debt securities with unrealized losses totaled $891.0 million. Of this value, $62.1 million had unrealized losses of $1.6 million for greater than one year and $828.9 million had unrealized losses of $1.9 million for less than one year.

As of December 31, 2017, the fair market value of investments with unrealized losses totaled $1,350.9 million. Of this value, $141.0 million had unrealized losses of $1.2 million for greater than one year and $1,209.9 million had unrealized losses of $2.2 million for less than one year.

Teradyne reviews its investments to identify and evaluate investments that have an indication of possible impairment. Based on this review, Teradyne determined that the unrealized losses related to these investments at April 1, 2018 and December 31, 2017 were temporary.

The contractual maturities of investments in debt securities held at April 1, 2018 were as follows:

 

		April 1, 2018
		Cost				Fair Market Value
		(in thousands)
Due within one year		$	861,794			$	860,526
Due after 1 year through 5 years			10,173				10,058
Due after 5 years through 10 years			14,583				13,823
Due after 10 years			40,036				40,024
Total		$	926,586			$	924,431

Contractual maturities of investments in debt securities held at April 1, 2018 exclude $2.7 million of debt mutual funds as they do not have a contractual maturity date.

Derivatives

Teradyne conducts business in a number of foreign countries, with certain transactions denominated in local currencies. The purpose of Teradyne’s foreign currency management is to minimize the effect of exchange rate fluctuations on certain foreign currency denominated monetary assets and liabilities. Teradyne does not use derivative financial instruments for trading or speculative purposes.

To minimize the effect of exchange rate fluctuations associated with the remeasurement of monetary assets and liabilities denominated in foreign currencies, Teradyne enters into foreign currency forward contracts. The change in fair value of these derivatives is recorded directly in earnings, and is used to offset the change in value of monetary assets and liabilities denominated in foreign currencies.

The notional amount of foreign currency forward contracts at April 1, 2018 and December 31, 2017 was $108.8 million and $116.8 million, respectively.

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

 

17

The following table summarizes the fair value of derivative instruments as of April 1, 2018 and December 31, 2017:

 

		Balance Sheet Location				April 1, 2018				December 31, 2017
						(in thousands)
Derivatives not designated as hedging instruments:
Foreign currency forward contracts assets			Prepayments			$	12			$	389
Foreign currency forward contracts liabilities			Other current liabilities				(224	)			(446	)
Total derivatives						$	(212	)		$	(57	)

The following table summarizes the effect of derivative instruments recognized in the statement of operations for the three months ended April 1, 2018 and April 2, 2017.

 

		Location of Losses Recognized in Statement of Operations		For the Three Months Ended
				April 1, 2018				April 2, 2017
				(in thousands)
Derivatives not designated as hedging instruments:
Foreign currency forward contracts		Other (income) expense, net		$	1,575			$	1,011

 

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

(2)	For the three months ended April 1, 2018 and April 2, 2017, net gains from the remeasurement of monetary assets and liabilities denominated in foreign currencies were $0.6 million and $1.5 million, respectively.

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

G. DEBT

Convertible Senior Notes

On December 12, 2016, Teradyne completed a private offering of $460.0 million convertible senior unsecured notes (the “Notes”). The Notes will mature on December 15, 2023, unless earlier repurchased or converted. The Notes bear interest from December 12, 2016 at a rate of 1.25% per year payable semi-annually in arrears on June 15 and December 15 of each year, beginning on June 15, 2017.

The Notes will be convertible at the option of the noteholders at any time prior to the close of business on the business day immediately preceding September 15, 2023, under the following circumstances: (1) during any calendar quarter beginning after March 31, 2017 (and only during such calendar quarter), if the closing sale price of Teradyne’s common stock, for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than 130% of the conversion price on each applicable trading day; (2) during the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price (as defined in the Indenture) per $1,000 principal amount of Notes for each trading day of the measurement period was less than 98% of the product of the closing sale price of the Teradyne’s common stock and the conversion rate on each such trading day; and (3) upon the occurrence of specified corporate events. On or after September 15, 2023 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their Notes at any time, regardless of the foregoing circumstances. Teradyne may satisfy its conversion obligation by paying or delivering cash, shares of its common stock or a combination of cash and shares of its common stock, at Teradyne’s election. As of December 31, 2017 the conversion price was approximately $31.80 per share of Teradyne’s common stock. The conversion rate is subject to adjustment under certain circumstances.

 

18

Concurrent with the offering of the Notes, Teradyne entered into convertible note hedge transactions (the “Note Hedge Transactions”) with the initial purchasers or their affiliates (the “Option Counterparties”). The Note Hedge Transactions cover, subject to customary anti-dilution adjustments, the number of shares of the common stock that underlie the Notes, with a strike price equal to the conversion price of the Notes of $31.80. The Note Hedge Transactions cover, subject to customary anti-dilution adjustments, approximately 14.5 million shares of Teradyne’s common stock.

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

Separately and concurrent with the pricing of the Notes, Teradyne entered into warrant transactions with the Option Counterparties (the “Warrant Transactions”) in which it sold net-share-settled (or, at its election subject to certain conditions, cash-settled) warrants to the Option Counterparties. The Warrant Transactions cover, subject to customary anti-dilution adjustments, approximately 14.5 million shares of common stock. As of December 31, 2017, the strike price of the warrants was approximately $39.91 per share. The strike price is subject to adjustments under certain circumstances. The Warrant Transactions could have a dilutive effect to Teradyne’s common stock to the extent that the market price per share of Teradyne’s common stock, as measured under the terms of the Warrant Transactions, exceeds the applicable strike price of the warrants.

