Table of Contents
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM
10-Q
 
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 29,June 28, 2020
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
 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)
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading
Symbol(s)
 
Name of each exchange
on which registered
Common Stock, par value $0.125 per share
 
TER
 
Nasdaq Stock Market LLC
Indicate by
check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days.    
Yes
☒
    No  
☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
(232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files)    Yes  
☒
    No  
☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in
Rule
 12b-2
of the Exchange Act (check one):
Large accelerated filer
 
☒
  
Accelerated filer
 
☐
Non-accelerated
filer		 ☐  Emerging growth company ☐
Non-accelerated
filer
Smaller reporting company 
☐
Emerging growth company
☐
Smaller reporting company
☐
   
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  
☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2
of the Exchange Act).    Yes  
☐
    No  
☒
The number of shares outstanding of the registrant’s only class of Common Stock as of April 2
7
,July 24, 2020 was 165,768,292166,032,335 shares.
 
Table of Contents
TERADYNE, INC.
INDEX
Page No.
 
PART I. FINANCIAL INFORMATION
Item 1.
 
Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets as of June 28, 2020 and December 31, 2019
1
 
   
Item 1.
 
Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets as of March 29, 2020 and December 31, 2019
1
Condensed Consolidated Statements of Operations for the Three and Six Months Ended March 29,June 28, 2020 and March 31,June 30, 2019
2
   
 
Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended March 29,June 28, 2020 and March 31,June 30, 2019
3
   
 
Condensed Consolidated Statements of Shareholders’ Equity for the Three and Six Months Ended March 29,June 28, 2020 and March 31,June 30, 2019
4
   
 
Condensed Consolidated Statements of Cash Flows for the ThreeSix Months Ended March 29,June 28, 2020 and March 31,June 30, 2019
5
   
 
Notes to Condensed Consolidated Financial Statements
6
   
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
2730
   
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
36
4
2
   
Item 4.
Controls and Procedures
37
4
2
   
 
PART II. OTHER INFORMATION
Item 1.
 
Legal Proceedings
4
3
 
   
Item 1A.
Risk Factors
4
3
   
Item 1.
Legal Proceedings
38
Item 1A.
Risk Factors
38
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
39
4
5
   
Item 4.
Mine Safety Disclosures
40
4
5
   
Item 6.
Exhibits
41
4
6
Table of Contents
PART I
Item 1:
Financial Statements
TERADYNE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
   
June 28,
2020
  
December 31,
2019
 
   
(in thousands,
except per share amount)
 
ASSETS
   
Current assets:
   
Cash and cash equivalents
  $725,431  $773,924 
Marketable securities
   229,791   137,303 
Accounts receivable, less allowance for doubtful accounts of $1,829 and $1,736 at June 28, 2020 and December 31, 2019, respectively
   694,521   362,368 
Inventories, net
   206,088   196,691 
Prepayments and other current assets
   238,176   188,598 
  
 
 
  
 
 
 
Total current assets
   2,094,007   1,658,884 
Property, plant and equipment, net
   353,595   320,216 
Operating lease
right-of-use
assets, net
   56,172   57,539 
Marketable securities
   106,968   104,490 
Deferred tax assets
   79,210   75,185 
Retirement plans assets
   17,817   18,457 
Other assets
   11,854   10,332 
Acquired intangible assets, net
   107,563   125,480 
Goodwill
   422,003   416,431 
  
 
 
  
 
 
 
Total assets
  $3,249,189  $2,787,014 
  
 
 
  
 
 
 
LIABILITIES
   
Current liabilities:
   
Accounts payable
  $184,163  $126,617 
Accrued employees’ compensation and withholdings
   175,589   163,883 
Deferred revenue and customer advances
   124,224   104,876 
Other accrued liabilities
   119,732   70,871 
Operating lease liabilities
   20,000   19,476 
Contingent consideration
   16,789   9,106 
Income taxes payable
   89,216   44,200 
  
 
 
  
 
 
 
Total current liabilities
   729,713   539,029 
Retirement plans liabilities
   130,826   134,471 
Long-term deferred revenue and customer advances
   55,634   45,974 
Long-term contingent consideration
   32,948   30,599 
Long-term other accrued liabilities
   22,703   19,535 
Deferred tax liabilities
   11,997   14,070 
Long-term operating lease liabilities
   43,582   45,849 
Long-term income taxes payable
   74,930   82,642 
Debt
   402,305   394,687 
  
 
 
  
 
 
 
Total liabilities
   1,504,638   1,306,856 
  
 
 
  
 
 
 
Commitments and contingencies (See Note Q)
   
SHAREHOLDERS’ EQUITY
   
Common stock, $0.125 par value, 1,000,000 shares authorized: 165,806 and 166,410 shares issued and outstanding at June 28, 2020 and December 31, 2019, respectively
   20,725   20,801 
Additional
paid-in
capital
   1,730,716   1,720,129 
Accumulated other comprehensive loss
   (8,500)   (18,854)
Retained earnings (accumulated deficit)
   1,610   (241,918) 
  
 
 
  
 
 
 
Total shareholders’ equity
   1,744,551   1,480,158 
  
 
 
  
 
 
 
Total liabilities and shareholders’ equity
  $3,249,189  $2,787,014 
  
 
 
  
 
 
 
Table of Contents
PART I
Item 1:
Financial Statements
TERADYNE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
         
 
March 29,
2020
  
December 31,
2019
 
 
(in thousands,
except per share information)
 
ASSETS
      
Current assets:
      
Cash and cash equivalents
 $
593,494
  $
773,924
 
Marketable securities
  
211,001
   
137,303
 
Accounts receivable, less allowance for doubtful accounts of $1,813 and $1,736 at March 29, 2020 and December 31, 2019, respectively
  
487,365
   
362,368
 
Inventories, net
  
182,978
   
196,691
 
Prepayments and other current assets
  
227,740
   
188,598
 
         
Total current assets
  
1,702,578
   
1,658,884
 
Property, plant and equipment, net
  
332,241
   
320,216
 
Operating lease
right-of-use
assets, net
  
58,808
   
57,539
 
Marketable securities
  
100,513
   
104,490
 
Deferred tax assets
  
74,493
   
75,185
 
Retirement plans assets
  
18,229
   
18,457
 
Other assets
  
9,272
   
10,332
 
Acquired intangible assets, net
  
114,321
   
125,480
 
Goodwill
  
409,933
   
416,431
 
         
Total assets
 $
2,820,388
  $
2,787,014
 
         
LIABILITIES
      
Current liabilities:
      
Accounts payable
 $
129,633
  $
126,617
 
Accrued employees’ compensation and withholdings
  
119,226
   
163,883
 
Deferred revenue and customer advances
  
98,815
   
104,876
 
Other accrued liabilities
  
87,274
   
70,871
 
Operating lease liabilities
  
19,591
   
19,476
 
Contingent consideration
  
662
   
9,106
 
Income taxes payable
  
58,760
   
44,200
 
         
Total current liabilities
  
513,961
   
539,029
 
Retirement plans liabilities
  
125,970
   
134,471
 
Long-term deferred revenue and customer advances
  
50,791
   
45,974
 
Long-term other accrued liabilities
  
19,941
   
19,535
 
Long-term contingent consideration
  
19,810
   
30,599
 
Deferred tax liabilities
  
11,628
   
14,070
 
Long-term operating lease liabilities
  
46,328
   
45,849
 
Long-term incomes taxes payable
  
82,820
   
82,642
 
Debt
  
398,466
   
394,687
 
         
Total liabilities
  
1,269,715
   
1,306,856
 
         
Commitments and contingencies (See Note
Q
)
      
SHAREHOLDERS’ EQUITY
      
Common stock, $0.125 par value, 1,000,000 shares authorized
,
165,938 and 166,410 shares issued and outstanding at March 29, 2020 and December 31, 2019, respectively
  
20,742
   
20,801
 
Additional
paid-in
capital
  
1,721,367
   
1,720,129
 
Accumulated other comprehensive loss
  
(27,113
)  
(18,854
)
Accumulated deficit
  
(164,323
)  
(241,918
)
         
Total shareholders’ equity
  
1,550,673
   
1,480,158
 
         
Total liabilities and shareholders’ equity
 $
2,820,388
  $
2,787,014
 
         
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, 2019, are an integral part of the
condensed
consolidated financial statements.
1
Table of Contents
TERADYNE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
         
 
For the Three Months
Ended
 
 
March 29,
2020
  
March 31,
2019
 
 
(in thousands, except
per share amounts)
 
Revenues:
      
Products
 $
610,906
  $
393,442
 
Services
  
93,449
   
100,657
 
         
Total revenues
  
704,355
   
494,099
 
Cost of revenues:
      
Cost of products
  
259,996
   
165,368
 
Cost of services
  
38,809
   
41,096
 
         
Total cost of revenues (exclusive of acquired intangible assets amortization shown separately below)
  
298,805
   
206,464
 
         
Gross profit
  
405,550
   
287,635
 
Operating expenses:
      
Selling and administrative
  
111,388
   
102,013
 
Engineering and development
  
85,159
   
76,791
 
Acquired intangible assets amortization
  
9,891
   
10,634
 
Restructuring and other
  
(7,606
)  
5,112
 
         
Total operating expenses
  
198,832
   
194,550
 
         
Income from operations
  
206,718
   
93,085
 
Non-operating
(income) expense:
      
Interest income
  
(2,751
)  
(4,989
)
Interest expense
  
5,551
   
5,520
 
Other (income) expense, net
  
6,849
   
(1,425
)
         
Income before income taxes
  
197,069
   
93,979
 
Income tax provision (benefit)
  
20,878
   
(15,159
)
         
Net income
 $
176,191
  $
109,138
 
         
Net income per common share:
      
Basic
 $
1.06
  $
0.63
 
         
Diluted
 $
0.97
  $
0.62
 
         
Weighted average common shares—basic
  
166,589
   
173,532
 
         
Weighted average common shares—diluted
  
180,736
   
176,972
 
         
Cash dividend declared per common share
 $
0.10
  $
0.09
 
         
 
   
For the Three Months

Ended
  
For the Six Months

Ended
 
   
June 28,
2020
  
June 30,
2019
  
June 28,
2020
  
June 30,
2019
 
   
(in thousands, except per share amount)
 
Revenues:
     
Products
  $734,630  $457,511  $1,345,536  $850,953 
Services
   104,031   106,667   197,480   207,324 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total revenues
   838,661   564,178   1,543,016   1,058,277 
Cost of revenues:
     
Cost of products
   322,732   193,299   582,728   358,667 
Cost of services
   44,456   46,961   83,265   88,057 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total cost of revenues (exclusive of acquired intangible assets amortization shown separately below)
   367,188   240,260   665,993   446,724 
  
 
 
  
 
 
  
 
 
  
 
 
 
Gross profit
   471,473   323,918   877,023   611,553 
Operating expenses:
     
Selling and administrative
   113,259   108,811   224,647   210,824 
Engineering and development
   94,102   81,434   179,261   158,225 
Acquired intangible assets amortization
   8,941   10,083   18,832   20,717 
Restructuring and other
   37,222   (10,404)   29,616   (5,292) 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total operating expenses
   253,524   189,924   452,356   384,474 
  
 
 
  
 
 
  
 
 
  
 
 
 
Income from operations
   217,949   133,994   424,667   227,079 
Non-operating
(income) expense:
     
Interest income
   (1,368)   (4,384)   (4,119)   (9,373) 
Interest expense
   6,043   5,800   11,594   11,320 
Other (income) expense, net
   (4,017)   1,401   2,833   (24) 
  
 
 
  
 
 
  
 
 
  
 
 
 
Income before income taxes
   217,291   131,177   414,359   225,156 
Income tax provision
   28,383   33,780   49,261   18,621 
  
 
 
  
 
 
  
 
 
  
 
 
 
Net income
  $188,908  $97,397  $365,098  $206,535 
  
 
 
  
 
 
  
 
 
  
 
 
 
Net income per common share:
     
Basic
  $1.14  $0.57  $2.20  $1.20 
  
 
 
  
 
 
  
 
 
  
 
 
 
Diluted
  $1.05  $0.55  $2.02  $1.16 
  
 
 
  
 
 
  
 
 
  
 
 
 
Weighted average common shares—basic
   165,789   171,241   166,189   172,387 
  
 
 
  
 
 
  
 
 
  
 
 
 
Weighted average common shares—diluted
   180,257   178,590   180,497   177,781 
  
 
 
  
 
 
  
 
 
  
 
 
 
Cash dividend declared per common share
  $0.10  $0.09  $0.20  $0.18 
  
 
 
  
 
 
  
 
 
  
 
 
 
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, 2019, are an integral part of the condensed
consolidated financial statements.
2
Table of Contents
TERADYNE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
         
 
For the Three Months
Ended
 
 
March 29,
2020
  
March 31,
2019
 
 
(in thousands)
 
Net income
 $
176,191
  $
109,138
 
Other comprehensive income, net of tax:
      
Foreign currency translation adjustment, net of tax of $0, $0, respectively
  
(8,779
)  
(4,659
)
Available-for-sale
marketable securities:
      
Unrealized gains on debt securities arising during period, net of tax of $187, $577, respectively
  
1,037
   
2,100
 
Less: Reclassification adjustment for gains included in net income, net of tax of $(145), $(20), respectively
  
(515
)  
(70
)
         
  
522
   
2,030
 
Defined benefit pension and post-retirement plans:
      
Amortization of prior service benefit included in net periodic pension and post-retirement benefit, net of tax of $0, $(11), respectively
  
(2
)  
(37
)
         
Other comprehensive loss
  
(8,259
)  
(2,666
)
         
Comprehensive income
 $
167,932
  $
106,472
 
         
 
   
For the Three Months

Ended
  
For the Six Months

Ended
 
   
June 28,
  
June 30,
  
June 28,
  
June 30,
 
   
2020
  
2019
  
2020
  
2019
 
   
(in thousands)
 
Net income
  $188,908  $97,397  $365,098  $206,535 
Other comprehensive income, net of tax:
     
Foreign currency translation adjustment, net of tax of $0, $0, $0, $0, respectively
   15,805   5,642   7,026   983 
Available-for-sale
marketable securities:
     
Unrealized gains on debt securities arising during period, net of tax of $1,084, $678, $1,271, $1,256, respectively
   3,793   2,537   4,830   4,637 
Less: Reclassification adjustment for gains included in net income, net of tax of $(277), $(6), $(421), $(26), respectively
   (983)   (27)   (1,499)   (97) 
  
 
 
  
 
 
  
 
 
  
 
 
 
   2,810   2,510   3,331   4,540 
Defined benefit retirement plans:
     
Amortization of prior service credit, net of tax
of $0, $(11), $(1), $(21), respectively
   (2)   (37)   (3)   (74) 
  
 
 
  
 
 
  
 
 
  
 
 
 
Other comprehensive income
   18,613   8,115   10,354   5,449 
  
 
 
  
 
 
  
 
 
  
 
 
 
Comprehensive income
  $207,521  $105,512  $375,452  $211,984 
  
 
 
  
 
 
  
 
 
  
 
 
 
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, 2019, are an integral part of the condensed
consolidated financial statements.
3
Table of Contents
TERADYNE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited)
                         
 
Common
Stock
Shares
  
Common
Stock
Par
Value
  
Additional
Paid-in

Capital
  
Accumulated
Other
Comprehensive
Loss
  
Accumulated
Deficit
  
Total
Shareholders’
Equity
 
 
(in thousands)
 
For the Three Months Ended March 29, 2020
                  
Balance, December 31, 2019
  
166,410
  $
20,801
  $
1,720,129
  $
(18,854
) $
(241,918
) $
1,480,158
 
Net issuance of common stock under stock-based plans
  
872
   
109
   
(10,045
)        
(9,936
)
Stock-based compensation expense
        
11,283
         
11,283
 
Repurchase of common stock
  
(1,344
)  
(168
)        
(81,897
)  
(82,065
)
Cash dividends ($0.10 per share)
              
(16,699
)  
(16,699
)
Net income
              
176,191
   
176,191
 
Other comprehensive loss
           
(8,259
)     
(8,259
)
                         
Balance, March 29, 2020
  
165,938
   
20,742
   
1,721,367
   
(27,113
)  
(164,323
)  
1,550,673
 
                         
For the Three Months Ended March 31, 2019
                  
Balance, December 31, 2018
  
175,522
  $
21,940
  $
1,671,645
  $
(13,040
) $
(158,191
) $
1,522,354
 
Net issuance of common stock under stock-based plans
  
1,287
   
161
   
(210
)        
(49
)
Stock-based compensation expense
        
8,562
         
8,562
 
Repurchase of common stock
  
(4,456
)  
(557
)        
(150,913
)  
(151,470
)
Cash dividends ($0.09 per share)
              
(15,641
)  
(15,641
)
Net income
              
109,138
   
109,138
 
Other comprehensive loss
           
(2,666
)     
(2,666
)
                         
Balance, March 31, 2019
  
172,353
  $
21,544
  $
1,679,997
  $
(15,706
) $
(215,607
) $
1,470,228
 
                         
 
   
Common
Stock
Shares
  
Common
Stock
Par
Value
  
Additional
Paid-in

Capital
  
Accumulated
Other
Comprehensive
Loss
  
(Accumulated
Deficit)
Retain
ed

Earnings
  
Total
Shareholders’
Equity
 
   
(in thousands)
 
For the Three Months Ended June 28, 2020
       
Balance, March 29, 2020
   165,938  $20,742  $1,721,367  $(27,113)  $(164,323)  $1,550,673 
Net issuance of common stock under stock-based plans
   41   5   (451)           (446) 
Stock-based compensation expense
          9,800           9,800 
Repurchase of common stock
   (173)   (22)           (6,379)   (6,401) 
Cash dividends ($0.10 per share)
                  (16,596)   (16,596) 
Net income
                  188,908   188,908 
Other comprehensive income
              18,613       18,613 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Balance, June 28, 2020
   165,806  $20,725  $1,730,716  $(8,500)  $1,610  $1,744,551 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
For the Three Months Ended June 30, 2019
       
Balance, March 31, 2019
   172,353  $21,544  $1,679,997  $(15,706)  $(215,607)  $1,470,228 
Net issuance of common stock under stock-based plans
   99   13   679           692 
Stock-based compensation expense
          7,535           7,535 
Repurchase of common stock
   (2,016)   (252)           (88,902)   (89,154) 
Cash dividends ($0.09 per share)
                  (15,401)   (15,401) 
Net income
                  97,397   97,397 
Other comprehensive income
              8,115       8,115 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Balance, June 30, 2019
   170,436  $21,305  $1,688,211  $(7,591)  $(222,513)  $1,479,412 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
For the Six Months Ended June 28, 2020
       
Balance, December 31, 2019
   166,410  $20,801  $1,720,129  $(18,854)  $(241,918)  $1,480,158 
Net issuance of common stock under stock-based plans
   913   114   (10,496)           (10,382) 
Stock-based compensation expense
          21,083           21,083 
Repurchase of common stock
   (1,517)   (190)           (88,275)   (88,465) 
Cash dividends ($0.10 per share)
                  (33,295)   (33,295) 
Net income
                  365,098   365,098 
Other comprehensive income
              10,354       10,354 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Balance, June 28, 2020
   165,806  $20,725  $1,730,716  $(8,500)  $1,610  $1,744,551 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
For the Six Months Ended June 30, 2019
       
Balance, December 31, 2018
   175,522  $21,940  $1,671,645  $(13,040)  $(158,191)  $1,522,354 
Net issuance of common stock under stock-based plans
   1,385   174   469           643 
Stock-based compensation expense
          16,097           16,097 
Repurchase of common stock
   (6,471)   (809)           (239,815)   (240,624) 
Cash dividends ($0.09 per share)
                  (31,042)   (31,042) 
Net income
                  206,535   206,535 
Other comprehensive income
              5,449       5,449 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Balance, June 30, 2019
   170,436  $21,305  $1,688,211  $(7,591)  $(222,513)  $1,479,412 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
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, 2019, are an integral part of the condensed
consolidated financial statements.
4
Table of Contents
TERADYNE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
         
 
For the Three Months Ended
 
 
March 29,
2020
  
March 31,
2019
 
 
(in thousands)
 
Cash flows from operating activities:
      
Net income
 $
176,191
  $
109,138
 
Adjustments to reconcile net income from operations to net cash provided by operating activities:
      
Depreciation
  
18,489
   
16,651
 
Amortization
  
13,391
   
12,942
 
Stock-based compensation
  
10,460
   
9,474
 
Provision for excess and obsolete inventory
  
4,057
   
2,397
 
Deferred taxes
  
(1,825
)  
1,206
 
Contingent consideration adjustment
  
(10,020
)  
2,970
 
Losses (gains) on investments
  
4,657
   
(2,828
)
Other
  
503
   
219
 
Changes in operating assets and liabilities, net of businesses acquired:
      
Accounts receivable
  
(126,779
)  
(41,706
)
Inventories
  
15,818
   
(2,917
)
Prepayments and other assets
  
(39,620
)  
(18,648
)
Accounts payable and other liabilities
  
(35,323
)  
(53,323
)
Deferred revenue and customer advances
  
(913
)  
6,455
 
Retirement plans contributions
  
(1,262
)  
(1,210
)
Income taxes
  
15,278
   
(22,804
)
         
Net cash provided by operating activities
  
43,102
   
18,016
 
         
Cash flows from investing activities:
      
Purchases of property, plant and equipment
  
(36,700
)  
(25,711
)
Purchases of marketable securities
  
(187,119
)  
(375,184
)
Proceeds from maturities of marketable securities
  
98,457
   
141,201
 
Proceeds from sales of marketable securities
  
15,005
   
5,440
 
Acquisition of businesses, net of cash acquired
  
149
   
(6,970
)
Proceeds from life insurance
  
—  
   
273
 
         
Net cash used for investing activities
  
(110,208
)  
(260,951
)
         
Cash flows from financing activities:
      
Issuance of common stock under stock purchase and stock option plans
  
12,752
   
14,268
 
Repurchase of common stock
  
(79,039
)  
(156,468
)
Dividend payments
  
(16,686
)  
(15,627
)
Payments related to net settlement of employee stock compensation awards
  
(22,070
)  
(14,318
)
Payments of contingent consideration
  
(8,852
)  
(27,615
)
         
Net cash used for financing activities
  
(113,895
)  
(199,760
)
         
Effects of exchange rate changes on cash and cash equivalents
  
571
   
(329
)
         
Decrease in cash and cash equivalents
  
(180,430
)  
(443,024
)
Cash and cash equivalents at beginning of period
  
773,924
   
926,752
 
         
Cash and cash equivalents at end of period
 $
593,494
  $
483,728
 
         
 
   
For the Six Months Ended
 
   
June 28,
2020
  
June 30,
2019
 
   
(in thousands)
 
Cash flows from operating activities:
   
Net income
  $365,098  $206,535 
Adjustments to reconcile net income from operations to net cash provided by operating activities:
   
Depreciation
   38,305   33,882 
Amortization
   26,234   24,976 
Stock-based compensation
   21,367   18,109 
Contingent consideration adjustment
   19,239   (8,701) 
Provision for excess and obsolete inventory
   9,637   5,799 
Deferred taxes
   (7,163)   515 
Gains on investments
   (469)   (3,741) 
Retirement plan actuarial (gains) losses
   (99)   448 
Other
   523   429 
Changes in operating assets and liabilities, net of businesses acquired:
   
Accounts receivable
   (331,040)   (79,478) 
Inventories
   (3,728)   (2,447) 
Prepayments and other assets
   (49,479)   (17,067) 
Accounts payable and other liabilities
   113,578   (14,424) 
Deferred revenue and customer advances
   28,655   15,826 
Retirement plans contributions
   (2,501)   (2,414) 
Income taxes
   37,842   (14,973) 
  
 
 
  
 
 
 
Net cash provided by operating activities
   265,999   163,274 
  
 
 
  
 
 
 
Cash flows from investing activities:
   
Purchases of property, plant and equipment
   (84,014)   (58,956) 
Purchases of marketable securities
   (299,548)   (484,181) 
Proceeds from maturities of marketable securities
   182,984   233,193 
Proceeds from sales of marketable securities
   26,661   42,454 
Proceeds from life insurance
   546   273 
Acquisition of businesses, net of cash acquired
   149   (21,970) 
  
 
 
  
 
 
 
Net cash used for investing activities
   (173,222)   (289,187) 
  
 
 
  
 
 
 
Cash flows from financing activities:
   
Issuance of common stock under stock purchase and stock option plans
   12,757   15,089 
Repurchase of common stock
   (88,465)   (247,222) 
Dividend payments
   (33,266)   (31,019) 
Payments related to net settlement of employee stock compensation awards
   (22,519)   (14,446) 
Payments of contingent consideration
   (8,852)   (27,615) 
  
 
 
  
 
 
 
Net cash used for financing activities
   (140,345)   (305,213) 
  
 
 
  
 
 
 
Effects of exchange rate changes on cash and cash equivalents
   (925)   (519) 
  
 
 
  
��
 
 
Decrease in cash and cash equivalents
   (48,493)   (431,645) 
Cash and cash equivalents at beginning of period
   773,924   926,752 
  
 
 
  
 
 
 
Cash and cash equivalents at end of period
  $725,431  $495,107 
  
 
 
  
 
 
 
Supplemental cash flow disclosure
   
Non-cash investing activities:
   
Capital expenditures incurred but not yet paid
  $6,281  $4,068 
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, 2019, are an integral part of the condensed
consolidated financial statements.
5
Table of Contents
TERADYNE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A. THE COMPANY
Teradyne, Inc. (“Teradyne”) is a leading global supplier of automation equipment for test and industrial applications. Teradyne designs, develops, manufactures and sells automatic test systems used to test semiconductors, wireless products, data storage and complex electronics systems in the consumer electronics, wireless, automotive, industrial, computing, communications, and aerospace and defense industries. Teradyne’s industrial automation products include collaborative robotic arms, autonomous mobile robots, and advanced robotic control software used by global manufacturing and light industrial customers to improve quality, increase manufacturing and material handling efficiency and decrease
manufacturing
costs. Teradyne’s automatic test equipment and industrial automation products and services include:
semiconductor test (“Semiconductor Test”) systems;
defense/aerospace (“Defense/Aerospace”) test instrumentation and systems, storage and system level 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-ownedwholly 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, 2019 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.
America generally accepted accounting principles (“U.S. GAAP”) for complete financial statements. 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 2, 2020, for the year ended December 31, 2019.
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. Due to the
COVID-19
pandemic, there has been uncertainty and disruption in the global economy and our markets. Teradyne is not aware of any specific event or circumstance that would require an update to its estimates or judgments or a revision of the carrying value of its assets or liabilities as of May
4
,August 3, 2020, the date of issuance of this Quarterly Report on Form
10-Q.
These estimates may change, as new events occur and additional information is obtained. Actual results could differ significantly from these estimates under different assumptions or conditions.
Goodwill
On January 26, 2017, the Financial Accounting Standards Board (“FASB”) issued ASUAccounting Standards Update (“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. Teradyne adopted this standard on January 1, 2020, on a prospective basis. The adoption of ASU
2017-04
did not have a material impact on the consolidated statement of operations, cash flows, or earnings per share. Teradyne assesses goodwill for impairment at least annually in the fourth quarter, as of December 31, on a reporting unit basis, or more frequently, when events and circumstances occur indicating that the recorded goodwill may be impaired. Under ASU
2017-04,
goodwill impairment will be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance will remain largely unchanged. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. The same
one-step
impairment test will be applied to goodwill at all reporting units, even those with zero or negative carrying amounts. Entities will be required to disclose the amount of goodwill at reporting units with zero or negative carrying amounts.
6
Table of Contents
Credit Losses
In June 2016, the FASB issued ASU
2016-13, “Financial
“Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This standard introduced the expected credit losses methodology for the measurement of credit losses on financial assets that are not measured at fair value through net income and replaces the “incurred loss” model with an “expected credit loss” model that requires consideration of a broader range of information to estimate expected credit losses over the lifetime of the asset. Teradyne adopted this standard on January 1, 2020 on a modified retrospective basis. The adoption of ASU
2016-13
did not have a material impact on the consolidated statement of operations, balance sheets, cash flows, or earnings per share.
6
Table of Contents
C. ACQUISITIONS
AutoGuide LLC
On November 13, 2019, Teradyne acquired 100% of the membership interests of AutoGuide, LLC (“AutoGuide”), a maker of high-payload autonomous mobile robots (“AMRs”), based in Chelmsford, MA, an emerging and fast growing segment of the global forklift market. The total purchase price was approximately $81.6 million, which included cash paid of approximately $57.6 million and $24.0 million in fair value of contingent consideration payable upon achievement of certain performance targets, extending potentially through 2022. At March 29,June 28, 2020, the maximum contingent consideration that could be paid is $106.9 million.
The contingent consideration is payable upon achievement of certain thresholds and targets for revenue and earnings before interest and taxes for periods from January 1, 2019 to December 31, 2020, January 1, 2019 to December 31, 2021, and January 1, 2019 to December 31, 2022.
The valuation of the contingent consideration is dependent on the following assumptions: forecasted revenues, revenue volatility, earnings before interest and taxes, and discount rate. These assumptions were estimated based on a review of the historical and projected results.
The AutoGuide acquisition was accounted for as a businessbu
s
iness combination and, accordingly, the results have been included in Teradyne’s consolidated results of operations from the date of acquisition. AutoGuide’s AMRs are used for material transport of payloads up to 4,500
kg in manufacturing, warehouse and logistics applications. These products complement MiR’sMobile Industrial Robots Aps (“MiR”) lower payload products and expand the Industrial Automation segment, which is a key component of Teradyne’s growth strategy.
The allocation of the total purchase price to AutoGuide’s net tangible assets and identifiable intangible assets was based on their estimated fair values as of the acquisition date. The excess of the purchase price over the identifiable intangible assets and net tangible assets in the amount of
$41.2 
million was allocated to goodwill, which is deductible for tax purposes. AutoGuide’s results have been included in Teradyne’s Industrial Automation segment from the date of acquisition.
The following table represents the final allocation of the purchase price:
 
Purchase Price 
Allocation
 
 
(in thousands)
 
Goodwill
 $
41,223
 
Intangible assets
  
37,660
 
Tangible assets acquired and liabilities assumed:
   
Other current assets
  
3,661
 
Non-current assets
  
1,227
 
Accounts payable and current liabilities
  
(1,223
)
Long-term other liabilities
  
(949
)
     
Total purchase price
 $
81,599
 
     
   
Purchase Price

Allocation
 
   
(in thousands)
 
Goodwill
  $41,223 
Intangible assets
   37,660 
Tangible assets acquired and liabilities assumed:
  
Other current assets
   3,661 
Non-current
assets
   1,227 
Accounts payable and current liabilities
   (1,223) 
Long-term other liabilities
   (949) 
  
 
 
 
Total purchase price
  $81,599 
  
 
 
 
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Table of Contents
Teradyne estimated the fair value of intangible assets using the income approach. Forecasted revenues is the key assumption for estimating the fair value.
Acquired intangible assets are amortized on a straight-line basis over their estimated useful lives
.lives. Components of these intangible assets and their estimated useful lives at the acquisition date are as follows:
         
 
Fair Value
  
Estimated Useful
Life
 
 
(in thousands)
  
(in years)
 
Developed technology
 $
24,590
   
6.0
 
Customer relationships
  
7,360
   
6.0
 
Trademarks and tradenames
  
5,450
   
7.0
 
Backlog
  
260
   
0.3
 
         
Total intangible assets
 $
37,660
   
6.1
 
         
 
   
Fair Value
   
Estimated Useful

Life
 
   
(in thousands)
   
(in years)
 
Developed technology
  $24,590    6.0 
Trademarks and tradenames
   7,360    6.0 
Customer relationships
   5,450    7.0 
Backlog
   260    0.3 
  
 
 
   
Total intangible assets
  $37,660    6.1 
  
 
 
   
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Table of Contents
The following unaudited pro forma information gives effect to the acquisition of AutoGuide as if the acquisition occurred on January 1, 2018. The unaudited pro forma results are not necessarily indicative of what actually would have occurred had the acquisition been in effect for the periods presented:
     
 
For the Three Months
Ended
 
 
March 31, 2019
 
 
(in thousands, except
per share amounts)
 
Revenue
s
 $
495,599
 
Net income
 $
107,289
 
Net income per common share:
   
Basic
 $
0.62
 
     
Diluted
 $
0.61
 
     
 
   
For the Three Months
Ended
   
For the Six Months
Ended
 
   
June 30,

2019
   
June 30,

2019
 
   
(in thousands)
 
Revenue
  $565,978   $1,061,577 
Net income
   95,948    203,237 
Net income per common share:
    
Basic
  $0.56   $1.18 
Diluted
  $0.54   $1.14 
Lemsys SA
On January 30, 2019, Teradyne acquired all of the issued and outstanding shares of Lemsys SA (“Lemsys”) for a total purchase price of approximately $9.1 million. Lemsys strengthens Teradyne’s position in the electrification trends of vehicles, solar and wind power, and industrial applications. The Lemsys acquisition was accounted for as a business combination and, accordingly, the results have been included in Teradyne’s Semiconductor Test segment from the date of acquisition. Teradyne’s final allocation of the purchase price was goodwill of $1.4 million, which is not deductible for tax purposes, acquired intangible assets of $4.6 million with an average estimated useful life of 5.2 years,, and $3.1 million of net tangible assets. The acquisition was not material to Teradyne’s consolidated financial statements.
8
Table of Contents
D. REVENUE
Disaggregation of Revenue
The following table provides information about disaggregated revenue by timing of revenue recognition, primary geographical market, and major product lines.
                                     
 
Semiconductor Test
    
Industrial Automation
 
Wireless
Test
  
Corporate
and Other
  
Total
 
 
System on
a Chip
  
Memory
  
System
Test
  
Universal
Robots
  
Mobile
Industrial
Robots
  
AutoGuide
       
 
(in thousands)
 
For the Three Months Ended March 29, 2020 (1)
                           
Timing of Revenue Recognition
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Point in Time
 $
348,044
  $
79,398
  $
100,712
  $
47,502
  $
9,097
  $
1,124
  $
41,056
  $
—
  $
626,933
 
Over Time
  
52,095
   
4,952
   
15,364
   
2,195
   
41
   
346
   
2,429
   
—
   
77,422
 
                                     
Total
 $
400,139
  $
84,350
  $
116,076
  $
49,697
  $
9,138
  $
1,470
  $
43,485
  $
—
  $
704,355
 
                                     
Geographical Market
                           
Asia Pacific
 $
362,732
  $
76,110
  $
80,017
  $
10,917
  $
1,593
  $
—
  $
37,805
  $
—
  $
569,174
 
Americas
  
17,386
   
6,896
   
28,291
   
14,743
   
3,465
   
1,470
   
4,688
   
—
   
76,939
 
Europe, Middle East and Africa
  
20,021
   
1,344
   
7,768
   
24,037
   
4,080
   
—
   
992
   
—
   
58,242
 
                                     
Total
 $
400,139
  $
84,350
  $
116,076
  $
49,697
  $
9,138
  $
1,470
  $
43,485
  $
—
  $
704,355
 
                                     
For the Three Months Ended March 31, 2019 (1)
                           
Timing of Revenue Recognition
                           
Point in Time
 $
238,755
  $
43,775
  $
45,237
  $
55,379
  $
9,106
  $
—  
  $
27,454
  $
(151
) $
419,555
 
Over Time
  
54,051
   
4,272
   
12,983
   
1,651
   
—  
   
—
   
1,587
   
—
   
74,544
 
                                     
Total
 $
292,806
  $
48,047
  $
58,220
  $
57,030
  $
9,106
  $
—
  $
29,041
  $
(151
) $
494,099
 
                                     
Geographical Market
                           
Asia Pacific
 $
260,326
  $
38,851
  $
24,285
  $
14,618
  $
1,727
  $
—
  $
26,019
  $
—
  $
365,826
 
Americas
  
16,167
   
8,763
   
26,809
   
15,803
   
3,539
   
—
   
2,241
   
(151
)  
73,171
 
Europe, Middle East and Africa
  
16,313
   
433
   
7,126
   
26,609
   
3,840
   
—
   
781
   
—
   
55,102
 
                                     
Total
 $
292,806
  $
48,047
  $
58,220
  $
57,030
  $
9,106
  $
—
  $
29,041
  $
(151
) $
494,099
 
                                     
 
8
Table of Contents
   
Semiconductor
 
Test
       
Industrial
 
Automation
            
   
System on
a Chip
   
Memory
   
System

Test
   
Universal
Robots
   
Mobile
Industrial
Robots
   
AutoGuide
   
Wireless

Test
   
Corporate

and

Other
  
Total
 
   
(in thousands)
 
For the Three Months Ended June 28, 2020 (1)
                 
Timing of Revenue Recognition
                 
Point in Time
  $520,496   $80,032   $57,741   $41,804   $11,196   $3,408   $46,347   $(253)  $760,771 
Over Time
   54,077    4,542    14,065    1,747    76    545    2,838    —     77,890 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
  
 
 
 
Total
  $574,573   $84,574   $71,806   $43,551   $11,272   $3,953   $49,185   $(253)  $838,661 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
  
 
 
 
Geographical Market
                 
Asia Pacific
  $547,700   $82,492   $38,656   $14,279   $1,232   $—     $41,907   $—    $726,266 
Americas
   16,251    855    28,494    11,364    2,390    3,953    5,353    (253)   68,407 
Europe, Middle East and Africa
   10,622    1,227    4,656    17,908    7,650    —      1,925    —     43,988 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
  
 
 
 
Total
  $574,573   $84,574   $71,806   $43,551   $11,272   $3,953   $49,185   $(253)  $838,661 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
  
 
 
 
For the Three Months Ended June 30, 2019 (1)
                 
Timing of Revenue Recognition
                 
Point in Time
  $265,130   $53,984   $60,137   $62,015   $10,505   $—     $39,236   $(89)  $490,918 
Over Time
   51,483    4,301    13,270    2,206    —      —      2,000    —     73,260 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
  
 
 
 
Total
  $316,613   $58,285   $73,407   $64,221   $10,505   $—     $41,236   $(89)  $564,178 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
  
 
 
 
Geographical Market
                 
Asia Pacific
  $285,981   $47,202   $38,191   $18,820   $2,681   $—     $34,642   $—    $427,517 
Americas
   15,601    8,783    29,911    17,980    2,783    —      5,926    (89)   80,895 
Europe, Middle East and Africa
   15,031    2,300    5,305    27,421    5,041    —      668    —     55,766 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
  
 
 
 
Total
  $316,613   $58,285   $73,407   $64,221   $10,505   $—     $41,236   $(89)  $564,178 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
  
 
 
 
For the Six Months Ended June 28, 2020 (2)
                 
Timing of Revenue Recognition
                 
Point in Time
  $868,542   $159,429   $158,453   $89,306   $20,293   $4,532   $87,403   $(253)  $1,387,705 
Over Time
   106,171    9,494    29,429    3,942    117    891    5,267    —     155,311 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
  
 
 
 
Total
  $974,713   $168,923   $187,882   $93,248   $20,410   $5,423   $92,670   $(253)  $1,543,016 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
  
 
 
 
Geographical Market
                 
Asia Pacific
  $910,433   $158,601   $118,674   $25,195   $2,825   $—     $79,711   $—    $1,295,439 
Americas
   33,637    7,751    56,784    26,108    5,855    5,423    10,041    (253)   145,346 
Europe, Middle East and Africa
   30,643    2,571    12,424    41,945    11,730    —      2,918    —     102,231 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
  
 
 
 
Total
  $974,713   $168,923   $187,882   $93,248   $20,410   $5,423   $92,670   $(253)  $1,543,016 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
  
 
 
 
For the Six Months Ended June 30, 2019 (2)
                 
Timing of Revenue Recognition
                 
Point in Time
  $503,952   $97,693   $105,373   $117,392   $19,613   $—     $66,691   $(240)  $910,474 
Over Time
   105,534    8,572    26,254    3,857    —      —      3,586    —     147,803 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
  
 
 
 
Total
  $609,486   $106,265   $131,627   $121,249   $19,613   $—     $70,277   $(240)  $1,058,277 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
  
 
 
 
Geographical Market
                 
Asia Pacific
  $546,374   $85,988   $62,478   $33,437   $4,408   $—     $60,661   $—    $793,346 
Americas
   31,768    17,546    56,718    33,783    6,322    —      8,167    (240)   154,064 
Europe, Middle East and Africa
   31,344    2,731    12,431    54,029    8,883    —      1,449    —     110,867 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
  
 
 
 
Total
  $609,486   $106,265   $131,627   $121,249   $19,613   $—     $70,277   $(240)  $1,058,277 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
  
 
 
 
(1)
Includes $1.8 $2.5 
million and $1.7 million in 2020 and 2019, respectively, for leases of Teradyne’s systems recognized outside Accounting Standards Codification (“ASC”) 606 “
Revenue from Contracts with Customers.”
(2)
Includes $4.3 million and $3.4 million in 2020 and 2019, respectively, for leases of Teradyne’s systems recognized outside ASC 606 “
Revenue from Contracts with Customers.”
Contract Balances
For
During the three and six months ended March 29,June 28, 2020, and March 31, 2019
,
Teradyne recognized
$
39.5
$21.1 million and $
19.5
$60.6 million, respectively, that was previously included within the deferred revenue and customer advances balances. During the three and six months ended June 30, 2019, Teradyne recognized $13.3 million and $33.4 million, respectively, that was previously included within the deferred revenue and customer advances balances. This revenue primarily relates to undelivered hardware, extended warranties, training, application support, and post contract support. Each of these represents a distinct performance obligation. Teradyne expects to
recognize
66
%
69% of the remaining performance obligation in the next 12 months, 26% in
1-3
next
12
months,
26
% in
1-3
years, and the remainder thereafter.
Accounts Receivable
Teradyne sells certain trade accounts receivables on a
non-recourse
basis to third-party financial institutions pursuant to factoring agreements. Teradyne accounts for these transactions as sales of receivables and presents cash proceeds as a cash provided by operating activities in the consolidated statements of cash flows. Total trade accounts receivable sold under the factoring agreements were $46.8$50.0 million
and $41.7$40.4 million for the three months ended March 29,June 28, 2020 and March 31,June 30, 2019, respectively and $96.8 million
and $82.1 million for the six months ended June 28, 2020 and June 30, 2019, respectively. Factoring fees for the sales of receivables were recorded in interest expense and were not material.
9
Table of Contents
E
.E. INVENTORIES
Inventories, net consisted of the following at March 29,June 28, 2020 and December 31, 2019:
         
 
March 29,
  
December 31,
 
 
2020
  
2019
 
 
(in thousands)
 
Raw material
 $
102,109
  $
118,595
 
Work-in-process
  
39,848
   
32,695
 
Finished goods
  
41,021
   
45,401
 
         
 $
182,978
  $
196,691
 
         
 
   
June 28,
2020
   
December 31,
2019
 
   
(in thousands)
 
Raw material
  $106,610   $118,595 
Work-in-process
   29,710    32,695 
Finished goods
   69,768    45,401 
  
 
 
   
 
 
 
  $206,088   $196,691 
  
 
 
   
 
 
 
Inventory reserves at March 29,June 28, 2020 and December 31, 2019 were $105.3$107.4 million and $103.6 million, respectively.
F
.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
Teradyne’s
available-for-sale
debt securities are classified as Level 2
and equity and debt mutual funds are classified
as Level 1. Contingent consideration is classified as Level 3. The vast majority of Level 2 securities are fixed income securities priced by third party pricing vendors. These pricing vendors utilize the most recent observable market information in pricing these securities or, if specific prices are not available, use other observable inputs like market transactions involving identical or comparable securities.
During the three and six months ended March 29,June 28, 2020 and March 31,June 30, 2019, there were no transfers in or out of Level 1, Level 2, or Level 3 financial instruments.
Realized gains recorded in the three and six months ended March 29,June 28, 2020 and March 31, 2019 were $1.4$1.6 million and $0.1$3.0 million, respectively. Realized losses recorded in the three and six months ended March 29,June 28, 2020 were $0.1 million and March 31,$0.2 million
, respe
ctively
. Realized gains recorded in the three and six months ended June 30, 2019 were $0.1
 million and $0.2 million, respectively. Realized losses recorded in the six months ended June 30, 2019 were $0.1 million. Realized gains and losses are included in other (income) expense, net.
Unrealized gains
on equity securities recorded in the three and six months ended June 28, 2020 were $3.7 million
.
Unrealized losses on equity securities recorded in the threesix months ended March 29,June 28, 2020 were
$6.0 
million. Unrealized gains on equity securities recorded in the three and six months ended March 31,June 30, 2019 were $0.9 million and $3.7 million
, respectively
 $2.8 million.
. Unrealized gains and losses on equity securities are included in other (income) expense, net. Unrealized gains and losses on
available-for-sale
debt securities are included in accumulated other comprehensive income (loss).
The cost of securities sold is based on the specific identification method.
10
Table of Contents
The following table sets forth by fair value hierarchy Teradyne’s financial assets and liabilities that were measured at fair value on a recurring basis as of March 29,June 28, 2020 and December 31, 2019.
                 