The Note Hedge Transactions are expected to reduce the potential dilution to Teradyne’s common stock upon any conversion of the Notes. However, the Warrant Transactions could separately have a dilutive effect to the extent that the market value per share of Teradyne’s common stock exceeds the applicable strike price of the warrant. The net cost of the Notes Hedge Transactions, after being partially offset by the proceeds from the sale of the warrants, was approximately $33 million.

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

Teradyne’s effective annual interest rate on the Notes will be approximately 5.0%. The Notes are classified as long-term debt in the balance sheet based on their December 15, 2023 maturity date. Debt issuance costs of approximately $7.2 million are being amortized to interest expense using the effective interest method over the seven year term of the Notes. As of April 1, 2018, unamortized debt issuance costs were approximately $6.0 million.

 

19

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

 

		April 1, 2018				December 31, 2017
		(in thousands)
Debt Principal		$	460,000			$	460,000
Unamortized discount			90,579				94,013
Net Carrying amount of convertible debt		$	369,421			$	365,987
		For the Three Months Ended
		April 1, 2018				April 2, 2017
		(in thousands)
Contractual interest expense on the coupon		$	1,438			$	1,438
Amortization of the discount component and debt issue fees recognized as interest expense			3,434				3,268
Total interest expense on the convertible debt		$	4,872			$	4,706

As of April 1, 2018, the remaining unamortized discount was $90.6 million, which will be amortized over 5.8 years using the effective interest rate method. The carrying amount of the equity component was $100.8 million. As of April 1, 2018, the conversion rate was equal to the initial conversion price of approximately $31.80 per share and the if-converted value of the Notes was $661.2 million.

Revolving Credit Facility

On April 27, 2015, Teradyne entered into a Credit Agreement (the “Credit Agreement”) with Barclays Bank PLC, as administrative agent and collateral agent, and the lenders party thereto. The Credit Agreement provides for a five-year, senior secured revolving credit facility of up to $350 million (the “Credit Facility”). The Credit Agreement further provides that, subject to customary conditions, Teradyne may seek to obtain from existing or new lenders incremental commitments under the Credit Facility in an aggregate principal amount not to exceed $150 million.

Proceeds from the Credit Facility may be used for general corporate purposes and working capital. Teradyne incurred $2.3 million in costs related to the revolving credit facility. These costs are being amortized over the five-year term of the revolving credit facility and are included in interest expense in the statements of operations. As of May 11, 2018, Teradyne has not borrowed any funds under the Credit Facility.

The interest rates applicable to loans under the Credit Facility are, at Teradyne’s option, equal to either a base rate plus a margin ranging from 0.00% to 1.00% per annum or LIBOR plus a margin ranging from 1.00% to 2.00% per annum, based on the Consolidated Leverage Ratio of Teradyne and its Restricted Subsidiaries. In addition, Teradyne will pay a commitment fee on the unused portion of the commitments under the Credit Facility ranging from 0.125% to 0.350% per annum, based on the then applicable Consolidated Leverage Ratio.

Teradyne is not required to repay any loans under the Credit Facility prior to maturity, subject to certain customary exceptions. Teradyne is permitted to prepay all or any portion of the loans under the Credit Facility prior to maturity without premium or penalty, other than customary LIBOR breakage costs.

The Credit Agreement contains customary events of default, representations, warranties and affirmative and negative covenants that, among other things, limit Teradyne’s and its Restricted Subsidiaries’ ability to sell assets, grant liens on assets, incur other secured indebtedness and make certain investments and restricted payments, all subject to exceptions set forth in the Credit Agreement. The Credit Agreement also requires Teradyne to satisfy two financial ratios measured as of the end of each fiscal quarter: a consolidated leverage ratio and an interest coverage ratio. As of May 11, 2018, Teradyne was in compliance with all covenants.

 

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The Credit Facility is guaranteed by certain of Teradyne’s domestic subsidiaries and collateralized by assets of Teradyne and such subsidiaries, including a pledge of 65% of the capital stock of certain foreign subsidiaries.

H. PREPAYMENTS

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

 

		April 1, 2018				December 31, 2017
		(in thousands)
Contract manufacturer and supplier prepayments		$	76,204			$	82,503
Prepaid maintenance and other services			8,449				8,189
Prepaid taxes			9,938				5,039
Other prepayments			11,964				12,386
Total prepayments		$	106,555			$	108,117

I. DEFERRED REVENUE AND CUSTOMER ADVANCES

Deferred revenue and customer advances consist of the following and are included in short and long-term deferred revenue and customer advances on the balance sheet:

 

		April 1, 2018				December 31, 2017
		(in thousands)
Maintenance and training		$	59,365			$	57,256
Extended warranty			24,590				24,438
Customer advances, undelivered elements and other			23,663				32,047
Total deferred revenue and customer advances		$	107,618			$	113,741

J. PRODUCT WARRANTY

Teradyne generally provides a one-year warranty on its products, commencing upon installation, acceptance, delivery or shipment. A provision is recorded upon revenue recognition to cost of revenues for estimated warranty expense based on historical experience. Related costs are charged to the warranty accrual as incurred. The warranty balance below is included in other accrued liabilities on the balance sheet.

 

		For the Three Months Ended
		April 1, 2018				April 2, 2017
		(in thousands)
Balance at beginning of period		$	8,200			$	7,203
Accruals for warranties issued during the period			3,063				3,021
Adjustments related to pre-existing warranties			(139	)			(471	)
Settlements made during the period			(3,576	)			(2,699	)
Balance at end of period		$	7,548			$	7,054

 

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