 
March 29, 2020
 
 
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
 $
270,460
  $
 —  
  $
 —  
  $
270,460
 
Cash equivalents
  
244,176
   
78,858
   
—  
   
323,034
 
Available-for-sale
securities:
                
Commercial paper
  
—  
   
101,947
   
—  
   
101,947
 
U.S. Treasury securities
  
—  
   
85,632
   
—  
   
85,632
 
Corporate debt securities
  
—  
   
67,467
   
—  
   
67,467
 
Certificates of deposit and time deposits
  
—  
   
25,776
   
—  
   
25,776
 
Debt mutual funds
  
5,237
   
—  
   
—  
   
5,237
 
U.S. government agency securities
  
—  
   
4,402
   
—  
   
4,402
 
Non-U.S.
government securities
  
—  
   
589
   
—  
   
589
 
Equity securities:
            
Mutual funds
  
20,464
   
—  
   
—  
   
20,464
 
                 
 $
540,337
  $
364,671
  $
 —  
  $
905,008
 
Derivative assets
  
—  
   
344
   
—  
   
344
 
                 
Total
 $
540,337
  $
365,015
  $
 —  
  $
905,352
 
                 
Liabilities
            
Contingent consideration
 $
 —  
  $
 —  
  $
20,472
  $
20,472
 
Derivative liabilities
  
—  
   
254
   
—  
   
254
 
                 
Total
 $
 —  
  $
254
  $
20,472
  $
20,726
 
                 
                 
Reported as follows:                
             
  (Level 1)  (Level 2)  (Level 3)  Total 
 
(in thousands)
 
Assets
            
Cash and cash equivalents
 $
514,636
  $
78,858
  $
 —  
  $
593,494
 
Marketable securities
  
—  
   
211,001
   
—  
   
211,001
 
Long-term marketable securities
  
25,701
   
74,812
   
—  
   
100,513
 
Prepayments and other current assets
  
—  
   
344
   
—  
   
344
 
                 
Total
 $
     540,337
  $
365,015
  $
 —  
  $
905,352
 
                 
Liabilities
            
Other current liabilities
 $
 —  
  $
254
  $
 —  
  $
254
 
Contingent consideration
  
—  
   
—  
   
662
   
662
 
Long-term contingent consideration
  
—  
   
—  
   
19,810
   
19,810
 
                 
                 
Total
 $
 —  
  $
254
  $
       20,472
  $
20,726
 
                 
 
1110
Table of Contents
                 
 
December 31, 2019
 
 
Quoted Prices
in Active
Markets for
Identical
Instruments
(Level 1)
  
Significant
Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
  
Total
 
 
(in thousands)
 
Assets
            
Cash
 $
311,975
  $
 —  
  $
 —  
   
311,975
 
Cash equivalents
  
410,285
   
51,664
   
—  
   
461,949
 
Available-for-sale
securities:
             
Corporate debt securities
  
—  
   
97,307
   
—  
   
97,307
 
Commercial paper
  
—  
   
54,149
   
—  
   
54,149
 
U.S. Treasury securities
  
—  
   
42,382
   
—  
   
42,382
 
U.S. government agency securities
  
—  
   
9,952
   
—  
   
9,952
 
Debt mutual funds
  
6,888
   
—  
   
—  
   
6,888
 
Certificates of deposit and time deposits
  
—  
   
4,751
   
—  
   
4,751
 
Non-U.S.
government securities
  
—  
   
592
   
—  
   
592
 
Equity securities:
            
Equity mutual funds
  
25,772
   
—  
   
—  
   
25,772
 
                 
 $
754,920
  $
260,797
  $
 —  
  $
1,015,717
 
Derivative assets
  
—  
   
528
   
—  
   
528
 
                 
Total
 $
754,920
  $
261,325
  $
 —  
  $
1,016,245
 
                 
Liabilities
            
Contingent consideration
 $
 —  
  $
 —  
  $
39,705
  $
39,705
 
Derivative liabilities
  
—  
   
203
   
—  
   
203
 
                 
                 
Total
 $
 —  
  $
203
  $
39,705
  $
39,908
 
                 
                 
Reported as follows:                
             
  (Level 1)  (Level 2)  (Level 3)  Total 
 
(in thousands)
 
Assets
            
Cash and cash equivalents
 $
722,260
  $
51,664
  $
 —  
  $
773,924
 
Marketable securities
  
—  
   
137,303
   
—  
   
137,303
 
Long-term marketable securities
  
32,660
   
71,830
   
—  
   
104,490
 
Prepayments and other current assets
  
—  
   
528
   
—  
   
528
 
                 
Total
 $
      754,920
  $
261,325
  $
 —  
  $
1,016,245
 
                 
Liabilities
            
Other accrued liabilities
 $
 —  
  $
203
  $
 —  
  $
203
 
Contingent consideration
  
—  
   
—  
   
9,106
   
9,106
 
Long-term contingent consideration
  
—  
   
—  
   
30,599
   
30,599
 
                 
Total
 $
 —  
  $
203
  $
       39,705
  $
39,908
 
                 
12
Table of Contents
   
June 28, 2020
 
   
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
  $345,312   $—     $—     $345,312 
Cash equivalents
   326,347    53,772    —      380,119 
Available-for-sale
securities:
         —   
U.S. Treasury securities
   —      165,305    —      165,305 
Commercial paper
   —      63,844    —      63,844 
Corporate debt securities
   —      63,218    —      63,218 
Certificates of deposit and time deposits
   —      9,506    —      9,506 
Debt mutual funds
   6,876    —      —      6,876 
U.S. government agency securities
   —      4,425    —      4,425 
Non-U.S.
government securities
   —      601    —      601 
Equity securities:
        
Mutual funds
   22,984    —      —      22,984 
  
 
 
   
 
 
   
 
 
   
 
 
 
  $701,519   $360,671   $—     $1,062,190 
Derivative assets
   —      30    —      30 
  
 
 
   
 
 
   
 
 
   
 
 
 
Total
  $701,519   $360,701   $—     $1,062,220 
  
 
 
   
 
 
   
 
 
   
 
 
 
Liabilities
        
Contingent consideration
  $—     $—     $49,737   $49,737 
Derivative liabilities
   —      222    —      222 
  
 
 
   
 
 
   
 
 
   
 
 
 
Total
  $—     $222   $49,737   $49,959 
  
 
 
   
 
 
   
 
 
   
 
 
 
Reported as follows:
        
   
(Level 1)
   
(Level 2)
   
(Level 3)
   
Total
 
   
(in thousands)
 
Assets
        
Cash and cash equivalents
  $671,659   $53,772   $—     $725,431 
Marketable securities
   —      229,791    —      229,791 
Long-term marketable securities
   29,860    77,108    —      106,968 
Prepayments and other current assets
   —      30    —      30 
  
 
 
   
 
 
   
 
 
   
 
 
 
Total
  $701,519   $360,701   $—     $1,062,220 
  
 
 
   
 
 
   
 
 
   
 
 
 
Liabilities
   .       
Other current liabilities
  $—     $222   $—     $222 
Contingent consideration
   —      —      16,789    16,789 
Long-term contingent consideration
   —      —      32,948    32,948 
Total
  $—     $222   $49,737   $49,959 
  
 
 
   
 
 
   
 
 
   
 
 
 
11
Table of Contents
   
December 31, 2019
 
   
Quoted Prices

in Active

Markets for

Identical

Instruments

(Level 1)
   
Significant

Other

Observable

Inputs

(Level 2)
   
Significant

Unobservable

Inputs

(Level 3)
   
Total
 
   
(in thousands)
 
Assets
        
Cash
  $311,975   $—     $—      311,975 
Cash equivalents
   410,285    51,664    —      461,949 
Available-for-sale
securities:
         —   
Corporate debt securities
   —      97,307    —      97,307 
Commercial paper
   —      54,149    —      54,149 
U.S. Treasury securities
   —      42,382    —      42,382 
U.S. government agency securities
   —      9,952    —      9,952 
Debt mutual funds
   6,888    —      —      6,888 
Certificates of deposit and time deposits
   —      4,751    —      4,751 
Non-U.S.
government securities
   —      592    —      592 
Equity securities:
        
Equity mutual funds
   25,772    —      —      25,772 
  
 
 
   
 
 
   
 
 
   
 
 
 
  $754,920   $260,797   $—     $1,015,717 
Derivative assets
   —      528    —      528 
  
 
 
   
 
 
   
 
 
   
 
 
 
Total
  $754,920   $261,325   $—     $1,016,245 
  
 
 
   
 
 
   
 
 
   
 
 
 
Liabilities
        
Contingent consideration
  $—     $—     $39,705   $39,705 
Derivative liabilities
   —      203    —      203 
  
 
 
   
 
 
   
 
 
   
 
 
 
Total
  $—     $203   $39,705   $39,908 
  
 
 
   
 
 
   
 
 
   
 
 
 
Reported as follows:
        
   
(Level 1)
   
(Level 2)
   
(Level 3)
   
Total
 
   
(in thousands)
 
Assets
        
Cash and cash equivalents
  $722,260   $51,664   $—     $773,924 
Marketable securities
   —      137,303    —      137,303 
Long-term marketable securities
   32,660    71,830    —      104,490 
Prepayments and other current assets
   —      528    —      528 
  
 
 
   
 
 
   
 
 
   
 
 
 
Total
  $754,920   $261,325   $—     $1,016,245 
  
 
 
   
 
 
   
 
 
   
 
 
 
Liabilities
        
Other accrued liabilities
  $—     $203   $—     $203 
Contingent consideration
   —      —      9,106    9,106 
Long-term contingent consideration
   —      —      30,599    30,599 
  
 
 
   
 
 
   
 
 
   
 
 
 
Total
  $—     $203   $39,705   $39,908 
  
 
 
   
 
 
   
 
 
   
 
 
 
12
Table of Contents
Changes in the fair value of Level 3 contingent consideration for the three and six months ended March 29,June 28, 2020 and March 31,June 30, 2019 were as follows:
         
 
For the Three Months
Ended
 
 
March 29,
  
March 31,
 
 
2020
  
2019
 
 
(in thousands)
 
Balance at beginning of period
 $
39,705
  $
70,543
 
Foreign currency impact
  
(361
)  
(610
)
Payments (a)(b)
  
(8,852
)  
(34,590
)
Fair value adjustment (c)(d)
  
(10,020
)  
2,970
 
         
Balance at end of period
 $
20,472
  $
38,313
 
         
 
   
For the Three Months

Ended
   
For the Six Months

Ended
 
   
June 28,
   
June 30,
   
June 28,
   
June 30,
 
   
2020
   
2019
   
2020
   
2019
 
   
(in thousands)
 
Balance at beginning of period
  $20,472   $38,313   $39,705   $70,543 
Foreign currency impact
   6    206    (355)    (405) 
Payments (a)(b)
   —      —      (8,852)    (34,590) 
Fair value adjustment (c)(d)
   29,259    (11,672)    19,239    (8,701) 
  
 
 
   
 
 
   
 
 
   
 
 
 
Balance at end of period
  $49,737   $26,847   $49,737   $26,847 
  
 
 
   
 
 
   
 
 
   
 
 
 
(a)
In the threesix months ended March 29,June 28, 2020, Teradyne paid $8.9 million of contingent consideration for the
earn-out
in connection with the acquisition
of
MiR.
(b)
In the threesix months ended March 31,June 30, 2019, Teradyne paid $30.8 million and $3.8 million of contingent consideration for the earn-outs in connection with the acquisitionsacquisition of MiR and Universal Robots A/S (“Universal Robots”), respectively.
(c)
In the three and six months ended March 29,June 28, 2020, the fair value of contingent consideration for the earn-outs in connection with the acquisitionsacquisition of MiR and AutoGuide decreased by $2.9$0.6 million and $7.1$3.6 million, respectively, due to lower forecasted results. In the three and six months ended June 28, 2020, the fair value of contingent consideration for the earn-outs in connection with the acquisition of AutoGuide increased by $29.9 million and $22.8 million, respectively
, due to higher f
or
e
casted re
sults
.
(d)
In the three and six months ended March 31,June 30, 2019, the fair value of contingent consideration for the
earn-out
in connection with the acquisition of MiR increaseddecreased by $3.0 million.$11.7 million and $8.7 million, respectively, primarily due to a decrease in the forecasted revenue.
The following table provides quantitative information associated with the fair value measurement of Teradyne’s Level 3 financial instruments:
                 
Liability
 
March 29, 
2020 Fair
 
Value
  
Valuation
Technique
  
Unobservable Inputs
  
Weighted
Average
 
 
(in thousands)
       
Contingent consideration
(AutoGuide)
 $
19,810
   
Monte Carlo 
Simulation
   
Revenue volatility
   
14.0
%
        
Discount Rate
   
4.4
%
Contingent consideration
(MiR)
 $
662
   
Monte Carlo
Simulation
   
Revenue volatility
   
16.0
%
        
Discount Rate
   
2.2
%
 
Liability
  
June 28,
2020 Fair
 
Value
   
Valuation
Technique
  
Unobservable Inputs
  
Weighted

Average
 
   
(in thousands)
           
Contingent consideration
(AutoGuide)
  $49,737   Monte Carlo Simulation  Revenue volatility   15.5% 
      Discount Rate   1.8% 
Contingent consideration
(MiR)
  $—     Monte Carlo Simulation  Revenue volatility   10.0% 
      Discount Rate   0.8% 
As of March 29,June 28, 2020, the significant unobservable inputs used in the Monte Carlo simulation to fair value the AutoGuide and MiR contingent consideration include forecasted revenues, revenue volatility, earnings before interest and taxes, and discount rate. Increases or decreases in the inputs would result in a higher or lower fair value measurement.
As of March 29,June 28, 2020, the maximum amount of contingent consideration that could be paid in connection with the acquisition of AutoGuide is $106.9 million. The
earn-out
periods end on December
31, 2020, December 31, 2021 and December 31, 2022.
As of March 29,June 28, 2020, the maximum amount of contingent consideration that could be paid in connection with the acquisition of MiR is $61.4$63.5 million. The remaining
earn-out
period ends on December 31, 2020.
13
Table of Contents
The carrying amounts and fair values of Teradyne’s financial instruments at March 29,June 28, 2020 and December 31, 2019 were as follows:
                 
 
March 29, 2020
  
December 31, 2019
 
 
Carrying Value
  
Fair Value
  
Carrying Value
  
Fair Value
 
 
(in thousands)
 
Assets
            
Cash and cash equivalents
 $
593,494
  $
593,494
  $
773,924
  $
773,924
 
Marketable securities
  
311,514
   
311,514
   
241,793
   
241,793
 
Derivative assets
  
344
   
344
   
528
   
528
 
Liabilities
            
Contingent consideration
  
20,472
   
20,472
   
39,705
   
39,705
 
Derivative liabilities
  
254
   
254
   
203
   
203
 
Convertible debt (1)
  
398,466
   
829,438
   
394,687
   
1,010,275
 
 
   
June 28, 2020
   
December 31, 2019
 
   
Carrying Value
   
Fair Value
   
Carrying Value
   
Fair Value
 
   
(in thousands)
 
Assets
        
Cash and cash equivalents
  $725,431   $725,431   $773,924   $773,924 
Marketable securities
   336,759    336,759    241,793    241,793 
Derivative assets
   30    30    528    528 
Liabilities
        
Contingent consideration
   49,737    49,737    39,705    39,705 
Derivative liabilities
   222    222    203    203 
Convertible debt (1)
   402,305    1,198,669    394,687    1,010,275 
(1)
The carrying value represents the bifurcated debt component only, while the fair value is based on quoted market prices for the convertible note, which includes the equity conversion features.
The fair values of accounts receivable, net and accounts payable approximate the carrying value due to the short-term nature of these instruments.
The following table summarizes the composition of
available-for-sale
marketable securities at March 29,June 28, 2020:
                     
 
March 29, 2020
 
 
Available-for-Sale
   
 
Cost
  
Unrealized
Gain
  
Unrealized
(Loss)
  
Fair Market
Value
  
Fair Market
Value of
Investments
with Unrealized
Losses
 
 
(in thousands)
 
Commercial paper
 $
101,915
  $
33
  $
(1
) $
101,947
  $
1,296
 
U.S. Treasury securities
  
82,680
   
2,958
   
(6
)  
85,632
   
96
 
Corporate debt securities
  
65,696
   
2,951
   
(1,180
)  
67,467
   
40,891
 
Certificates of deposit and time deposits
  
25,769
   
7
   
—  
   
25,776
   
—  
 
Debt mutual funds
  
5,089
   
148
   
—  
   
5,237
   
—  
 
U.S. government agency securities
  
4,335
   
67
   
—  
   
4,402
   
—  
 
Non-U.S.
government securities
  
589
   
—  
   
—  
   
589
   
—  
 
                     
 $
286,073
  $
6,164
  $
(1,187
) $
291,050
  $
42,283
 
                     
Reported as follows:
                     
 
Cost
  
Unrealized
Gain
  
Unrealized
(Loss)
  
Fair Market
Value
  
Fair Market
Value of
Investments
with Unrealized
Losses
 
 
(in thousands)
 
Marketable securities
 $
210,722
  $
430
  $
(151
) $
211,001
  $
32,037
 
Long-term marketable securities
  
75,351
   
5,734
   
(1,036
)  
80,049
   
10,246
 
                     
 $
286,073
  $
6,164
  $
(1,187
) $
291,050
  $
42,283
 
                     
14
Table of Contents
The following table summarizes the composition of
available-for-sale
marketable securities at December 31, 2019:
                     
 
December 31, 2019
 
 
Available-for-Sale
   
 
Cost
  
Unrealized
Gain
  
Unrealized
(Loss)
  
Fair Market
Value
  
Fair Market
Value of
Investments
with Unrealized
Losses
 
 
(in thousands)
 
Corporate debt securities
 $
93,267
  $
4,081
  $
(41
) $
97,307
  $
2,009
 
Commercial paper
  
54,124
   
26
   
(1
)  
54,149
   
1,391
 
U.S. Treasury securities
  
42,167
   
431
   
(216
)  
42,382
   
17,556
 
U.S. government agency securities
  
9,942
   
14
   
(4
)  
9,952
   
3,043
 
Debt mutual funds
  
6,753
   
135
   
—  
   
6,888
   
—  
 
Certificates of deposit and time deposits
  
4,751
   
—  
   
—  
   
4,751
   
—  
 
Non-U.S.
government securities
  
592
   
—  
   
—  
   
592
   
—  
 
                     
 $
211,596
  $
4,687
  $
(262
) $
216,021
  $
23,999
 
                     
 
Reported as follows:
 
Cost
  
Unrealized
Gain
  
Unrealized
(Loss)
  
Fair Market
Value
  
Fair Market
Value of
Investments
with Unrealized
Losses
 
 
(in thousands)
 
Marketable securities
 $
137,144
  $
160
  $
(1
) $
137,303
  $
2,922
 
Long-term marketable securities
  
74,452
   
4,527
   
(261
)  
78,718
   
21,077
 
                     
 $
211,596
  $
4,687
  $
(262
) $
216,021
  $
23,999
 
                     
   
June 28, 2020
 
   
Available-for-Sale
     
   
Cost
   
Unrealized

Gain
   
Unrealized

(Loss)
  
Fair Market

Value
   
Fair Market

Value of

Investments

with Unrealized

Losses
 
   
(in thousands)
 
U.S. Treasury securities
  $163,586   $1,734   $(15)  $165,305   $18,709 
Commercial paper
   63,774    70    —     63,844    —   
Corporate debt securities
   56,672    6,682    (136)   63,218    1,447 
Certificates of deposit and time deposits
   9,498    8    —     9,506    —   
Debt mutual funds
   6,686    190    —     6,876    —   
U.S. government agency securities
   4,353    72    —     4,425    —   
Non-U.S.
government securities
   601    —      —     601    —   
  
 
 
   
 
 
   
 
 
  
 
 
   
 
 
 
  $305,170   $8,756   $(151)  $313,775   $20,156 
  
 
 
   
 
 
   
 
 
  
 
 
   
 
 
 
Reported as follows:
   
Cost
   
Unrealized

Gain
   
Unrealized

(Loss)
  
Fair Market

Value
   
Fair Market

Value of

Investments

with Unrealized

Losses
 
   
(in thousands)
 
Marketable securities
  $229,471   $331   $(11)  $229,791   $17,366 
Long-term marketable securities
   75,699    8,425    (140)   83,984    2,790 
  $305,170   $8,756   $(151)  $313,775   $20,156 
  
 
 
   
 
 
   
 
 
  
 
 
   
 
 
 
14
Table of Contents
The following table summarizes the composition of
available-for-sale
marketable securities at December 31, 2019:
   
December 31, 2019
 
   
Available-for-Sale
     
   
Cost
   
Unrealized

Gain
   
Unrealized

(Loss)
  
Fair Market

Value
   
Fair Market

Value of

Investments

with Unrealized

Losses
 
   
(in thousands)
 
Corporate debt securities
  $93,267   $4,081   $(41)  $97,307   $2,009 
Commercial paper
   54,124    26    (1)   54,149    1,391 
U.S. Treasury securities
   42,167    431    (216)   42,382    17,556 
U.S. government agency securities
   9,942    14    (4)   9,952    3,043 
Debt mutual funds
   6,753    135    —     6,888    —   
Certificates of deposit and time deposits
   4,751    —      —     4,751    —   
Non-U.S.
government securities
   592    —      —     592    —   
  
 
 
   
 
 
   
 
 
  
 
 
   
 
 
 
  $211,596   $4,687   $(262)  $216,021   $23,999 
  
 
 
   
 
 
   
 
 
  
 
 
   
 
 
 
Reported as follows:
   
Cost
   
Unrealized

Gain
   
Unrealized

(Loss)
  
Fair Market

Value
   
Fair Market

Value of

Investments

with Unrealized

Losses
 
   
(in thousands)
 
Marketable securities
  $137,144   $160   $(1)  $137,303   $2,922 
Long-term marketable securities
   74,452    4,527    (261)   78,718    21,077 
  
 
 
   
 
 
   
 
 
  
 
 
   
 
 
 
  $211,596   $4,687   $(262)  $216,021   $23,999 
  
 
 
   
 
 
   
 
 
  
 
 
   
 
 
 
As of March 29,June 28, 2020 and December 31, 2019, the fair market value of investments with unrealized losses less than one year totaled $42.3$20.2 million and $23.6 million, respectively.
Teradyne reviews its investments to identify and evaluate investments that have an indication of possible impairment. Based on this review, Teradyne determined that the unrealized losses related to these investments at March 29,June 28, 2020 and December 31, 2019 were not other than temporary.
The contractual maturities of investments in
available-for-sale
securities held at March 29,June 28, 2020 were as follows:
 
March 29, 2020
 
 
Cost
  
Fair Market
Value
 
 
(in thousands)
 
Due within one year
 $
210,722
  $
211,001
 
Due after 1 year through 5 years
  
18,933
   
19,465
 
Due after 5 years through 10 years
  
12,440
   
13,160
 
Due after 10 years
  
38,889
   
42,187
 
         
Total
 $
280,984
  $
285,813
 
         
   
June 28, 2020
 
   
Cost
   
Fair Market

Value
 
   
(in thousands)
 
Due within one year
  $229,471   $229,791 
Due after 1 year through 5 years
   21,054    21,587 
Due after 5 years through 10 years
   13,762    14,974 
Due after 10 years
   34,197    40,547 
  
 
 
   
 
 
 
Total
  $298,484   $306,899 
  
 
 
   
 
 
 
Contractual maturities of investments in
available-for-sale
securities held at March 29,June 28, 2020 exclude $5.2 million
d
ebt mutual funds
with a fair market value of debt mutual funds $6.9 mi
ll
ion,
as they do not have a contractual maturity date.
15
Table of Contents
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.
15
Table of Contents
To minimize the effect of exchange rate fluctuations associated with the remeasurement of monetary assets and liabilities denominated in foreign currencies, Teradyne enters into foreign currency forward contracts. The change in fair value of these derivatives is recorded directly in earnings, and is used to offset the change in value of monetary assets and liabilities denominated in foreign currencies.
The notional amount of foreign currency forward contracts at March 29,June 28, 2020 and December 31, 2019 was $132.1$125.0 million and $144.9 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.
The following table summarizes the fair value of derivative instruments as of March 29,June 28, 2020 and December 31, 2019:
 
Balance Sheet
Location
  
March 29,
2020
  
December 31,
2019
 
   
(in thousands)
 
Derivatives not designated as hedging instruments:
         
Foreign exchange contracts
  
Prepayments
  $
344
  $
528
 
Foreign exchange contracts
  
Other current liabilities
   
(254
)  
(203
)
             
Total derivatives
    $
90
  $
325
 
             
   
Balance Sheet

Location
   
June 28,
2020
   
December 31,
2019
 
       
(in thousands)
 
Derivatives not designated as hedging instruments:
      
Foreign exchange contracts
   Prepayments   $30   $528 
Foreign exchange contracts
   Other current liabilities    (222)    (203) 
    
 
 
   
 
 
 
Total derivatives
    $(192)   $325 
    
 
 
   
 
 
 
The following table summarizes the effect of derivative instruments recognized in the statement of operations for the three and six months ended March 29,June 28, 2020 and March 31,June 30, 2019:
 
Location of Losses
 
For the Three Months 
Ended
 
 
 
 
 
 
 
Recognized in
 
March 29,
 
  
March 31,
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Statement of Operations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2020
  
2019
 
  
(in thousands)
 
Derivatives not designated as hedging instruments:
      
Foreign exchange contracts
 
Other (income) expense, net
 $
4,011
 
 
 
 
 
 		$
3,934
 
   
Location of (Gains) Losses
  
For the Three Months

Ended
   
For the Six Months

Ended
 
   
Recognized in
  
June 28,
   
June 30,
   
June 28,
   
June 30,
 
   
Statement of Operations
  
2020
   
2019
   
2020
   
2019
 
      
(in thousands)
 
Derivatives not designated as hedging instruments:
        
Foreign exchange contracts  
Other (income) expense, net
   $470    $239    $4,481    $4,173 
(1)
The table does not reflect the corresponding gains and losses from the remeasurement of
the
monetary assets and liabilities denominated in foreign currencies.
(2)
For the three months ended March 29,June 28, 2020, net losses from the remeasurement of monetary assets and March 31,liabilities denominated in foreign currencies were $0.4 million. For the six months ended June 28, 2020, net gains from the remeasurement of monetary assets and liabilities denominated in foreign currencies were $1.6 million.
(3)
For the three months ended June 30, 2019, net losses from the remeasurement of monetary assets and liabilities denominated in foreign currencies were $1.3 million. For the six months ended June 30, 2019, net gains from the remeasurement of monetary assets and liabilities denominated in foreign currencies were $2.0
$1.9 million.
million and $3.2 million, respectively.
See Note
G
: G: “Debt” regarding derivatives related to the convertible senior notes.
G
.G. DEBT
Convertible Senior Notes
On December 12, 2016, Teradyne completed a private offering of $460.0 million aggregate principal amount of 1.25% convertible senior unsecured notes (the “Notes”) due December 15, 2023 and received net proceeds, after issuance costs, of approximately $450.8 million, $33.0 million of which was used to pay the net cost of the convertible note hedge transactions and $50.1 million of which was used to repurchase 2.0 million shares of Teradyne’s common stock under its existing stock repurchase program from purchasers of the Notes in privately negotiated transactions effected through one of the initial purchasers or its affiliates conducted concurrently with the pricing of the Note offering. The Notes will mature on December 15, 2023, unless earlier repurchased
16
Table of Contents
or converted. The Notes bear interest from December 12, 2016 at a rate of 1.25% per year payable semiannually in arrears on June 15 and December 15 of each year. The Notes will be convertible at the option of the noteholders at any time prior to the close of business on the business day immediately preceding September 15, 2023, only under the following circumstances: (1) during any calendar quarter beginning after March 31, 2017 (and only during such calendar quarter), if the closing sale price of Teradyne’s common stock, for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than 130% of the conversion price on each applicable trading day; (2) during the 5 business day period after any 5 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
16
Table of Contents
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 March 29,June 28, 2020, the conversion price
was
approximately
$
31.61
$31.59 per share of Teradyne’s common stock. The conversion rate is subject to adjustment under certain circumstances. As of May 
4
,August 3, 2020, eightnine holders exercised the option to convert seventeeneighteen thousand dollarsdollars’ worth of Notes.
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 $31.61.$31.59. The Note Hedge Transactions cover, subject to customary anti-dilution adjustments, approximately 14.6 million shares of Teradyne’s common stock.
Separately
and concurrent with the pricing of the Notes,
Teradyne
entered into warrant transactions with the Option
Counterparties
(the (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
. Counterparties. The Warrant Transactions cover, subject to customary anti-dilution adjustments, approximately 14.6 million shares of common stock. As of March 29,June 28, 2020, the strike price of the warrants was approximately $
39.66
$39.64 per share. The strike price is subject to adjustment under certain circumstances. The Warrant Transactions could have a dilutive effect to
Teradyne
’s Teradyne’s common stock to the extent that the market price per share of
Teradyne
’s Teradyne’s common stock, as measured under the terms of the Warrant Transactions, exceeds the applicable strike price of the warrants.
The Note Hedge Transactions are expected to reduce the potential dilution to Teradyne’s common stock upon any conversion of the Notes. However, the Warrant Transactions could separately have a dilutive effect to the extent that the market value per share of Teradyne’s common stock exceeds the applicable strike price of the warrant. The net cost of the Note Hedge Transactions, after being partially offset by the proceeds from the sale of the warrants, was approximately $33.0 million.
In connection with establishing their initial hedge of these convertible note hedge and warrant transactions, the Option Counterparties have entered into various derivative transactions with respect to Teradyne’s common stock and/or purchased shares of Teradyne’s common stock or other securities, including the Notes, concurrent with, or shortly after, the pricing of the Notes. In addition, the Option Counterparties may modify their hedge positions by entering into or unwinding various derivative transactions with respect to Teradyne’s common stock or by selling Teradyne’s common stock or other securities, including the Notes, in secondary market transactions (and may do so during any observation period related to the conversion of the Notes). These activities could adversely affect the value of Teradyne’s common stock and the Notes.
Teradyne considered the guidance of ASC
815-40,
“Derivatives and Hedging—Contracts in Entity’s Own Equity,”
and concluded that the convertible note hedge is both indexed to Teradyne’s common stock and should be classified in stockholders’ equity in its statements of financial position. The convertible note hedge is considered indexed to Teradyne’s common stock as the terms of the Note Hedge Transactions do not contain an exercise contingency and the settlement amount equals the difference between the fair value of a fixed number of Teradyne’s shares and a fixed strike price. Because the only variable that can affect the settlement amount is Teradyne’s stock price, which is an input to the fair value of a
fixed-for-fixed
option contract, the convertible note hedge is considered indexed to Teradyne’s common stock.
Teradyne assessed whether the convertible note hedge should be classified as equity under ASC
815-40.
In the Note Hedge Transactions contract the settlement terms permit net cash settlement or net share settlement, at the option of Teradyne. Therefore, the criteria as set forth in ASC
815-40
were evaluated by Teradyne. In reviewing the criteria, Teradyne noted the following: (1) the convertible note hedge does not require Teradyne to issue shares; (2) there is no requirement to net cash settle the convertible note hedge for failure to make timely filings with the SEC; (3) in the case of termination, the convertible note hedge is settled in the same consideration as the holders of the underlying stock; (4) the counterparty does not have rights that rank higher than those of a shareholder of the stock underlying the convertible note hedge; and (5) there is no requirement to post collateral. Based on its analysis of those criteria, Teradyne concluded that the convertible note hedge should be recorded in equity and no further adjustment should be made in future periods to adjust the value of the convertible note hedge.
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Table of Contents
Teradyne analyzed the Warrant Transactions under ASC
815-40,
“Derivatives and Hedging—Contracts in Entity’s Own Equity,”
and other relevant literature, and determined that it met the criteria for classification as an equity transaction and is considered indexed to Teradyne’s common stock. As a result, Teradyne recorded the proceeds from the warrants as an increase to additional
paid-in
capital. Teradyne does not recognize subsequent changes in fair value of the warrants in its financial statements.
The provisions of ASC
470-20,
“
Debt with Conversion and Other Options,
” are applicable to the Notes. ASC
470-20
requires Teradyne to separately account for the liability (debt) and equity (conversion feature) components of the Notes in a manner that reflects Teradyne’s nonconvertible debt borrowing rate at the date of issuance when interest cost is recognized in subsequent periods.
17
Table of Contents
Teradyne allocated $100.8 million of the $460.0 million principal amount of the Notes to the equity component, which represents a discount to the debt and will be amortized to interest expense using the effective interest method through December 2023. Accordingly, Teradyne’s effective annual interest rate on the Notes will be approximately 5.0%. The Notes are classified as long-term debt in the balance sheet based on their December 15, 2023 maturity date. Debt issuance costs of approximately $7.2 million are being amortized to interest expense using the effective interest method over the seven-year term of the Notes. As of March 29,June 28, 2020, debt issuance costs were approximately $4.1$3.8 million.
The below tables represent the key components of Teradyne’s convertible senior notes:
 
March 29,
2020
  
December 31,
2019
 
 
(in thousands)
 
Debt Principal
 $
459,987
  $
460,000
 
Unamortized discount
  
61,521
   
65,313
 
         
Net Carrying amount of convertible debt
 $
398,466
  $
394,687
 
         
   
June 28,

2020
   
December 31,
2019
 
   
(in thousands)
 
Debt Principal
  $459,987   $460,000 
Unamortized discount
   57,682    65,313 
  
 
 
   
 
 
 
Net Carrying amount of convertible debt
  $402,305   $394,687 
  
 
 
   
 
 
 
 
For the Three Months 
Ended
 
 
March 29,
2020
  
March 31,
2019
 
 
(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
  
3,792
   
3,608
 
         
Total interest expense on the convertible debt
 $
5,230
  $
5,046
 
         
   
For the Three Months
Ended
   
For the Six Months
Ended
 
   
June 28,

2020
   
June 30,
2019
   
June 28,

2020
   
June 30,
2019
 
   
(in thousands)
 
Contractual interest expense on the coupon
  $1,438   $1,438   $2,875   $2,875 
Amortization of the discount component and debt issue fees recognized as interest expense
   3,839    3,653    7,631    7,262 
  
 
 
   
 
 
   
 
 
   
 
 
 
Total interest expense on the convertible debt
  $5,277   $5,091   $10,506   $10,137 
  
 
 
   
 
 
   
 
 
   
 
 
 
As of March 29,June 28, 2020, the remaining unamortized discount was $61.5$57.7 million, which will be amortized over 3.73.5 years using the effective interest rate method. The carrying amount of the equity component was $100.8 million. As of March 29,June 28, 2020, the
if-converted
value of the Notes was $798.3$1,192.0 million.
Revolving Credit Facility
On May 1, 2020, Teradyne entered into a credit agreement (the “Credit Agreement”) with Truist Bank, as administrative agent and collateral agent, and the lenders party thereto. The Credit Agreement provides for a three-year, senior secured revolving credit facility of $400.0 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 $150.0 million.
.
Proceeds from the Credit Facility may be used for general corporate purposes and working capital.
During the three months ended June 28, 2020, Teradyne incurred $3.5 million in costs related to the revolving credit facility. These costs are being amortized over the three-year term of the revolving credit facility and are included in interest expense in the statement of operations.
As of August 3, 2020, 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 0.50% to 1.25% per annum or LIBOR, a minimum of 0.75%, plus a margin ranging from 1.50% to 2.25% per annum, based on the consolidated leverage ratio of Teradyne. In addition, Teradyne will pay a commitment fee on the unused portion of the commitments under the Credit Facility ranging from 0.25% to 0.40% 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.
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The Credit Agreement contains customary events of default, representations, warranties and affirmative and negative covenants that, among other things, limit Teradyne’s 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.
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.
HAs of August 3, 2020, Teradyne was in compliance with all
covenants
.
H. PREPAYMENTS
Prepayments consist of the following and are included in prepayments and other assets on the balance sheet:
 
March 29,
  
December 31,
 
 
2020
  
2019
 
 
(in thousands)
 
Contract manufacturer and supplier prepayments
 $
173,082
  $
143,392
 
Prepaid taxes
  
9,667
   
8,046
 
Prepaid maintenance and other services
  
10,828
   
8,503
 
Other prepayments
  
17,890
   
16,753
 
         
Total prepayments
 $
211,467
  $
176,694
 
         
   
June 28,
2020
   
December 31,
2019
 
   
(in thousands)
 
Contract manufacturer and supplier prepayments
  $191,029   $143,392 
Prepaid maintenance and other services
   10,316    8,046 
Prepaid taxes
   6,665    8,503 
Other prepayments
   14,171    16,753 
  
 
 
   
 
 
 
Total prepayments
  $222,181   $176,694 
  
 
 
   
 
 
 
I
.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:
 
March 29,
  
December 31,
 
 
2020
  
2019
 
 
(in thousands)
 
Maintenance, se
r
vice and training
 $
68,483
  $
63,815
 
Extended warranty
  
33,503
   
30,677
 
Customer advances, undelivered elements and other
  
47,620
   
56,358
 
         
Total deferred revenue and customer advances
 $
149,606
  $
150,850
 
         
   
June 28,
2020
   
December 31,
2019
 
   
(in thousands)
 
Maintenance, service and training
  $75,144   $63,815 
Extended warranty
   40,178    30,677 
Customer advances, undelivered elements and other
   64,536    56,358 
  
 
 
   
 
 
 
Total deferred revenue and customer advances
  $179,858   $150,850 
  
 
 
   
 
 
 
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J
.J. PRODUCT WARRANTY
Teradyne generally provides a
one-year
warranty on its products, commencing upon installation, acceptance 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
 
 
March 29,
  
March 31,
 
 
2020
  
2019
 
 
(in thousands)
 
Balance at beginning of period
 $
8,996
  $
7,909
 
Acquisition
  
—  
   
14
 
Accruals for warranties issued during the period
  
5,066
   
3,066
 
Accruals related to
pre-existing
warranties
  
1,056
   
1,330
 
Settlements made during the period
  
(4,147
)  
(4,567
)
         
Balance at end of period
 $
10,971
  $
7,752
 
         
   
For the Three Months

Ended
   
For the Six Months

Ended
 
   
June 28,
2020
   
June 30,
2019
   
June 28,
2020
   
June 30,
2019
 
   
(in thousands)
 
Balance at beginning of period
  $10,971   $7,752   $8,996   $7,909 
Accruals for warranties issued during the period
   6,200    2,295    11,267    5,360 
Accruals related to
pre-existing
warranties
   356    694    1,412    2,024 
Settlements made during the period
   (4,511)    (2,608)    (8,659)    (7,174) 
Acquisition
   —      —      —      14 
  
 
 
   
 
 
   
 
 
   
 
 
 
Balance at end of period
  $13,016   $8,133   $13,016   $8,133 
  
 
 
   
 
 
   
 
 
   
 
 
 
When Teradyne receives revenue for extended warranties, beyond one year, it is deferred and recognized on a straight-line basis over the contract period. Related costs are expensed as incurred. The balance below is included in short and long-term deferred revenue and customer advances.
 
For the Three Months
Ended
 
 
March 29,
  
March 31,
 
 
2020
  
2019
 
 
(in thousands)
 
Balance at beginning of period
 $
30,677
  $
27,422
 
Deferral of new extended warranty revenue
  
7,600
   
5,820
 
Recognition of extended warranty deferred revenue
  
(4,774
)  
(6,000
)
         
Balance at end of period
 $
33,503
  $
27,242
 
         
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For the Three Months

Ended
 
  
For the Six Months

Ended
 
 
  
June 28,
2020
 
  
June 30,
2019
 
  
June 28,
2020
 
  
June 30,
2019
 
 
  
(in thousands)
 
Balance at beginning of period
  
$
33,503
 
  
$
27,242
 
  
$
30,677
 
  
$
27,422
 
Deferral of new extended warranty revenue
  
 
11,450
 
  
 
5,476
 
  
 
19,050
 
  
 
11,296
 
Recognition of extended warranty deferred revenue
  
 
(4,775
) 
  
 
(4,002
) 
  
 
(9,549
) 
  
 
(10,002
) 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Balance at end of period
  
$
40,178
 
  
$
28,716
 
  
$
40,178
 
  
$
28,716
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
K
.K. STOCK-BASED COMPENSATION
Under Teradyne’s stock compensation plans, Teradyne grants service-based restricted stock units, performance-based restricted stock units and stock options, and employees are eligible to purchase Teradyne’s common stock through its Employee Stock Purchase Plan (“ESPP”).
Service
-basedService-based restricted stock unit awards granted to employees vest in equal annual installments over four years. Restricted stock unit awards granted to
non-employee
directors vest after a
one-year
period, with 100% of the award vesting on the earlier of (a) the first anniversary of the grant date or (b) the date of the following year’s Annual Meeting of Shareholders. Teradyne expenses the cost of the restricted stock unit awards subject to
service
-based service-based vesting, which is determined to be the fair market value of the shares at the date of grant, ratably over the period during which the restrictions lapse.
Performance-based restricted stock units (“PRSUs”) granted to Teradyne’s executive officers may have a performance metric based on relative total shareholder return (“TSR”). Teradyne’s three-year TSR performance is measured against the New York Stock Exchange (“NYSE”) Composite Index. The final number of TSR PRSUs that vest will vary based upon the level of performance achieved
from 0% to 200% of the target shares capped at four times the grant date value for grants prior to 2019.
The TSR PRSUs will vest upon the three-year anniversary of the grant date. The TSR PRSUs are valued using a Monte Carlo simulation model. The number of units expected to be earned, based upon the achievement of the TSR market condition, is factored into the grant date Monte Carlo valuation. Compensation expense is recognized on a straight-line basis over the shorter of the three-year service period or the period from the grant to the date described in the retirement provisions below. Compensation expense for executive officers meeting the retirement provisions prior to the grant date is recognized during the 365 days following the grant. Compensation expense is recognized regardless of the eventual number of units that are earned based upon the market condition, provided the executive officer remains an employee at the end of the three-year period. Compensation expense is reversed if at any time during the three-year service period the executive officer is no longer an employee, subject to the retirement and termination eligibility provisions noted below.
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Table of Contents
PRSUs granted to Teradyne’s executive officers may also have a performance metric
based
on
three-year
cumulative
non-GAAP
profit before interest and tax (“PBIT”) as a percent of
Teradyne
’s Teradyne’s revenue.
Non-GAAP
PBIT is a financial measure equal to GAAP income from operations less restructuring and other, net; amortization of acquired intangible assets; acquisition and divestiture related charges or credits; pension actuarial gains and losses;
non-cash
convertible debt interest expense; and other
non-recurring
gains and charges. The final number of PBIT PRSUs that vest will vary based upon the level of performance achieved from
0
% 0% to
200
% 200% of the target shares.
The PBIT PRSUs will vest upon the three-year anniversary of the grant date. Compensation expense is recognized on a straight-line basis over the shorter of the three-year service period or the period from the grant date to the date described in the retirement provisions below. Compensation expense for executive officers meeting the retirement provisions prior to the grant date is recognized during the 365 days following the grant. Compensation expense is recognized based on the number of units that are earned based upon the three-year Teradyne PBIT as a percent of Teradyne’s revenue, provided the executive officer remains an employee at the end of the three-year period subject to the retirement and termination eligibility provisions noted below.
If a PRSU recipient’s employment ends prior to the determination of the performance percentage due to (1) permanent disability or death or (2) retirement or termination other than for cause, after attaining both at least
age sixty and at least ten years of service, then all or a portion of the recipient’s PRSUs (based on the actual performance percentage achieved on the determination date) will vest on the date the performance percentage is determined. Except as set forth in the preceding sentence, no PRSUs will vest if the executive officer is no longer an employee at the end of the three-yearthree-year period.
Stock options to purchase Teradyne’s common stock at 100% of the fair market value on the grant date vest in equal annual installments over four years from the grant date and have a maximum term of seven years.
During the threesix months ended March 29,June 28, 2020 and March 31,June 30, 2019, Teradyne granted 0.4 million and 0.60.8 million of service-based restricted stock unit awards to employees at a weighted average grant date fair value of $70.98$70.52 and $35.88,$36.84, respectively
,
and 0.1 million of service-based restricted stock unit awards to
non-employee
directors at a weighted average grant date fair value of $64.99 and $48.03, respectively.
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Table of Contents
During the threesix months ended March 29,June 28, 2020 and March 31,June 30, 2019, Teradyne granted 0.1 million of PBIT PRSUs with a grant date fair value of $70.94 and $35.67,$36.88, respectively.
During the threesix months ended March 29,June 28, 2020 and March 31,June 30, 2019, Teradyne grante
d
granted 0.1
million of TSR PRSUs, with a grant date fair value of
 $
89.93
$89.93 and $
48.47
,$51.51, respectively.
The fair value was estimated using the Monte Carlo simulation model with the following assumptions:
 
For the Three Months
Ended
 
 
March 29,
  
March 31,
 
 
2020
  
2019
 
Risk-free interest rate
  
1.5
%  
2.6
%
Teradyne volatility-historical
  
34.9
%  
31.8
%
NYSE Composite Index volatility-historical
  
11.4
%  
12.0
%
Dividend yield
  
0.6
%  
1.0
%
   
For the Six Months

Ended
 
   
June 28,
2020
  
June 30,
2019
 
Risk-free interest rate
   1.5%   2.6% 
Teradyne volatility-historical
   34.9%   31.9% 
NYSE Composite Index volatility-historical
   11.4%   11.9% 
Dividend yield
   0.6%   1.0% 
Expected volatility was based on the historical volatility of Teradyne’s stock and the NYSE Composite Index for the 2020 and 2019 grant over the most recent three-year period. The risk-free interest rate was determined using the U.S. Treasury yield curve in effect at the time of grant. Dividend yield was based upon an estimated annual dividend amount
of $0.40
per share divided by Teradyne’s stock price on the grant date of
 $
72.10
$72.10 for the 2020 grant and an estimated annual dividend amount of
 $
0.36
$0.36 per share divided by Teradyne’s stock price on the grant date of
 $
36.75
$36.75 for the 2019 grant.
During the threesix months ended March 29,June 28, 2020 and March 31,June 30, 2019, Teradyne granted 0.1 
million of service-based stock options to executive officers at a weighted average grant date fair value of
 $
20.67
$20.67 and $
10.26
,$10.61, respectively.
The fair value of stock options was estimated using the Black-Scholes option-pricing model with the following assumptions:
         
 
For the Three Months
Ended
 
 
March 29,
  
March 31,
 
 
2020
  
2019
 
Expected life (years)
  
5.0
   
5.0
 
Risk-free interest rate
  
1.6
%  
2.6
%
Volatility-historical
  
31.6
%  
30.1
%
Dividend yield
  
0.6
%  
1.0
%
 
   
For the Six Months

Ended
 
   
June 28,
2020
  
June 30,
2019
 
Expected life (years)
   5.0   5.0 
Risk-free interest rate
   1.6%   2.5% 
Volatility-historical
   31.6%   30.1% 
Dividend yield
   0.6%   1.0% 
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Table of Contents
Teradyne determined the stock options’ expected life based upon historical exercise data for executive officers, the age of the executive officers and the terms of the stock option grant. Volatility was determined using historical volatility for a period equal to the expected life. The risk-free interest rate was determined using the U.S. Treasury yield curve in effect at the time of grant. Dividend yield was based upon an estimated annual dividend amount of $0.40
per share divided by Teradyne’s stock price on the grant date of
 $
72.10
$72.10 for the 2020 grant and an estimated annual dividend amount of $0.36 per share divided by Teradyne’s stock price on the grant date of
$
36.75
$37.95 for the 2019 grant.
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Table of Contents
L. ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
Changes in accumulated other comprehensive (loss) income, which are presented net of tax, consist of the following:
 
                 
 
Foreign
Currency
Translation
Adjustment
  
Unrealized
Gains
(Losses) on
Marketable
Securities
  
Retirement
Plans Prior
Service
Credit
  
Total
 
 
(in thousands)
 
Three Months Ended March 29, 2020
            
Balance at December 31, 2019, net of tax of $0, $946, $(1,124)
 $
(23,514
) $
3,480
  $
1,180
  $
(18,854
)
Other comprehensive income (loss) before reclassifications, net of tax of $0, $187, $0
  
(8,779
)  
1,037
   
—
   
(7,742
)
Amounts reclassified from accumulated other comprehensive income, net of tax of $0, $(145), $0
  
—
   
(515
)  
(2
)  
(517
)
                 
Net current period other comprehensive income (loss), net of tax of $0, $42, $0
  
(8,779
)  
522
   
(2
)  
(8,259
)
                 
Balance at March 29, 2020, net of tax of $0, $988, $(1,124)
 $
(32,293
) $
4,002
  $
1,178
  $
(27,113
)
                 
Three Months Ended March 
31
, 2019
            
Balance at December 31, 2018, net of tax of $0, $(521), $(1,081)
 $
(12,523
) $
(1,845
) $
1,328
  $
(13,040
)
Other comprehensive income (loss) before reclassifications, net of tax of $0, $577, $0
  
(4,659
)  
2,100
   
—
   
(2,559
)
Amounts reclassified from accumulated other comprehensive income, net of tax of $0, $(20), $(11)
  
—
   
(70
)  
(37
)  
(107
)
                 
Net current period other comprehensive income (loss), net of tax of $0, $557, $(11)
  
(4,659
)  
2,030
   
(37
)  
(2,666
)
                 
Balance as March 31, 2019, net of tax of $0, $36, $(1,092)
 $
(17,182
) $
185
  $
1,291
  $
(15,706
)
                 
   
Foreign

Currency

Translation

Adjustment
   
Unrealized

Gains

(Losses) on

Marketable

Securities
   
Retirement

Plans Prior

Service

Credit
   
Total
 
   
(in thousands)
 
Six Months Ended June 28, 2020
        
Balance at December 31, 2019, net of tax of $0, $946, $(1,124), respectively
  $(23,514)   $3,480   $1,180   $(18,854) 
Other comprehensive income before reclassifications, net of tax of $0, $1,271, $0, respectively
   7,026    4,830    —      11,856 
Amounts reclassified from accumulated other comprehensive income, net of tax of $0, $(421), $(1), respectively
   —      (1,499)    (3)    (1,502) 
  
 
 
   
 
 
   
 
 
   
 
 
 
Net current period other comprehensive income (loss), net of tax of $0, $850, $(1), respectively
   7,026    3,331    (3)    10,354 
  
 
 
   
 
 
   
 
 
   
 
 
 
Balance at June 28, 2020, net of tax of $0, $1,796, $(1,125), respectively
  $(16,488)   $6,811   $1,177   $(8,500) 
  
 
 
   
 
 
   
 
 
   
 
 
 
Six Months Ended June 30, 2019
        
Balance at December 31, 2018, net of tax of $0, $(521), $(1,081), respectively
  $(12,523)   $(1,845)   $1,328   $(13,040) 
Other comprehensive income before reclassifications, net of tax of $0, $1,256, $0, respectively
   983    4,637    —      5,620 
Amounts reclassified from accumulated other comprehensive income, net of tax of $0, $(26), $(21), respectively
   —      (97)    (74)    (171) 
  
 
 
   
 
 
   
 
 
   
 
 
 
Net current period other comprehensive income (loss), net of tax of $0, $1,230, $(21), respectively
   983    4,540    (74)    5,449 
  
 
 
   
 
 
   
 
 
   
 
 
 
Balance as June 30, 2019, net of tax of $0, $709, $(1,102), respectively
  $(11,540)   $2,695   $1,254   $(7,591) 
  
 
 
   
 
 
   
 
 
   
 
 
 
Reclassifications out of accumulated other comprehensive (loss) income to the statement of operations for the three and six months ended March 29,June 28, 2020 and March 31,June 30, 2019 were as follows:
             
  
For the Three Months
Ended
  
Affected Line Item
in the Statements
of Operations
 
 
March 29,
  
March 31,
   
 
2020
  
2019
   
Details about Accumulated Other Comprehensive
(
loss
)
Income Components
 
(in thousands)
   
Available-for-sale
marketable securities:
         
Unrealized gains, net of tax of $145, $20
 $
515
  $
70
   
Interest income
 
Defined benefit pension and postretirement plans:
         
Amortization of prior service benefit, net of tax of $0, $11
  
2
   
37
   
(a)
 
             
Total reclassifications, net of tax of $145, $31
 $
517
  $
107
   
Net income
 
             
 
Details about Accumulated Other Comprehensive Income Components
  
For the Three Months

Ended
   
For the Six Months

Ended
   
Affected Line Item

in the Statements

of Operations
 
   
June 28,
2020
   
June 30,
2019
   
June 28,
2020
   
June 30,
2019
     
   
(in thousands)
     
Available-for-sale
marketable securities:
          
Unrealized gains, net of tax of $277, $6, $421, $26, respectively
  $983   $27   $1,499   $97    Interest income 
Defined benefit 
retirement
plans:
          
Amortization of prior service
credit
, net of tax of $0, $11, $1, $21, respectively
   2    37    3    74    (a) 
  
 
 
   
 
 
   
 
 
   
 
 
   
Total reclassifications, net of tax of $277, $17, $422, $47, respectively
  $985   $64   $1,502   $171    Net income 
  
 
 
   
 
 
   
 
 
   
 
 
   
(a)
The amortization of prior service benefit is included in the computation of net periodic pension cost and postretirement benefit. See Note P: “Retirement Plans.”
 
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Table of Contents
M. GOODWILL AND ACQUIRED INTANGIBLE ASSETS
Goodwill
Teradyne performs its annual goodwill impairment test as required under the provisions of ASC
350-10,
“Intangibles—Goodwill and Other”
on December 31 of each fiscal year unless interim indicators of impairment exist. Goodwill is considered impaired when the net book value of a
reporting
unit exceeds its estimated fair value.
21
Table of Contents
The changes in the carrying amount of goodwill by reportable segments for the threesix months ended March 29,June 28, 2020, were as follows:
                     
 
Industrial
Automation
  
System
Test
  
Wireless
Test
  
Semiconductor
Test
  
Total
 
 
(in thousands)
 
Balance at December 31, 2019
               
Goodwill
 $
396,483
  $
158,699
  $
361,819
  $
261,996
  $
1,178,997
 
Accumulated impairment losses
  
—  
   
(148,183
)  
(353,843
)  
(260,540
)  
(762,566
)
                     
  
396,483
   
10,516
   
7,976
   
1,456
   
416,431
 
AutoGuide acquisition
  (149)  
—  
   
—  
   
—  
   (149)
Foreign currency translation adjustment
  
(6,354
)  
—  
   
—  
   
5
   
(6,349
)
                     
Balance at March 29, 2020
               
Goodwill
  
389,980
   
158,699
   
361,819
   
262,001
   
1,172,499
 
Accumulated impairment losses
  
—  
   
(148,183
)  
(353,843
)  
(260,540
)  
(762,566
)
                     
 $
389,980
  $
10,516
  $
7,976
  $
1,461
  $
409,933
 
                     
 
   
Industrial

Automation
   
System

Test
   
Wireless

Test
   
Semiconductor

Test
   
Total
 
   
(in thousands)
 
Balance at December 31, 2019
          
Goodwill
  $396,483   $158,699   $361,819   $261,996   $1,178,997 
Accumulated impairment losses
   —      (148,183)    (353,843)    (260,540)    (762,566) 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
   396,483    10,516    7,976    1,456    416,431 
AutoGuide acquisition
   (149)    —      —      —      (149) 
Foreign currency translation adjustment
   5,671    —      —      50    5,721 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Balance at June 28, 2020
          
Goodwill
   402,005    158,699    361,819    262,046    1,184,569 
Accumulated impairment losses
   —      (148,183)    (353,843)    (260,540)    (762,566) 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
  $402,005   $10,516   $7,976   $1,506   $422,003 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Intangible Assets
Teradyne reviews long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of these assets are no longer appropriate.
Amortizable intangible assets consist of the following and are included in intangible assets, net on the balance sheet:
                 
 
Gross
Carrying
Amount
  
Accumulated
Amortization
  
Foreign Currency
Translation
Adjustment
  
Net
Carrying
Amount
 
 
(in thousands)
 
Balance, March 29, 2020
  
Developed technology
 $
361,787
  $
(286,166
) $
(6,663
) $
68,958
 
Customer relationships
  
75,669
   
(60,406
)  
(547
)  
14,716
 
Tradenames and trademarks
  
70,120
   
(38,067
)  
(1,406
)  
30,647
 
Backlog
  
260
   
(260
)  
—  
   
—  
 
                 
Total intangible assets
 $
507,836
  $
(384,899
) $
(8,616
) $
114,321
 
                 
Balance, December 31, 2019
            
Developed technology
 $
361,787
  $
(279,000
) $
(5,709
) $
77,078
 
Customer relationships
  
75,669
   
(59,077
)  
(455
)  
16,137
 
Tradenames and trademarks
  
70,120
   
(36,671
)  
(1,184
)  
32,265
 
Backlog
  
260
   
(260
)  
—  
   
—  
 
                 
Total intangible assets
 $
507,836
  $
(375,008
) $
(7,348
) $
125,480
 
                 
 
   
Gross

Carrying

Amount
   
Accumulated

Amortization
   
Foreign
Currency
Translation
Adjustment
   
Net

Carrying

Amount
 
   
(in thousands)
 
Balance at June 28, 2020
        
Developed technology
  $361,787   $(292,394)   $(5,095)   $64,298 
Customer relationships
   75,669    (61,730)    (295)    13,644 
Tradenames and trademarks
   70,120    (39,457)    (1,042)    29,621 
  
 
 
   
 
 
   
 
 
   
 
 
 
Total intangible assets
  $507,576   $(393,581)   $(6,432)   $107,563 
  
 
 
   
 
 
   
 
 
   
 
 
 
Balance at December 31, 2019
        
Developed technology
  $361,787   $(279,000)   $(5,709)   $77,078 
Customer relationships
   75,669    (59,077)    (455)    16,137 
Tradenames and trademarks
   70,120    (36,671)    (1,184)    32,265 
Backlog
   260    (260)    —      —   
  
 
 
   
 
 
   
 
 
   
 
 
 
Total intangible assets
  $507,836   $(375,008)   $(7,348)   $125,480 
  
 
 
   
 
 
   
 
 
   
 
 
 
Aggregate intangible asset amortization expense was $8.9 million and $18.8 million, respectively, for the three and six months ended March 29,June 28, 2020 and March 31, 2019
was $9.9$10.1 million and $10.6$20.7 million, respectively.respectively, for the three and six months ended June 30, 2019.
23
Table of Contents
Estimated intangible asset amortization expense for each of the five succeeding fiscal years is as follows:
     
  
Amortization Expense
 
Year
 
(in thousands)
 
2020 (remainder)
  
20,411
 
2021
  
20,391
 
2022
  
19,498
 
2023
  
19,023
 
2024
  
18,718
 
Thereafter
  
16,280
 
 
Year
  
Amortization Expense
 
   
(in thousands)
 
2020 (remainder)
   11,721 
2021
   20,804 
2022
   19,911 
2023
   19,430 
2024
   19,123 
Thereafter
   16,574 
22
Table of Contents
N
.N. NET INCOME PER COMMON SHARE
The following table sets forth the computation of basic and diluted net income per common share:
         
 
For the Three Months
Ended
 
 
March 29,
  
March 31,
 
 
2020
  
2019
 
 
(in thousands, except per share amounts)
 
Net income for basic and diluted net income per share
 $
176,191
  $
109,138
 
         
Weighted average common shares-basic
  
166,589
   
173,532
 
Effect of dilutive potential common shares:
      
Incremental shares from assumed conversion of convertible
notes (1)
  
7,333
   
2,186
 
Convertible note hedge warrant shares (2)
  
5,492
   
—  
 
Restricted stock units
  
1,163
   
1,021
 
Stock options
  
134
   
222
 
Employee stock purchase plan
  
25
   
11
 
         
Dilutive potential common shares
  
14,147
   
3,440
 
Weighted average common shares-diluted
  
180,736
   
176,972
 
Net income per common share-basic
 $
1.06
  $
0.63
 
         
Net income per common share-diluted
 $
0.97
  $
0.62
 
         
 
   
For the Three Months

Ended
   
For the Six Months

Ended
 
   
June 28,
   
June 30,
   
June 28,
   
June 30,
 
   
2020
   
2019
   
2020
   
2019
 
   
(in thousands, except per share amounts)
 
Net income for basic and diluted net income per share
  $188,908   $97,397   $365,098   $206,535 
  
 
 
   
 
 
   
 
 
   
 
 
 
Weighted average common shares-basic
   165,789    171,241    166,189    172,387 
Effect of dilutive potential common shares:
        
Incremental shares from assumed conversion of convertible notes (1)
   7,599    4,364    7,466    3,275 
Convertible note hedge warrant shares (2)
   5,824    1,778    5,658    889 
Restricted stock units
   913    1,002    1,038    1,012 
Stock options
   132    183    133    202 
Employee stock purchase plan
   —      22    13    16 
  
 
 
   
 
 
   
 
 
   
 
 
 
Dilutive potential common shares
   14,468    7,349    14,308    5,394 
  
 
 
   
 
 
   
 
 
   
 
 
 
Weighted average common shares-diluted
   180,257    178,590    180,497    177,781 
  
 
 
   
 
 
   
 
 
   
 
 
 
Net income per common share-basic
  $1.14   $0.57   $2.20   $1.20 
  
 
 
   
 
 
   
 
 
   
 
 
 
Net income per common share-diluted
  $1.05   $0.55   $2.02   $1.16 
  
 
 
   
 
 
   
 
 
   
 
 
 
(1)
Incremental shares from assumed conversion of the convertible notes was calculated using the difference between the average Teradyne stock price for the period and the conversion price of $31.61,$31.59, multiplied by 14.6 million shares. The result of this calculation, representing the total intrinsic value of the convertible debt, was divided by the average Teradyne stock price for the period.
(2)
Convertible notes hedge warrant shares were calculated using the difference between the average Teradyne stock price for the period and the warrant price of $39.66,$39.64, multiplied by 14.6 million shares. The result of this calculation, representing the total intrinsic value of the warrant, was divided by the average Teradyne stock price for the period.
The computation of diluted net income per common share for the three and six months ended March 29,June 28, 2020 excludes the effect of the potential vesting of 0.30.1 million and 0.2 million, respectively
,
of restricted stock units because the effect would have been anti-dilutive.
The computation of diluted net income per common share for the three and six months ended March 
31
,
June 30, 2019
excludes the effect of the potential vesting of 0.60.2 million sharesand 0.4 million of restricted stock units options, respectively
,
because the effect would have been anti-dilutive.
O
.O. RESTRUCTURING AND OTHER
During the three months ended March 29,June 28, 2020,
Teradyne recorded a $29.9 million charge for the increase in the fair value of the AutoGuide contingent consideration liability,
a
$4.0 million contract termination settlement
charge
, $3.1 million of acquisition related compensation and expenses, and $0.8 million of other expenses, partially offset by a $0.6 million
gain
of
 $10.0 
million for the decrease in the fair value of the AutoGuide and MiR contingent consideration liabilit
iliability.
es
, partially offset by
 $1.4 
million
24
Table of acquisition related compensation and expenses
 and
$0.7 Contents
million of severance charges related to headcount reductions primarily in Industrial Automation and Semiconductor Test.
During the three months ended March 31,June 30, 2019, Teradyne recorded an expense of $3.0a $11.7 million
gain
 for the increasedecrease in the fair value of the MiR contingent consideration liability, $1.3partially offset by $0.8 million recorded for severance charges primarily in Semiconductor Test and $0.5 million of acquisition related compensation and expenses.
During the six months ended June 28, 2020, Teradyne recorded a $22.8 million charge for the increase in the fair value of the AutoGuide contingent consideration liabilities, $4.5 million of acquisition related compensation and expenses,
a
$4.0 million contract termination settlement
charge
, $1.1 million of other expenses, and $0.8 million of severance charges primarily in Semiconductor Test, partially offset by
 a
$3.6 million
gain
 for the decrease in the fair value of the MiR contingent consideration liability.
During the six months ended June 30, 2019, Teradyne recorded a $8.7 million
gain
 for the decrease in the fair value of the MiR contingent consideration liability, partially offset by $1.8 million of acquisition related compensation and expenses
,
and $0.8$1.6 million ofrecorded for severance charges related to headcount reductions primarily in Semiconductor Test.
P
.
P. RETIREMENT PLANS
ASC 715,
“Compensation—Retirement Benefits”
requires an employer with a defined benefit plan or other postretirement benefit plan to recognize an asset or a liability on its balance sheet for the overfunded or underfunded status of the plan. The pension asset or liability represents a difference between the fair value of the pension plan’s assets and the projected benefit obligation at December 31. Teradyne uses a December 31 measurement date for all of its 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
23
Table of Contents
of the U.S. qualified pension plan consist primarily of fixed income and equity securities. In addition, Teradyne has unfunded qualified foreign plans as well as an unfunded supplemental executive defined benefit plan in the United States to provide retirement benefits in excess of levels allowed by the Employment Retirement Income Security Act (“ERISA”) and the Internal Revenue Code (“IRC”).
In the threesix months ended March 29,June 28, 2020, Teradyne contributed $0.7$1.4 million to the U.S. supplemental executive defined benefit pension plan and $0.2$0.4 million to certain qualified pension plans for
non-U.S.
subsidiaries.
25
Table of Contents
For the three and six months ended March 29, June 
28
,
2020
and March 31, June 
30
,
2019
, Teradyne’s net periodic pension cost was comprised of the following:
                 
 
For the Three Months Ended
 
 
March 29, 2020
  
March 31, 2019
 
 
United
States
  
Foreign
  
United
States
  
Foreign
 
 
(in thousands)
 
Service cost
 $
433
  $
201
  $
405
  $
188
 
Interest cost
  
1,522
   
115
   
1,795
   
173
 
Expected return on plan assets
  
(1,233
)  
(15
)  
(1,511
)  
(7
)
                 
Total net periodic pension cost
 $
722
  $
301
  $
689
  $
354
 
                 
 
   
For the Three Months Ended
 
   
June 28, 2020
   
June 30, 2019
 
   
United

States
   
Foreign
   
United

States
   
Foreign
 
   
(in thousands)
 
Service cost
  $433   $208   $399   $192 
Interest cost
   1,523    119    1,799    176 
Expected return on plan assets
   (1,232)    (15)    (1,510)    (7) 
Net actuarial loss
   180    —      252    —   
  
 
 
   
 
 
   
 
 
   
 
 
 
Total net periodic pension cost
  $904   $312   $940   $361 
  
 
 
   
 
 
   
 
 
   
 
 
 
   
For the Six Months Ended
 
   
June 28, 2020
   
June 30, 2019
 
   
United

States
   
Foreign
   
United

States
   
Foreign
 
   
(in thousands)
 
Service cost
  $866   $417   $804   $381 
Interest cost
   3,045    238    3,595    349 
Expected return on plan assets
   (2,464)    (31)    (3,021)    (14) 
Net actuarial loss
   180    —    252    — 
  
 
 
   
 
 
   
 
 
   
 
 
 
Total net periodic pension cost
  $1,627   $624   $1,630   $716 
  
 
 
   
 
 
   
 
 
   
 
 
 
Postretirement Benefit Plan
In addition to receiving pension benefits, Teradyne employees in the United States who meet early retirement eligibility requirements as of their termination dates may participate in Teradyne’s Welfare Plan, which includes medical and dental benefits up to age 65. Death benefits provide a fixed sum to retirees’ survivors and are available to all retirees. Substantially all of Teradyne’s current U.S. employees could become eligible for these benefits, and the existing benefit obligation relates primarily to those employees.
For the three and six months ended March 29,June 28, 2020 and March 31,June 30, 2019, Teradyne’s net periodic postretirement benefit cost was comprised of the following:
         
 
For the Three Months
Ended
 
 
March 29,
 
 
March 31,
 
 
2020
 
 
2019
 
 
(in thousands)
 
Service cost
 $
11
  $
9
 
Interest cost
  
62
   
85
 
Amortization of prior service credit
  
(2
)  
(48
)
         
Total net periodic postretirement benefit cost
 $
71
  $
46
 
         
 
   
For the Three Months

Ended
   
For the Six Months

Ended
 
   
June 28,
2020
   
June 30,
2019
   
June 28,
2020
   
June 30,
2019
 
   
(in thousands)
 
Service cost
  $17   $11   $28   $20 
Interest cost
   58    88    120    173 
Amortization of prior service credit
   (2)    (48)    (4)    (95) 
Net actuarial (gain) loss
   (279)    196    (279)    196 
  
 
 
   
 
 
   
 
 
   
 
 
 
Total net periodic postretirement benefit (credit) cost
  $(206)   $247   $(135)   $294 
  
 
 
   
 
 
   
 
 
   
 
 
 
Q
.Q. COMMITMENTS AND CONTINGENCIES
Purchase Commitments
As of March 29,June 28, 2020, Teradyne had entered into purchase commitments for certain components and materials. The purchase commitments covered by the agreements aggregate to approximately $543.8$544.2 million, of which $529.4$534.3 million is for less than one year.
26
Table of Contents
Legal Claims
Teradyne is subject to various legal proceedings and
claims
which have arisen in the ordinary course of business such as, but not limited to, patent, employment, commercial and environmental matters. Teradyne believes that it has meritorious defenses against all pending claims and intends to vigorously contest them. While it is not possible to predict or determine the outcomes of any pending claims or to provide possible ranges of losses that may arise, Teradyne believes the potential losses associated with all of these actions are unlikely to have a material adverse effect on its business, financial position or results of operations.
24
Table of Contents
R
.R. INCOME TAXES
A reconciliation of the United States federal statutory corporate tax rate to Teradyne’s effective tax rate was as follows:
         
 
For the Three Months
Ended
 
 
March 29,
 
 
March 31,
 
 
2020
 
 
2019
 
US statutory federal tax rate
  
21.0
%  
21.0
%
Foreign taxes
  
(5.7
)  
(3.1
)
Tax credits
  
(1.9
)  
(3.0
)
Discrete benefit related to equity compensation
  
(4.1
)  
(4.1
)
Discrete benefit related to release of reserves for uncertain tax positions
  
—
   
(27.6
)
Other, net
  
1.3
   
0.7
 
         
Effective tax rate
  
10.6
%  
(16.1
)%
         
 
   
For the Three Months

Ended
  
For the Six Months

Ended
 
   
June 28,
2020
  
June 30,
2019
  
June 28,
2020
  
June 30,
2019
 
US statutory federal tax rate
   21.0%   21.0%   21.0%   21.0% 
Discrete benefit related to release of reserves for uncertain tax positions
   0.1   (0.3)   0.1   (11.5) 
Foreign taxes
   (4.6)   (5.8)   (5.1)   (4.7) 
International provisions of the U.S. Tax Cuts and Jobs Act of 2017
   (1.9)   1.9   (1.1)   0.8 
Tax credits
   (1.4)   (2.1)   (1.6)   (2.5) 
Discrete benefit related to equity compensation
   (0.1)   (0.5)   (2.0)   (2.0) 
Discrete expense related to U.S. transition tax
   —     11.2   —     6.5 
Other, net
   —     0.4   0.6   0.7 
  
 
 
  
 
 
  
 
 
  
 
 
 
Effective tax rate
   13.1%   25.8%   11.9%   8.3% 
  
 
 
  
 
 
  
 
 
  
 
 
 
On a quarterly basis, Teradyne evaluates the realizability of the deferred tax assets by jurisdiction and assesses the need for a valuation allowance. As of March 29,June 28, 2020, Teradyne believes that it will ultimately realize the deferred tax assets recorded on the condensed consolidated balance sheet. However, should Teradyne believe that it is
more-likely-than-not
that the deferred tax assets would not be realized, the tax provision would increase in the period in which Teradyne determined that the realizability was not likely. Teradyne considers the probability of future taxable income and historical profitability, among other factors, in assessing the realizability of the deferred tax assets.
As of March 29,June 28, 2020 and December 31, 2019, Teradyne had $21.3$21.4 million and $21.2 million, respectively, of reserves for uncertain tax positions. The $0.1$0.2 million net increase in reserves for uncertain tax positions is associated with U.S. research and development tax credits generated in the current year.
As of March 29,June 28, 2020, Teradyne does not anticipate a material change inestimates that it is reasonably possible that the balance of unrecognized tax benefits duringmay decrease
by
approximately $1.1 million in the next twelve months.months as a result of a lapse of statutes of
limitation.
The estimated decrease relates to transfer pricing.
Teradyne recognizes interest and penalties related to income tax matters in income tax expense. As of March 29,June 28, 2020 and December 31, 2019, $1.6$1.7 million and $1.4 million, respectively, of interest and penalties were accrued for uncertain tax positions. For the threesix months ended March 29,June 28, 2020 and March 31,June 30, 2019, expense of $0.1$0.3 million and $0.3$0.1 million, respectively, was recorded for interest and penalties related to income tax items.
Teradyne qualifies for a tax holiday in Singapore by fulfilling the requirements of an agreement with the Singapore Economic Development Board under which certain headcount and spending requirements must be met. The tax savings due to the tax holiday for the threesix months ended March 29,June 28, 2020 was $7.1$13.6 million, or $0.04$0.08 per diluted share. The tax savings due to the tax holiday for the threesix months ended March 31,June 30, 2019 was $2.1$7.0 million, or $0.01$0.04 per diluted share. The tax holiday is scheduled to expire on December
 31, 2020. Teradyne is currently in discussion with the Singapore Economic Development Board with respect to extension of the tax holiday for periods after December
 31, 2020.
S27
. SEGMENT INFORMATION
Table of Contents
S. SEGMENT INFORMATIO
N
Teradyne has 4 reportable segments (Semiconductor Test, System Test, Industrial Automation and Wireless Test). Each of the Semiconductor Test, System Test, and Wireless Test segments is also an individual operating segment. The Industrial Automation reportable segment consists of operating segments with discrete financial information, which have been combined into one reportable segment as they share similar economic characteristics, types of products, production processes
 and
distribution channels, and currency risks.channels. The Semiconductor Test segment includes operations related to the design, manufacturing and marketing of semiconductor test products and services. The System Test segment includes operations related to the design, manufacturing and marketing of products and services for defense/aerospace instrumentation test, storage
and system level
test
,
and circuit-board test. The Industrial Automation segment includes operations related to the design, manufacturing and marketing of collaborative robotic arms, autonomous mobile robots and advanced robotic control software. The Wireless Test segment includes operations related to the design, manufacturing and marketing of wireless test products and services.
Teradyne evaluates performance based on several factors, of which the primary financial measure is business segment income (loss) before income taxes. The accounting policies of the business segments in effect are described in Note B: “Accounting Policies” in Teradyne’s Annual Report on Form
10-K
for the year ended December 31, 2019.
25
Table of Contents
Segment information for the three and six months ended March 29,June 28, 2020 and March 31,June 30, 2019 is as follows:
                         
 
Semiconductor
Test
 
 
System
Test
 
 
Industrial
Automation
 
 
Wireless
Test
 
 
Corporate
and
Other
 
 
Consolidated
 
 
(in thousands)
 
Three Months Ended March 29, 2020
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues
 $
484,489
  $
116,076
  $
60,305
  $
43,485
  $
—
  $
704,355
 
Income (loss) before taxes (1)(2)
  
153,816
   
48,407
   
(15,335
)  
10,220
   
(39
)
 
  
197,069
 
Total assets (3)
  
921,108
   
137,056
   
643,011
   
106,400
   
1,012,813
   
2,820,388
 
Three Months Ended March 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues
 $
340,853
  $
58,220
  $
66,136
  $
29,041
  $
(151
) $
494,099
 
Income
(
loss
)
before taxes (1)(2)
  
83,049
   
15,340
   
(5,295
)  
3,628
   
(2,743
)  
93,979
 
Total assets (3)
  
770,967
   
98,916
   
596,899
   
73,066
   
1,076,795
   
2,616,643
 
 
   
Semiconductor

Test
   
System

Test
   
Industrial

Automation
  
Wireless

Test
   
Corporate

and

Other
  
Consolidated
 
   
(in thousands)
 
Three Months Ended June 28, 2020
          
Revenues
  $659,147   $71,806   $58,776  $49,185   $(253)  $838,661 
Income (loss) before income taxes (1)(2)
   228,787    19,193    (11,403)   14,482    (33,768)   217,291 
Total assets (3)
   1,192,355    126,164    662,103   108,066    1,160,501   3,249,189 
Three Months Ended June 30, 2019
          
Revenues
  $374,898   $73,407   $74,726  $41,236   $(89)  $564,178 
Income before income taxes (1)(2)
   91,355    23,535    (3,730)   10,930    9,087   131,177 
Total assets (3)
   745,073    123,460    601,676   93,232    1,108,073   2,671,514 
Six Months Ended June 28, 2020
          
Revenues
  $1,143,636   $187,882   $119,081  $92,670   $(253)  $1,543,016 
Income (loss) before income taxes (1)(2)
   382,603    67,600    (26,738)   24,702    (33,808)   414,359 
Total assets (3)
   1,192,355    126,164    662,103   108,066    1,160,501   3,249,189 
Six Months Ended June 30, 2019
          
Revenues
  $715,751   $131,627   $140,862  $70,277   $(240)  $1,058,277 
Income (loss) before income taxes (1)(2)
   174,404    38,875    (9,025)   14,558    6,344   225,156 
Total assets (3)
   745,073    123,460    601,676   93,232    1,108,073   2,671,514 
(1)
Included in Corporate and Other are: contingent consideration adjustments, severance charges, interest income, interest expense, net foreign exchange gains (losses),
pension and postretirement plans actuarial (gains) losses,
intercompany eliminations and acquisition related charges.
(2)
Included in income (loss) before taxes are charges and credits related to restructuring and other, and inventory charges.
(3)
Total assets are attributable to each segment. Corporate assets consist of cash and cash equivalents, marketable securities and certain other assets.
 
2
8
Table of Contents
Included in each segment are charges and credits in the following line items in the statements of operations:
         
 
For the Three Months
Ended
 
 
March 29,
 
 
March 31,
 
 
2020
 
 
2019
 
 
(in thousands)
 
Semiconductor Test:
 
 
 
 
 
 
Cost of revenues—inventory charge
 $
3,026
  $
1,174
 
Industrial Automation:
 
 
 
 
 
 
Restructuring and other—acquisition related expenses and compensation
  
618
   
1,261
 
Corporate and Other:
 
 
 
 
 
 
Restructuring and other—MiR contingent consideration adjustment
  
(2,878
)  
3,003
 
Restructuring and other—AutoGuide contingent consideration adjustment
  
(7,142
)  
—
 
Restructuring and other—acquisition related expenses and compensation
  
741
   
—
 
 
   
For the Three Months

Ended
   
For the Six Months

Ended
 
   
June 28,
2020
   
June 30,
2019
   
June 28,
2020
   
June 30,
2019
 
   
(in thousands)
   
(in thousands)
 
Semiconductor Test:
        
Contract termination settlement
charge
  $4,000   $—     $4,000   $—   
Cost of revenues—inventory charge
   3,799    2,278    6,825    3,452 
Restructuring and other—employee severance
   —      —      —      924 
Wireless Test:
        
Cost of revenues—inventory charge
   1,582    829    2,155    1,168 
Industrial Automation:
        
Restructuring and other—acquisition related expenses and compensation
   —      —      790    1,695 
System Test:
        
Cost of revenues—inventory charge
   —      —      —      763 
Corporate and Other:
        
Restructuring and other—AutoGuide contingent consideration adjustment
   29,927    —      22,785    —   
Restructuring and other—acquisition related expenses and compensation
   2,974    —      3,715    —   
Restructuring and other – other
   750    —      750    —   
Restructuring and other—MiR contingent consideration adjustment
   (668)    (11,671)    (3,546)    (8,668) 
T
.T. SHAREHOLDERS’ EQUITY
Stock Repurchase Program
In January 2020, Teradyne’s Board of Directors authorized a new stock repurchase program for up to $1.0 
billion of common stock. Effective April 1, 2020, Teradyne suspended its share repurchase program.
During the threesix months ended March 29,June 28, 2020, Teradyne repurchased 1.31.5 million shares of common stock for $79.0$88.5 million at an average price of $58.81$58.33 per share. During the threesix months ended March 31,June 30, 2019, Teradyne repurchased 4.56.5 million shares of common stock for $156.5$247.2 million at an average price of $35.12$38.20 per share.
The total price includes commissions and is recorded as a reduction to retained earnings.
Dividend
Holders of Teradyne’s common stock are entitled to receive dividends when they are declared by Teradyne’s Board of Directors.
In January 2020 and May 2020, Teradyne’s Board of Directors declared a quarterly cash dividend of $0.10 per share. Dividend payments for the three and six months ended March 29,June 28, 2020 were $16.7 million.$16.6 million and $33.3 million, respectively.
In January 2019 and May 2019, Teradyne’s Board of Directors declared a quarterly cash dividend of $0.09 per share. Dividend payments for the three and six months ended March 31,June 30, 2019 were $15.6 million.$15.4 million and $31.0 million, respectively.
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While Teradyne declared a quarterly cash dividend and has suspended its share repurchase program, it may reduce or eliminate the cash dividend and may implement a new share repurchase program in the future. Future cash dividends and stock repurchases are subject to the discretion of Teradyne’s Board of Directors, which will consider, among other things, Teradyne’s earnings, capital requirements and financial condition.
2
U. SUBSEQUENT EVENT9
On May 1, 2020, Teradyne entered into a credit agreement (the “Credit Agreement”) with Truist Bank, as administrative agent and collateral agent, and the lenders party thereto. The Credit Agreement provides for a three-year, senior secured revolving credit facilityTable of $400.0 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 $150.0 million.
Contents
Proceeds from the Credit Facility may be used for general corporate purposes and working capital. As of May 
4
, 2020, 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 0.50% to 1.25% per annum or LIBOR, a minimum of 0.75%, plus a margin ranging from 1.50% to 2.25% per annum, based on the consolidated leverage ratio of Teradyne. In addition, Teradyne will pay a commitment fee on the unused portion of the commitments under the Credit Facility ranging from 0.25% to 0.40% 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 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.
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.
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, 2019. Readers are cautioned not to place undue reliance on these forward-looking statements which reflect management’s analysis only as of the date hereof. We assume no obligation to update these forward-looking statements to reflect actual results or changes in factors or assumptions affecting forward-looking statements, except as may be required by law.
Overview
We are a leading global supplier of automation equipment for test and industrial applications. We design, develop, manufacture and sell automatic test systems used to test semiconductors, wireless products, data storage and complex electronics systems in the consumer electronics, wireless, automotive, industrial, computing, communications, and aerospace and defense industries. Our industrial automation products include collaborative robotic arms, autonomous mobile robots and advanced robotic control software used by global manufacturing and light industrial customers to improve quality, increase manufacturing and material handling efficiency and decrease manufacturing costs. Our automatic test equipment and industrial automation products and services include:
semiconductor test (“Semiconductor Test”) systems;
defense/aerospace (“Defense/Aerospace”) test instrumentation and systems, storage and system level test (“Storage Test”) systems, and circuit-board test and inspection (“Production Board Test”) systems (collectively these products represent “System Test”);
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industrial automation (“Industrial Automation”) products; and
wireless test (“Wireless Test”) systems.
We have a customer base which includes integrated device manufacturers (“IDMs”), outsourced semiconductor assembly and test providers (“OSATs”), original equipment manufacturers (“OEMs”), wafer foundries, fabless companies that design, but contract with others for the manufacture of integrated circuits (“ICs”), developers of wireless devices and consumer electronics, manufacturers of circuit boards, automotive suppliers, wireless product manufacturers, storage device manufacturers, aerospace and military contractors, and distributors that sell collaborative robots, autonomous mobile robots and wireless test systems.
The sales of our products and services are dependent, to a large degree, on these customers who are subject to cyclical trends in the demand for their products. These cyclical periods have had, and will continue to have, a significant effect on our business because our customers often delay or accelerate purchases in reaction to changes in their businesses and to demand fluctuations in the semiconductor, electronics and industrial automation industries. Historically, these demand fluctuations have resulted in significant variations in our results of operations.
The market for our test products is concentrated with a limited number of significant customers accounting for a substantial portion of the purchases of test equipment. A few customers drive significant demand for our products both through direct sales and sales to the customers’ supply partners. We expect that sales of our test products will continue to be concentrated with a limited number of significant customers for the foreseeable future.
On January 30, 2019, we acquired all of the issued and outstanding shares of Lemsys SA (“Lemsys”) for a total purchase price of approximately $9.1 million. Lemsys strengthens our position in the electrification trends of vehicles, solar, wind, and industrial applications. Lemsys is included in our Semiconductor Test segment.
On November 13, 2019, we acquired 100% of the membership interests of AutoGuide, LLC (“AutoGuide”), a maker of high payload AMRs, an emerging and fast growingfast-growing segment of the global forklift market. The total purchase price was approximately $81.6 million, which included cash paid of approximately $57.6 million and $24.0 million in fair value of contingent consideration payable upon achievement of certain performance targets, extending potentially through 2022. The maximum contingent consideration that could be paid is $106.9 million. AutoGuide’s AMRs are used for material transport of payloads up to 4,500 kg in manufacturing, warehouse and logistics applications. These products complement MiR’s lower payload products. AutoGuide is included in our Industrial Automation segment.
We believe our recent acquisitions have enhanced our opportunities for growth. We intend to continue to invest in our business, grow market share in our markets and expand further our addressable markets while tightly managing our costs.
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Impact of the
COVID-19
Pandemic on our Business
The novel coronavirus
(COVID-19)
pandemic has resulted in government authorities implementing numerous measures in an effort to contain the spread of the virus, such as travel bans and restrictions, limitations on gatherings or social distancing requirements, quarantines,
shelter-in-place
orders, and business limitations and shutdowns. These measures have impacted our
day-to-day
operations and could disrupt our business, workforce and operations, as well as the operations of our customers, contract manufacturers and suppliers for an uncertain period of time. We are continuing to monitor the rapidly evolving situation regarding the
COVID-19
pandemic and its impact on our business, results of operations, financial condition, liquidity and cash flows. However, despite careful tracking, we are unable to accurately predict the full impact of
COVID-19,
which will depend on future developments that are highly uncertain and cannot be predicted with accuracy, including, but not limited to, the duration and continued spread of the outbreak, its severity, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume.
Health and Safety
In response to the
COVID-19
pandemic, we have taken proactive, aggressive action to protect the health and safety of our employees, customers, contract manufacturers and suppliers and we have complied with all government orders around the globe. The spread of
COVID-19
has caused us to modify our business practices, including implementing social distancing protocols, suspending employee travel, requiring most employees to work remotely, cancelling physical participation in meetings, and extensively and frequently disinfecting our workspaces. Around the world, the majority of our employees are working from home. However, some of our engineering, operations, supply line and customer support teams must be
on-site
at our or our customers’ facilities. We are providing those
on-site
employees with the necessary protective resources and procedures to minimize their exposure risk. We may take further actions as may be required or recommended by government authorities or that we determine are in the best interests of our employees, customers, contract manufacturers and suppliers.
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Operations
We believe the
COVID-19
pandemic, and the numerous measures implemented by authorities in response, has adversely impacted our results of operations, including by increasing costs and decreasing demand in our Industrial Automation businesses, but we cannot accurately estimate the amount of the impact to our firstsecond quarter 2020 financial results or to our future financial results. In addition, restrictions on our access to manufacturing facilities or on our support operations or workforce, or similar limitations for our contract manufacturers and suppliers, and restrictions or disruptions affecting transportation, such as reduced availability of transportation and increased border controls or closures, could limit our capacity to meet customer demand which could have a material adverse effect on our financial condition and results of operations. These measures have impacted and may further impact our workforce and operations, as well as those of our customers, contract manufacturers and suppliers. The constraints and limits imposed on our operations may slow or diminish our production and research and development activities as well as application support projects with our customers. At this time, application support projects are largely on track with employees assisting customers
on-site
where necessary but with the use of enhanced safety protocols. Research and development projects are, with minor exceptions, on schedule despite the rapid shift of a significant number of our engineers working remotely. While governmental measures may be modified or extended, we expect that our manufacturing and research and development facilities will remain operational, at sufficient capacity to support production demand. We are monitoring our operations closely in an effort to avoid any potential productivity loss caused by responses to the
COVID-19
pandemic.
Supply
We have not yet experienced any significant impacts or interruptions to our supply chain as a result of the
COVID-19
pandemic. However, our suppliers have faced and may continue to face difficulties maintaining operations in light of government-ordered restrictions, including social distancing requirements and
shelter-in-place
mandates. Our supply chain team, and our suppliers, overcame numerous supply, production, and logistics obstacles during the first quarter, but there is no assurance we or they will be able to do so in the future. Although we regularly monitor the financial health of companies in our supply chain, financial hardship on our suppliers or
sub-suppliers
caused by the
COVID-19
pandemic could disrupt our ability to obtain components required to manufacture our products, adversely affecting our operations. To mitigate the risk of any potential supply interruptions, we may choose to increase certain inventory levels during the quarter. Additionally, restrictions or disruptions affecting transportation, such as reduced availability of air transport, port closures and increased border controls or closures, have led in some instances to higher costs and delays, both for obtaining components and shipping finished goods to customers, which could harm our profitability, make our products less competitive, or cause our customers to seek alternative suppliers.
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Demand
The COVID-19 pandemic has significantly increased economic uncertainty in our markets, which could result in a significant decrease in demand for our products for an uncertain period of time. Demand for our Test products was strong throughout the firstsecond quarter and into the secondthird quarter. While there is incremental softening in the automotive sector, there is strengthening demand in mobility, 5G, and memory test. Our Industrial Automation business, however, has seen a significant decline in demand which we expect will continue in the second quarter, due to COVID-19 related shutdowns affecting global manufacturing. We anticipate that the COVID-19 pandemic could cause further global economic disruption that could cause demand for our products to decline, which would adversely affect our business.
Liquidity
Although there is uncertainty related to the anticipated impact of the COVID-19 pandemic on our future results, we believe our business model, our current cash reserves and the recent steps we have taken to manage our cash flow, such as suspending our stock repurchase program, leave us well-positioned to manage our business through this crisis as it continues to unfold. We have a strong balance sheet as well as an operating model that can flex up and down with extreme demand swings and still remain profitable. Based on our analysis, we believe our existing balances of cash and cash equivalents and our currently anticipated operating cash flows will be sufficient to meet our working capital needs and other capital and liquidity requirements for the next twelve months. However, due to the uncertainty related to the future impact of the COVID-19 pandemic, in order to bolster our liquidity position, on May 1, 2020 we entered into a credit agreement providing for a three-year, senior secured revolving credit facility of $400 million as further described in Note U: “Subsequent Event.G: “Debt.” As of May 4,August 3, 2020, we have not borrowed any funds under the credit facility. While test demand remained strong at the beginning of our secondthird quarter and our balance sheet has over $900 million$1 billion in available cash with no short-term debt as of May 4,August 3, 2020, the impact of the COVID-19 pandemic on short-term Test and Industrial Automation demand remain uncertain.
We are continuing to monitor the rapidly evolving situation regarding the COVID-19 pandemic and guidance from government authorities around the world, including federal, state and local public health authorities and may take additional actions based on their recommendations. In these circumstances, there may be developments outside our control requiring us to adjust our operating plan. As a result, given the uncertain nature of this situation, we are not able to accurately predict the full extent of the impact of COVID-19 on our business, financial condition, results of operations, liquidity or cash flows in the future. In addition, see Part II—Item 1A, “Risk Factors,” included herein for updates to our risk factors regarding risks associated with the COVID-19 pandemic.
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Critical Accounting Policies and Estimates
We have identified the policies which are critical to understanding our business and our results of operations. There have been no significant changes during the threesix months ended March 29,June 28, 2020 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, 2019, except as noted below.
Due to the
COVID-19
pandemic, there has been uncertainty and disruption in the global economy and our markets. We are not aware of any specific event or circumstance that would require an update to our estimates or judgments or a revision of the carrying value of our assets or liabilities as of May 4,August 3, 2020, the date of issuance of this Quarterly Report on Form
10-Q.
These estimates may change, as new events occur and additional information is obtained. Actual results could differ significantly from these estimates under different assumptions or conditions.
Goodwill
On January 26, 2017, the Financial Accounting Standards Board (“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. We adopted this standard on January 1, 2020, on a prospective basis. The adoption of ASU
2017-04
did not have a material impact on the consolidated statement of operations, cash flows, or earnings per share. We assess goodwill for impairment at least annually in the fourth quarter, as of December 31, on a reporting unit basis, or more frequently, when events and circumstances occur indicating that the recorded goodwill may be impaired. Under ASU
2017-04,
goodwill impairment will be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance will remain largely unchanged. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. The same
one-step
impairment test will be applied to goodwill at all reporting units, even those with zero or negative carrying amounts. Entities will be required to disclose the amount of goodwill at reporting units with zero or negative carrying amounts.
Credit Losses
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This standard introduced the expected credit losses methodology for the measurement of credit losses on financial assets that are not measured at fair value through net income and replaces the “incurred loss” model with an “expected credit loss” model that requires consideration of a broader range of information to estimate expected credit losses over the lifetime of the asset. We adopted this standard on January 1, 2020 on a modified retrospective basis. The adoption of ASU 2016-13 did not have a material impact on our consolidated statement of operations, balance sheets, cash flows, or earnings per share.
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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. Due to the
COVID-19
pandemic, there has been uncertainty and disruption in the global economy and our markets. Teradyne is not aware of any specific event or circumstance that would require an update to its estimates or judgments or a revision of the carrying value of its assets or liabilities as of May 4,August 3, 2020, the date of issuance of this Quarterly Report on Form
10-Q.
These estimates may change, as new events occur and additional information is obtained. Actual results may differ significantly from these estimates under different assumptions or conditions.
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SELECTED RELATIONSHIPS WITHIN THE CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
         
 
For the Three Months
Ended
 
 
March 29,
  
March 31,
 
 
2020
  
2019
 
Percentage of revenues:
      
Revenues:
      
Products
  
87
%  
80
%
Services
  
13
   
20
 
         
Total revenues
  
100
   
100
 
Cost of revenues:
      
Cost of products
  
37
   
33
 
Cost of services
  
6
   
8
 
         
Total cost of revenues (exclusive of acquired intangible assets amortization shown separately below)
  
42
   
42
 
         
Gross profit
  
58
   
58
 
Operating expenses:
      
Selling and administrative
  
16
   
21
 
Engineering and development
  
12
   
16
 
Acquired intangible assets amortization
  
1
   
2
 
Restructuring and other
  
(1
)  
1
 
         
Total operating expenses
  
28
   
39
 
         
Income from operations
  
29
   
19
 
Non-operating
(income) expense:
      
Interest income
  
—  
   
(1
)
Interest expense
  
1
   
1
 
Other (income) expense, net
  
1
   
—  
 
         
Income before income taxes
  
28
   
19
 
Income tax provision (benefit)
  
3
   
(3
)
         
Net income
  
25
%  
22
%
         
 
   
For the Three Months

Ended
  
For the Six Months

Ended
 
   
June 28,
2020
  
June 30,
2019
  
June 28,
2020
  
June 30,
2019
 
Percentage of revenues:
     
Revenues:
     
Products
   88%   81%   87%   80% 
Services
   12   19   13   20 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total revenues
   100   100   100   100 
Cost of revenues:
     
Cost of products
   38   34   38   34 
Cost of services
   5   8   5   8 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total cost of revenues (exclusive of acquired intangible assets amortization shown separately below)
   44   43   43   42 
  
 
 
  
 
 
  
 
 
  
 
 
 
Gross profit
   56   57   57   58 
Operating expenses:
     
Selling and administrative
   14   19   15   20 
Engineering and development
   11   14   12   15 
Acquired intangible assets amortization
   1   2   1   2 
Restructuring and other
   3   (2)   1   (1) 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total operating expenses
   29   34   29   36 
  
 
 
  
 
 
  
 
 
  
 
 
 
Income from operations
   27   24   28   21 
Non-operating
(income) expense:
     
Interest income
   —     (1)   —     (1) 
Interest expense
   1   1   1   1 
Other (income) expense, net
   —     —     —     —   
  
 
 
  
 
 
  
 
 
  
 
 
 
Income before income taxes
   26   23   27   21 
Income tax provision
   3   6   3   2 
  
 
 
  
 
 
  
 
 
  
 
 
 
Net income
   23%   17%   24%   20% 
  
 
 
  
 
 
  
 
 
  
 
 
 
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Results of Operations
FirstSecond Quarter 2020 Compared to FirstSecond Quarter 2019
Revenues
Revenues by our four reportable segments were as follows:
             
 
For the Three Months
Ended
   
 
March 29,
  
March 31,
  
Dollar
 
 
2020
  
2019
  
Change
 
 
(in millions)
 
Semiconductor Test
 $
484.5
  $
340.9
  $
143.6
 
System Test
  
116.1
   
58.2
   
57.9
 
Industrial Automation
  
60.3
   
66.1
   
(5.8
)
Wireless Test
  
43.5
   
29.0
   
14.5
 
             
 $
704.4
  $
494.1
  $
210.3
 
             
 
   
For the Three Months

Ended
     
   
June 28,
2020
   
June 30,
2019
   
Dollar
Change
 
   
(in millions)
 
Semiconductor Test
  $659.1   $374.9   $284.2 
System Test
   71.8    73.4    (1.6) 
Industrial Automation
   58.8    74.7    (15.9) 
Wireless Test
   49.2    41.2    8.0 
Corporate and Other
   (0.3)    —      (0.3) 
  
 
 
   
 
 
   
 
 
 
  $838.7   $564.2   $274.5 
  
 
 
   
 
 
   
 
 
 
The increase in Semiconductor Test revenues of $143.6$284.2 million, or 42.1%75.8%, was driven primarily by an increase in semiconductor mobility tester sales resulting from increased complexity of silicon in handsets which drives demand for testers, and an increase in memory test sales of flash and DRAM memory testers. The increasedecrease in System Test revenues of $57.9$1.6 million, or 99.5%2.2%, was primarily due to higher sales in Storage Test of 3.5” hard disk drive and system level testers, and higher sales in Defense/Aerospace
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test instrumentation and systems, partially offset by lower sales in Production Board Test due to lower automotive electronics demand.demand, partially offset by higher sales in Storage Test of system level testers, and higher sales in Defense/Aerospace test instrumentation and systems. The decrease in Industrial Automation revenues of $5.8$15.9 million, or 8.8%21.3%, was primarily due to lower demand for collaborative robotic arms in automotive and manufacturing markets amplified by the impacts of COVID-19. The increase in Wireless Test revenues of $14.5$8.0 million, or 50.0%19.4%, was primarily due to increased tester demand for 5G cellular and new connectivity standards such as Ultra Wideband.WiFi 6 testers.
Revenues by country as a percentage of total revenues were as follows (1):
         
 
For the Three Months
Ended
 
 
March 29,
  
March 31,
 
 
2020
  
2019
 
Taiwan
  
30
%  
17
%
China
  
16
   
17
 
Korea
  
15
   
10
 
United States
  
11
   
15
 
Europe
  
8
   
11
 
Japan
  
7
   
12
 
Thailand
  
5
   
4
 
Singapore
  
3
   
6
 
Philippines
  
2
   
4
 
Malaysia
  
2
   
3
 
Rest of World
  
1
   
1
 
         
  
100
%  
100
%
         
   
For the Three Months

Ended
 
   
June 28,
2020
  
June 30,
2019
 
Taiwan
   51%   27% 
China
   14   20 
United States
   7   14 
Japan
   7   6 
Europe
   6   9 
Korea
   6   9 
Thailand
   3   4 
Singapore
   2   3 
Philippines
   2   2 
Malaysia
   1   3 
Rest of World
   1   3 
  
 
 
  
 
 
 
   100%   100% 
  
 
 
  
 
 
 
(1)
Revenues attributable to a country are based on location of customer site.
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Gross Profit
Our gross profit was as follows:
             
 
For the Three Months
Ended
   
 
March 29,
  
March 31,
  
Dollar/
Point
 
 
2020
  
2019
  
Change
 
 
(in millions)
 
Gross profit
 $
405.6
  $
287.6
  $
117.9
 
Percent of total revenues
  
57.6
%  
58.2
%  
(0.6
)
   
For the Three Months

Ended
    
   
June 28,
  
June 30,
  
Dollar/Point
 
   
2020
  
2019
  
Change
 
   
(in millions)
 
Gross profit
  $471.5  $323.9  $147.6 
Percent of total revenues
   56.2%   57.4%   (1.2) 
Gross profit as a percent of revenue decreased by 0.61.2 points, primarily due to product mix in Semiconductor Test.Test and higher logistic and operations costs due to COVID 19 pandemic.
We assess the carrying value of our inventory on a quarterly basis by estimating future demand and comparing that demand against
on-hand
and
on-order
inventory positions. Forecasted revenue information is obtained from sales and marketing groups and incorporates factors such as backlog and future revenue demand. This quarterly process identifies obsolete and excess inventory. Obsolete inventory, which represents items for which there is no demand, is fully reserved. Excess inventory, which represents inventory items that are not expected to be consumed during the next twelve quarters for our Semiconductor Test, System Test and Industrial Automation segments and the next four quarters for our Wireless Test segment, is written-down to estimated net realizable value.
During the three months ended March 29,June 28, 2020, we recorded an inventory provision of $4.1$5.6 million included in cost of revenues primarily due to downward revisions to previously forecasted demand levels, of which $3.0$3.8 million was related to Semiconductor Test and $0.5$1.6 million was related to Wireless Test.
During the three months ended March 31,June 30, 2019, we recorded an inventory provision of $2.4$3.4 million included in cost of revenues primarily due to downward revisions to previously forecasted demand levels, of which $1.2$2.3 million was related to Semiconductor Test and $0.5$0.8 million was related to Wireless Test and $0.3 million was related to System Test.
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Table of Contents
During the three months ended March 29,June 28, 2020 and March 31,June 30, 2019, we scrapped $1.2$1.8 million and $0.4$2.6 million of inventory, respectively. During the three months ended March 29,June 28, 2020 and March 31,June 30, 2019, we sold $1.1$0.3 million and $0.8$0.4 million of previously written-down or
written-off
inventory, respectively. As of March 29,June 28, 2020, we had inventory related reserves for inventory, which had been written-down or
written-off
totaling $105.3$107.4 million. We have no
pre-determined
timeline to scrap the remaining inventory.
Selling and Administrative
Selling and administrative expenses were as follows:
             
 
For the Three Months
Ended
   
 
March 29,
  
March 31,
  
Dollar
 
 
2020
  
2019
  
Change
 
 
(in millions)
 
Selling and administrative
 $
111.4
  $
102.0
  $
9.4
 
Percent of total revenues
  
15.8
%  
20.6
%   
   
For the Three Months

Ended
    
   
June 28,
  
June 30,
  
Dollar
 
   
2020
  
2019
  
Change
 
   
(in millions)
 
Selling and administrative
  $113.3  $108.8  $4.5 
Percent of total revenues
   13.5%   19.3%  
The increase of $9.4$4.5 million in selling and administrative expenses was primarily due to higher variable compensation, partially offset by lower sales and marketing spending in Semiconductor Test and Industrial Automation and higher variable compensation.Automation.
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Table of Contents
Engineering and Development
Engineering and development expenses were as follows:
             
 
For the Three Months
Ended
   
 
March 29,
  
March 31,
  
Dollar
 
 
2020
  
2019
  
Change
 
 
(in millions)
 
Engineering and development
 $
85.2
  $
76.8
  $
8.4
 
Percent of total revenues
  
12.1
%  
15.5
%   
   
For the Three Months

Ended
    
   
June 28,
  
June 30,
  
Dollar
 
   
2020
  
2019
  
Change
 
   
(in millions)
 
Engineering and development
  $94.1  $81.4  $12.7 
Percent of total revenues
   11.2%   14.4%  
The increase of $8.4$12.7 million in engineering and development expenses was primarily due to higher variable compensation and higher spending in Industrial Automation and Semiconductor Test and higher variable compensation.Test.
Restructuring and Other
During the three months ended March 29,June 28, 2020, we recorded a gain of $10.0$29.9 million for the decrease in the fair value of the AutoGuide and MiR contingent consideration liabilities, partially offset by $1.4 million of acquisition related compensation and expenses and $0.7 million of severance charges related to headcount reductions primarily in Industrial Automation and Semiconductor Test.
During the three months ended March 31, 2019, we recorded an expense of $3.0 millioncharge for the increase in the fair value of the MiRAutoGuide contingent consideration liability, $1.3a $4.0 million contract termination settlement charge, $3.1 million of acquisition related compensation and expenses, and $0.8 million of other expenses, partially offset by a $0.6 million gain for the decrease in the fair value of the MiR contingent consideration liability.
During the three months ended June 30, 2019, we recorded a $11.7 million gain for the decrease in the fair value of the MiR contingent consideration liability, partially offset by $0.8 million recorded for severance charges related to headcount reductions primarily in Semiconductor Test.Test and $0.5 million of acquisition related compensation and expenses.
Interest and Other
             
 
For the Three Months
Ended
   
 
March 29,
  
March 31,
  
Dollar
 
 
2020
  
2019
  
Change
 
 
(in millions)
 
Interest income
 $
 (2.8
) $
(5.0
) $
 2.2
 
Interest expense
  
5.6
   
5.5
   
0.1
 
Other (income) expense, net
  
6.8
   
(1.4
)  
8.2
 
   
For the Three Months

Ended
     
   
June 28,
   
June 30,
   
Dollar
 
   
2020
   
2019
   
Change
 
   
(in millions)
 
Interest income
  $(1.4)   $(4.4)   $3.0 
Interest expense
   6.0    5.8    0.2 
Other (income) expense, net
   (4.0)    1.4    (5.4) 
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Table of Contents
Interest income decreased by $2.2$3.0 million primarily due to lower interest rates and lower marketable securities balance in 2020 compared to 2019. Other (income) expense, net increasedchanged by $8.2$5.4 million, from an expense of $1.4 million to an income of $4.0 million, primarily due to changechanges in unrealized gains/losses on equity securities, from gains in 2019 to losses in 2020.securities.
Income (Loss) Before Income Taxes
             
 
For the Three Months
Ended
   
 
March 29,
  
March 31,
  
Dollar
 
 
2020
  
2019
  
Change
 
 
(in millions)
 
Semiconductor Test
 $
153.8
  $
83.0
  $
70.8
 
System Test
  
48.4
   
15.3
   
33.1
 
Wireless Test
  
10.2
   
3.6
   
6.6
 
Industrial Automation
  
(15.3
)  
(5.3
)  
(10.0
)
Corporate and Other (1)
  
—  
   
(2.7
)  
2.7
 
             
 $
197.1
  $
94.0
  $
103.1
 
             
   
For the Three Months

Ended
     
   
June 28,
   
June 30,
   
Dollar
 
   
2020
   
2019
   
Change
 
   
(in millions)
 
Semiconductor Test
  $228.8   $91.4   $137.4 
System Test
   19.2    23.5    (4.3) 
Wireless Test
   14.5    10.9    3.6 
Industrial Automation
   (11.4)    (3.7)    (7.7) 
Corporate and Other (1)
   (33.8)    9.1    (42.9) 
  
 
 
   
 
 
   
 
 
 
  $217.3   $131.2   $86.1 
  
 
 
   
 
 
   
 
 
 
(1)
Included in Corporate and Other are the following: contingent consideration adjustments, employee severance, interest (income) and expense, net foreign exchange (gains) and losses, pension and postretirement plans actuarial (gains) losses, intercompany eliminations, and certain acquisition related charges.charges and compensation.
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Table of Contents
The increase in income before income taxes in Semiconductor Test was driven primarily by an increase in semiconductor mobility tester sales resulting from increased complexity of silicon in handsets which drives demand for testers, and an increase in memory test sales of flash and DRAM memory testers. The decrease in income before income taxes in System Test was primarily due to lower sales in Production Board Test due to lower automotive electronics demand, partially offset by higher sales in Storage Test of system level testers, and higher sales in Defense/Aerospace test instrumentation and systems. The increase in income before income taxes in Wireless Test was primarily due to increased sales of 5G and WiFi 6 testers. The decrease in income before income taxes in Industrial Automation was primarily due to lower sales due to lower demand for collaborative robotic arms in automotive and manufacturing markets amplified by the impacts of COVID-19.
Income Taxes
The effective tax rate for the three months ended June 28, 2020 and June 30, 2019 was 13.1% and 25.8%, respectively. The decrease in the effective tax rate from the three months ended June 30, 2019 to the three months ended June 28, 2020 was primarily attributable to a reduction in discrete expense related to the U.S. one-time transition tax.
Six Months 2020 Compared to Six Months 2019
Revenues
Revenues by our four reportable segments were as follows:
   
For the Six Months

Ended
     
   
June 28,
   
June 30,
   
Dollar
 
   
2020
   
2019
   
Change
 
   
(in millions)
 
Semiconductor Test
  $1,143.6   $715.8   $427.8 
System Test
   187.9    131.6    56.3 
Industrial Automation
   119.1    140.9    (21.8) 
Wireless Test
   92.7    70.3    22.4 
Corporate and Other
   (0.3)    (0.2)    (0.1) 
  
 
 
   
 
 
   
 
 
 
  $1,543.0   $1,058.3   $484.6 
  
 
 
   
 
 
   
 
 
 
The increase in Semiconductor Test revenues of $427.8 million, or 59.8%, was driven primarily by an increase in semiconductor mobility tester sales resulting from increased complexity of silicon in handsets which drives demand for testers, and an increase in memory test sales of flash and DRAM testers. The increase in System Test revenues of $56.3 million, or 42.8%, was primarily due to higher sales in Storage Test of system level testers, and higher sales in Defense/Aerospace test instrumentation and systems, partially offset by lower sales in Production Board Test due to lower automotive electronics demand. The decrease in Industrial Automation revenues of $21.8 million, or 15.5%, was primarily due to lower demand for collaborative robotic arms in automotive and manufacturing markets amplified by the impacts of COVID-19. The increase in Wireless Test revenues of $22.4 million, or 31.9%, was primarily due to increased sales of 5G and WiFi 6 testers.
Revenues by country as a percentage of total revenues were as follows (1):
   
For the Six Months

Ended
 
   
June 28,
  
June 30,
 
   
2020
  
2019
 
Taiwan
   41%   23% 
China
   15   19 
Korea
   10   10 
United States
   9   14 
Europe
   7   10 
Japan
   7   9 
Thailand
   4   4 
Malaysia
   2   3 
Singapore
   2   4 
Philippines
   2   3 
Rest of World
   1   1 
  
 
 
  
 
 
 
   100%   100% 
  
 
 
  
 
 
 
(1)
Revenues attributable to a country are based on location of customer site.
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Table of Contents
Gross Profit
Our gross profit was as follows:
   
For the Six Months

Ended
    
   
June 28,
  
June 30,
  
Dollar/Point
 
   
2020
  
2019
  
Change
 
   
(in millions)
 
Gross profit
  $877.0  $611.6  $265.4 
Percent of total revenues
   56.8%   57.8%   (1.0) 
Gross profit as a percent of revenue decreased by 1.0 point, primarily due to product mix in Semiconductor Test.
We assess the carrying value of our inventory on a quarterly basis by estimating future demand and comparing that demand against on-hand and on-order inventory positions. Forecasted revenue information is obtained from sales and marketing groups and incorporates factors such as backlog and future revenue demand. This quarterly process identifies obsolete and excess inventory. Obsolete inventory, which represents items for which there is no demand, is fully reserved. Excess inventory, which represents inventory items that are not expected to be consumed during the next twelve quarters for our Semiconductor Test, System Test and Industrial Automation segments and the next four quarters for our Wireless Test segment, is written-down to estimated net realizable value.
During the six months ended June 28, 2020, we recorded an inventory provision of $9.6 million included in cost of revenues primarily due to downward revisions to previously forecasted demand levels, of which $6.8 million was related to Semiconductor Test, $2.2 million was related to Wireless Test, $0.4 million was related to System Test, and $0.2 million was related to Industrial Automation.
During the six months ended June 30, 2019, we recorded an inventory provision of $5.8 million included in cost of revenues primarily due to downward revisions to previously forecasted demand levels, of which $3.5 million was related to Semiconductor Test, $1.1 million was related to Wireless Test, $0.8 million was related to System Test, and $0.4 million was related to Industrial Automation.
During the six months ended June 28, 2020 and June 30, 2019, we scrapped $3.0 million and $3.0 million of inventory, respectively. During the six months ended June 28, 2020 and June 30, 2019, we sold $1.4 million and $1.1 million of previously written-down or written-off inventory, respectively. As of June 28, 2020, we had inventory related reserves for inventory, which had been written-down or written-off totaling $107.4 million. We have no pre-determined timeline to scrap the remaining inventory.
Selling and Administrative
Selling and administrative expenses were as follows:
   
For the Six Months

Ended
    
   
June 28,
  
June 30,
  
Dollar
 
   
2020
  
2019
  
Change
 
   
(in millions)
 
Selling and administrative
  $224.6  $210.8  $13.8 
Percent of total revenues
   14.6%   19.9%  
The increase of $13.8 million in selling and administrative expenses was primarily due to higher variable compensation and higher sales and marketing spending in Wireless Test and Semiconductor Test.
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Table of Contents
Engineering and Development
Engineering and development expenses were as follows:
   
For the Six Months

Ended
    
   
June 28,
  
June 30,
  
Dollar
 
   
2020
  
2019
  
Change
 
   
(in millions)
 
Engineering and development
  $179.3  $158.2  $21.1 
Percent of total revenues
   11.6%   15.0%  
The increase of $21.1 million in engineering and development expenses was primarily due to higher variable compensation and higher spending in Semiconductor Test and Industrial Automation.
Restructuring and Other
During the six months ended June 28, 2020, we recorded a $22.8 million charge for the increase in the fair value of the AutoGuide contingent consideration liabilities, $4.5 million of acquisition related compensation and expenses, a $4.0 million contract termination settlement charge, $1.1 million of other expenses, and $0.8 million of severance charges primarily in Semiconductor Test, partially offset by a $3.6 million gain for the decrease in the fair value of the MiR contingent consideration liability.
During the six months ended June 30, 2019, we recorded a $8.7 million gain for the decrease in the fair value of the MiR contingent consideration liability, partially offset by $1.8 million of acquisition related compensation and expenses and $1.6 million recorded for severance charges primarily in Semiconductor Test.
Interest and Other
   
For the Six Months

Ended
     
   
June 28,
   
June 30,
   
Dollar
 
   
2020
   
2019
   
Change
 
   
(in millions)
 
Interest income
  $(4.1)   $(9.4)   $5.3 
Interest expense
   11.6    11.3    0.3 
Other (income) expense, net
   2.8    —      2.8 
Interest income decreased by $5.3 million primarily due to lower interest rates and lower marketable securities balance in 2020 compared to 2019. Other (income) expense, net increased by $2.8 million primarily due to the change in unrealized gains/losses on equity securities and higher foreign exchange losses.
Income (Loss) Before Income Taxes
   
For the Six Months

Ended
     
   
June 28,
   
June 30,
   
Dollar
 
   
2020
   
2019
   
Change
 
   
(in millions)
 
Semiconductor Test
  $382.6   $174.4   $208.2 
System Test
   67.6    38.9    28.7 
Wireless Test
   24.7    14.6    10.1 
Industrial Automation
   (26.7)    (9.0)    (17.7) 
Corporate and Other (1)
   (33.8)    6.3    (40.1) 
  
 
 
   
 
 
   
 
 
 
  $414.4   $225.2   $189.2 
  
 
 
   
 
 
   
 
 
 
(1)
Included in Corporate and Other are, contingent consideration adjustments, employee severance, interest income, interest expense, net foreign exchange (gains) and losses, pension and postretirement plan actuarial (gains) losses, intercompany eliminations, and acquisition related expenses.
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Table of Contents
The increase in income before income taxes in Semiconductor Test was driven primarily by an increase in semiconductor mobility tester sales resulting from increased complexity of silicon in handsets which drives demand for testers, and an increase in memory test sales of flash and DRAM testers. The increase in income before income taxes in System Test was primarily due to higher sales in Storage Test of 3.5” hard disk drive and system level testers, and higher sales in Defense/Aerospace test instrumentation and systems, partially offset by lower sales in Production Board Test due to lower automotive electronics demand. The increase in Wireless Test income before income taxes in Wireless Test was primarily due to increased demand for connectivity, millimeter wavesales of 5G and cellular test products.WiFi 6 testers. The decrease in income before income taxes in Industrial Automation was primarily due to lower demand for collaborative robotic arms.arms in automotive and manufacturing markets amplified by the impacts of COVID-19.
Income Taxes
The effective tax rate for the threesix months ended March 29,June 28, 2020 and March 31,June 30, 2019 was 10.6%11.9% and (16.1%)8.3%, respectively. The increase in the effective tax rate from the threesix months ended March 31,June 30, 2019 to the threesix months ended March 29,June 28, 2020 iswas primarily attributable to thea reduction in discrete tax benefit fromrelated to the release of reserves for uncertain tax positions which was recognized in the three months ended March 31, 2019 and a reduction in the benefit from tax credits. These increases were partially offset by a projected shiftreduction in discrete expense related to the geographic distribution of income, which decreases the income subject to taxation in higher tax rate jurisdictions relative to lower tax rate jurisdictions.U.S. one-time transition tax.
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Table of Contents
Contractual Obligations
The following table reflects our contractual obligations as of March 29,June 28, 2020:
                         
 
Payments Due by Period
 
 
Total
  
Less than
1 year
  
1-3
years
  
3-5
years
  
More than
5 years
  
Other
 
 
(in thousands)
 
Convertible debt
 $
459,987
  $
—  
  $
—  
  $
459,987
  $
—  
  $
—  
 
Purchase obligations
  
543,774
   
529,368
   
14,406
   
—  
   
—  
   
—  
 
Retirement plans contributions
  
130,923
   
5,040
   
10,408
   
10,268
   
105,207
   
—  
 
Transition tax payable (1)
  
88,157
   
5,337
   
15,779
   
22,710
   
44,331
   
—  
 
Operating lease obligations
  
73,708
   
22,183
   
27,730
   
13,515
   
10,280
   
—  
 
Interest on long-term debt
  
23,000
   
5,750
   
11,500
   
5,750
   
—  
   
—  
 
Fair value of contingent consideration
  
20,472
   
662
   
19,810
   
—  
   
—  
   
—  
 
Other long-term liabilities reflected on the balance sheet under GAAP (2)
  
82,360
   
—  
   
39,492
   
10,843
   
456
   
31,569
 
                         
Total
 $
1,422,381
  $
568,340
  $
139,125
  $
523,073
  $
160,274
  $
31,569
 
                         
   
Payments Due by Period
 
   
Total
   
Less than

1 year
   
1-3
years
   
3-5
years
   
More than

5 years
   
Other
 
   
(in thousands)
 
Purchase obligations
  $544,225   $534,282   $9,943   $—     $—     $—   
Convertible debt
   459,987    —      —      459,987    —      —   
Retirement plans contributions
   130,826    5,216    10,386    10,318    104,906    —   
Transition tax payable (1)
   88,157    13,227    15,795    34,539    24,596    —   
Operating lease obligations
   77,692    23,956    31,508    13,367    8,861    —   
Interest on long-term debt
   20,125    5,750    11,500    2,875    —      —   
Fair value of contingent consideration
   49,737    16,789    32,948    —      —      —   
Other long-term liabilities reflected on the balance sheet under GAAP (2)
   90,336    —      47,470    7,700    464    34,702 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total
  $1,461,085   $599,220   $159,550   $528,786   $138,827   $34,702 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
(1)
Represents the transition tax liability associated with our accumulated foreign earnings as a result of enactment of the Tax Reform Act on December 22, 2017.
(2)
Included in other long-term liabilities are liabilities for customer advances, extended warranty, uncertain tax positions, deferred tax liabilities and other obligations. For certain long-term obligations, we are unable to provide a reasonably reliable estimate of the timing of future payments relating to these obligations and therefore we included these amounts in the column marked “Other.”
Liquidity and Capital Resources
Our cash, cash equivalents, and marketable securities balances decreasedincreased by $110.7$46.5 million in the threesix months ended March 29,June 28, 2020 to $905.0$1,062.2 million.
Operating activities during the threesix months ended March 29,June 28, 2020 provided cash of $43.1$266.0 million. Changes in operating assets and liabilities used cash of $172.8$206.7 million. This was due to a $150.6$384.2 million increase in operating assets and a $22.2$177.6 million decreaseincrease in operating liabilities.
The increase in operating assets was primarily due to a $126.8$331.0 million increase in accounts receivable due to increased sales, and a $39.6$49.5 million increase in prepayments and other assets, partially offset byand a $15.8$3.7 million decreaseincrease in inventories.
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Table of Contents
The decreaseincrease in operating liabilities was due to a $44.4$54.9 million decreaseincrease in accounts payable, a $47.2 million increase in other accrued employee compensation primarily due to first quarter payments related to variable compensation, $1.3liabilities, a $37.8 million of retirement plan contributions,increase in income taxes, a $0.9$28.7 million decreaseincrease in deferred revenue and customer advance payments, a $11.4 million increase in accrued employee compensation, partially offset by a $15.3$2.5 million increase in income taxes, a $7.1 million increase in other accrued liabilities, and, a $2.0 million increase in accounts payable.of retirement plan contributions.
Investing activities during the threesix months ended March 29,June 28, 2020 used cash of $110.2$173.2 million, due to $187.1$299.5 million used for purchases of marketable securities, and $36.7$84.0 million used for purchases of property, plant and equipment, partially offset by $98.5$183.0 million and $15.0$26.7 million in proceeds from maturities and sales of marketable securities, respectively, and proceeds from life insurance of $0.5 million related to the cash surrender value from the cancellation of a Teradyne owned life insurance policy, and $0.1 million, net of cash acquired, for the acquisition of AutoGuide.
Financing activities during the threesix months ended March 29,June 28, 2020 used cash of $113.9$140.3 million, due to $79.0$88.5 million used for the repurchase of 1.31.5 million shares of common stock at an average price of $58.81$58.33 per share, $22.1$22.5 million used for payments related to net settlements of employee stock compensation awards, $16.7$33.3 million used for dividend payments, and $8.9 million used for a payment related to MiR acquisition contingent consideration, partially offset by $12.8 million from the issuance of common stock under employee stock purchase and stock option plans.
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Table of Contents
Operating activities during the threesix months ended March 31,June 30, 2019 provided cash of $18.0$163.3 million. Changes in operating assets and liabilities used cash of $134.2 million. This was$115.0 million due to a $63.3$99.0 million increase in operating assets and a $70.9$16.0 million decrease in operating liabilities.
The increase in operating assets was primarily due to a $41.7$79.5 million increase in accounts receivable due to increased sales, an $18.6a $17.1 million increase in prepayments and other assets, and a $2.9$2.4 million increase in inventories.
The decrease in operating liabilities was due to a $59.5$26.8 million decrease in accrued employee compensation due primarily due to first quarter payments related to variable compensation, a $22.8$15.0 million decrease in income taxes, an $11.5 million decrease in other accrued liabilities, and $1.2$2.4 million of retirement plan contributions, partially offset by a $17.7 million increase in accounts payable, and a $6.5$15.8 million increase in deferred revenue and customer advance payments.payments, a $10.3 million increase in other accrued liabilities, and a $2.0 million increase in accounts payable.
Investing activities during the threesix months ended March 31,June 30, 2019 used cash of $261.0$289.2 million, due to $375.2$484.2 million used for purchases of marketable securities, $25.7$59.0 million used for purchases of property, plant and equipment, $15 million used for an investment in RealWear, and $7.0 million, net of cash acquired, used for the acquisition of Lemsys, partially offset by $141.2$233.2 million and $5.4$42.5 million in proceeds from maturities and sales of marketable securities, respectively, and proceeds from life insurance of $0.3 million related to the cash surrender value from the cancellation of a Teradyne owned life insurance policy.
Financing activities during the threesix months ended March 31,June 30, 2019 used cash of $199.8$305.2 million, due to $156.5$247.2 million used for the repurchase of 4.56.5 million shares of common stock at an average price of $35.12$38.20 per share, $31.0 million used for dividend payments, $27.6 million used for a paymentpayments related to MiR and Universal Robots acquisition contingent consideration, $15.6 million used for dividend payments, and $14.3$14.4 million used for payments related to net settlements of employee stock compensation awards, partially offset by $14.3$15.1 million from the issuance of common stock under employee stock purchase and stock option plans.
In January 2020 and May 2020, our Board of Directors declared a quarterly cash dividend of $0.10 per share. Dividend payments for the threesix months ended March 29,June 28, 2020 were $16.7$33.3 million.
In January 2019 and May 2019, our Board of Directors declared a quarterly cash dividend of $0.09 per share. Dividend payments for the threesix months ended March 31,June 30, 2019 were $15.6$31.0 million.
In January 2020, our Board of Directors cancelled the January 2018 stock repurchase program and approved a new stock repurchase program for up to $1.0 billion of common stock. On April 1, 2020, we suspended the share repurchase program. During the threesix months ended March 29,June 28, 2020, we repurchased 1.31.5 million shares of common stock for $79.0$88.5 million at an average price of $58.81$58.33 per share. During the threesix months ended March 31,June 30, 2019, we repurchased 4.56.5 million shares of common stock for $156.5$247.2 million at an average price of $35.12$38.20 per share.
While we declared a quarterly cash dividend and suspended our share repurchase program, we may reduce or eliminate the cash dividend and may implement a new share repurchase program in the future. Future cash dividends and stock repurchases are subject to the discretion of our Board of Directors, which will consider, among other things, our earnings, capital requirements and financial condition.
On May 1, 2020, we entered into a credit agreement providing for a three-year, senior secured revolving credit facility of $400 million. As of May 4,August 3, 2020, we have not borrowed any funds under the credit facility.
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We believe our cash, cash equivalents and marketable securities balance will be sufficient to pay our quarterly dividend and meet our working capital and expenditure needs for at least the next twelve months. Inflation has not had a significant long-term impact on earnings. At this time, the
COVID-19
pandemic has not had an impact on our liquidity, but there is no assurance that continued impacts resulting from the pandemic will not have an adverse effect in the future.
Equity Compensation Plans
As discussed in Note Q: “Stock Based Compensation” in our 2019 Annual Report on Form
10-K,
we have a 1996 Employee Stock Purchase Plan and a 2006 Equity and Cash Compensation Incentive Plan (the “2006 Equity Plan”).
The purpose of the 1996 Employee Stock Purchase Plan is to encourage stock ownership by all eligible employees of Teradyne. The purpose of the 2006 Equity Plan is to provide equity ownership and compensation opportunities in Teradyne to our employees, officers, directors, consultants and/or advisors. Both plans were approved by our shareholders.
Item 3:
Quantitative and Qualitative Disclosures about Market Risks
For “Quantitative and Qualitative Disclosures about Market Risk” affecting Teradyne, see Part 2 Item 7A, “Quantitative and Qualitative Disclosures about Market Risks,” in our Annual Report on Form
10-K
filed with the SEC on March 2, 2020. There were no material changes in our exposure to market risk from those set forth in our Annual Report on Form
10-K
for the fiscal year ended December 31, 2019.
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In addition to market risks described in our Annual Report on Form
10-K,
we have an equity price risk related to the fair value of our convertible senior unsecured notes issued in December 2016. In December 2016, Teradyne issued $460 million aggregate principal amount of 1.25% convertible senior unsecured notes (the “Notes”) due December 15, 2023. As of March 29,June 28, 2020, the Notes had a fair value of $829.4$1,198.7 million. The table below provides a sensitivity analysis of hypothetical 10% changes of Teradyne’s stock price as of the end of the firstsecond quarter of 2020 and the estimated impact on the fair value of the Notes. The selected scenarios are not predictions of future events, but rather are intended to illustrate the effect such event may have on the fair value of the Notes. The fair value of the Notes is subject to equity price risk due to the convertible feature. The fair value of the Notes will generally increase as Teradyne’s common stock price increases and will generally decrease as the common stock price declines in value. The change in stock price affects the fair value of the convertible senior notes, but does not impact Teradyne’s financial position, cash flows or results of operations due to the fixed nature of the debt obligation. Additionally, we carry the Notes at face value less unamortized discount on our balance sheet, and we present the fair value for required disclosure purposes only. In connection with the offering of the Notes we also sold warrants to the option counterparties. These transactions have been accounted for as an adjustment to our shareholders’ equity. The convertible note hedge transactions are expected to reduce the potential equity dilution upon conversion of the Notes. The warrants along with any shares issuable upon conversion of the Notes will have a dilutive effect on our earnings per share to the extent that the average market price of our common stock for a given reporting period exceeds the applicable strike price or conversion price of the warrants or Notes, respectively.
             
Hypothetical Change in Teradyne Stock Price
 
Fair Value
  
Estimated change
in fair value
  
Hypothetical percentage
increase (decrease) in
fair value
 
10% Increase
 $
901,709
  $
72,271
   
8.7
%
No Change
  
829,438
   
—  
   
—  
 
10% Decrease
  
759,085
   
(70,353
)  
(8.5
)
Hypothetical Change in Teradyne Stock Price
  
Fair Value
   
Estimated
change in
fair value
   
Hypothetical
percentage
increase
(decrease) in
fair value
 
10% Increase
  $1,314,002   $115,333    9.6% 
No Change
   1,198,669    —      —   
10% Decrease
   1,085,067    (113,602)    (9.5) 
Item 4:
Controls and Procedures
As of the end of the period covered by this report, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule
13a-15(b)
or Rule
15d-15(f)
promulgated under the Exchange Act. The evaluation included any impact to our controls caused by remote working arrangements for a number of our employees due to the
COVID-19
pandemic. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective in ensuring that material information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, including ensuring that such material information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
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PART II. OTHER INFORMATION
Item 1:
Legal Proceedings
We are subject to various legal proceedings and claims which have arisen in the ordinary course of business such as, but not limited to, patent, employment, commercial and environmental matters. We believe that we have meritorious defenses against all pending claims and intend to vigorously contest them. While it is not possible to predict or determine the outcomes of any pending claims or to provide possible ranges of losses that may arise, we believe the potential losses associated with all of these actions are unlikely to have a material adverse effect on our business, financial position or results of operations.
Item 1A:
Risk Factors
In addition to other information set forth in this Form
10-Q,
including the risk discussed below, 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, 2019, 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 and many of these risks could be further increased due to the
COVID-19
pandemic.
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.
The novel coronavirus
(COVID-19)
pandemic has impacted our business and could materially adversely affect our results of operations, financial condition, liquidity or cash flows.
The global outbreak of the recent novel strain of the coronavirus
(COVID-19)
has resulted in government authorities implementing numerous measures in an effort to contain the spread of the virus, such as travel bans and restrictions, limitations on gatherings or social distancing requirements, quarantines,
shelter-in-place
orders, and business limitations and shutdowns. These measures have impacted our
day-to-day
operations and could disrupt our business, workforce and operations, as well as the operations of our customers, contract manufacturers and suppliers for an uncertain period of time. We believe the The
COVID-19
pandemic, and the numerous measures implemented by authorities in response, has adversely impacted our results of operations, including by increasing costs company-wide and decreasing demand in our Industrial Automation businesses, but we cannot accurately estimate the full extent of the impact for our first quarter 2020 financial results or to our future financial results.
The
COVID-19
pandemic has significantly increased economic uncertainty in our markets, which could result in a significant decrease in demand for our products for an uncertain period of time. In addition, restrictions on our access to manufacturing facilities or on our support operations or workforce, or similar limitations for our contractor manufacturers and suppliers, and restrictions or disruptions affecting transportation, such as reduced availability of transportation and increased border controls or closures, could limit our capacity to meet customer demand, which could have a material adverse effect on our financial condition and results of operations. The spread of
COVID-19
has caused us to modify our business practices, including implementing social distancing protocols, suspending employee travel, requiring most employees to work remotely, canceling physical participation in meetings, events and conferences, and extensively and frequently disinfecting our workspaces, and we may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers, contract manufacturers and suppliers. These measures may not be sufficient to mitigate the risks posed by the virus, and our ability to perform critical functions could be harmed. In January 2020, we announced our intention to repurchase $250 million in shares in 2020. However, dueDue to the uncertainty regarding the duration, severity and business impact of the
COVID-19
pandemic, as of April 1, 2020, we have suspended our stock repurchase program.program announced in January 2020. At this time, we do not know whether or when we will resume our 2020 repurchase plan or authorize future stock repurchase programs.
We are continuing to monitor the rapidly evolving situation regarding the
COVID-19
pandemic and its impact on our business, results of operations, financial condition, liquidity and cash flows. However, despite careful tracking, we are unable to accurately predict the full impact of
COVID-19,
which will depend on future developments that are highly uncertain and cannot be predicted with accuracy, including, but not limited to, the duration and continued spread of the outbreak, its severity, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume.
Trade regulations and restrictions could impact our ability to sell products to and support certain customers, which may materially adversely affect our sales and results of operations.
We are subject to U.S. laws and regulations that limit and restrict the export of some of our products and services and may restrict our transactions with certain customers, business partners and other persons. In certain circumstances, export control and economic sanctions regulations may prohibit the export of certain products, services and technologies, and in other circumstances we may be required to obtain an export license before exporting the controlled item. We must also comply with export restrictions and
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laws imposed by other countries affecting trade and investments. We maintain an export compliance program but there are risks that the compliance controls could be circumvented, exposing us to legal liabilities. Compliance with these laws has not significantly limited our sales but could significantly limit them in the future. Changes in, and responses to, U.S. trade policy could reduce the competitiveness of our products and cause our sales to drop, which could have a material adverse effect on our business, financial condition or results of operations.
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The U.S. government from time to time has issued export restrictions that prohibit U.S. companies from exporting U.S. manufactured products, foreign manufactured products with more than 25% controlled U.S. content, as well as U.S. origin technology. For example, the U.S. Department of Commerce has restricted the access of U.S. origin technologies to certain Chinese companies by adding those companies to the Entity List under U.S. Export Administration Regulations (“EAR”).
On May 16, 2019, Huawei and 68 of its affiliates, including HiSilicon, were added to the U.S. Department of Commerce Entity List under the EAR. This action by the U.S. Department of Commerce imposes new export licensing requirements on exports,
re-exports,
and
in-country
transfers of all U.S. regulated products, software and technology to the designated Huawei entities. While most of our products are not subject to the EAR and therefore not affected by the Entity List restrictions, certain of our products are currently manufactured in the U.S. and thus subject to the Entity List restrictions. Compliance with the Entity List restrictions has not significantly impacted our sales. In addition, the prohibition on transfers of U.S. origin technology to Huawei could significantly limit our ability to service certain of our products sold to Huawei and our ability to engage in product development activities with Huawei and, therefore, could have a material adverse effect on our business, financial condition or results of operations. Furthermore, Huawei’s inability to obtain products from other companies in its supply chain may adversely impact Huawei’s demand for our products. Huawei or other foreign customers affected by future U.S. government sanctions or threats of sanctions may respond by developing their own solutions to replace our products or by adopting our foreign competitors’ solutions. Also, our controls related to Entity List compliance could be circumvented, exposing us to legal liabilities. Even if such restrictions are lifted, any financial or other penalties or continuing export restrictions imposed on Huawei could have a material adverse effect on our business, financial condition or results of operations.
TheOn May 15, 2020, the U.S. Department of Commerce may modify the U.S. EAR to expandpublished new regulations expanding the scope of the regulationsU.S. EAR to include additional products that would become subject to the Entity List restrictions relating to Huawei and the designated Huawei entities including HiSilicon. The comment period for the new regulations ended on July 14, 2020. These modifiednew regulations if implementedrestrict the sale to Huawei and the designated Huawei entities of items, such as currently reported,semiconductor devices, manufactured by Huawei’s contract manufacturers under specific, detailed conditions set forth in the new regulations. While the new regulations do not impose any new restrictions on Teradyne directly, the new regulations may impact our sales to third party contract manufacturers used by Huawei and HiSilicon to manufacture and test semiconductor and other electronic devices. Because the impact of these new regulations on Huawei’s business environment for Huawei is both fluid and uncertain, there are also risks that Huawei, HiSilicon and their third-party contract manufacturers may have less demand for our products and/or may purchase products from our competitors who are not impacted by the U.S. regulations. Until these or any new regulations become public and effective,at this time, we willdo not know the potential extent of the impact of the new regulations on our business with Huawei, HiSilicon and their third-party contract manufacturers. However, it is possible that these modifiednew regulations and any other additional regulations that may be implemented by the U.S. Department of Commerce or other government agency wouldcould have a material impact on our business and financial results.
On April 27,28, 2020, the Department of Commerce announcedpublished new export controlscontrol regulations for certain U.S. products and technology sold to military and civilian end users in China. The regulations went into effect on June 29, 2020. We do not expect that compliance with the new export controls will significantly impact our ability to sell products to our customers in China or to manufacture products in China. The new export controls, however, could disrupt our supply chain, increase our compliance costs and impact the demand for our products in China and, thus, have a material adverse impact on our business, financial condition or results of operations. In addition, while we maintain an export compliance program, our compliance controls could be circumvented, exposing us to legal liabilities. We will continue to assess the potential impact of the new export controls on our business and operations and take appropriate actions, including filing for licenses with the Department of Commerce, to minimize any disruption. However, we cannot be certain that the actions we take will mitigate all of the risks associated with the new export controls that may impact our business.
We have incurred indebtedness and may incur additional indebtedness.
On December 12, 2016, we completed a private offering of $460.0 million aggregate principal amount of 1.25% convertible senior unsecured notes (the “Notes”) due December 15, 2023 and received net proceeds, after issuance costs, of approximately $450.8 million, $33.0 million of which was used to pay the net cost, after being partially offset by proceeds from the sale of the warrants, of the convertible note hedge transactions and $50.1 million of which was used to repurchase 2.0 million shares of our common stock. Holders of the Notes may require us to repurchase the Notes upon the occurrence of certain fundamental changes involving us or the holders may elect to convert into shares of our common stock.
On May 1, 2020, we entered into a three-year, senior secured revolving credit facility of up to $400.0 million. Subject to customary conditions, we may seek to obtain from existing or new lenders incremental commitments under the credit facility in an aggregate principal amount not to exceed $150.0 million. We have not borrowed any funds under this credit facility. We could borrow funds under this credit facility at any time for general corporate purposes and working capital.
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The issuance of the Notes and any additional indebtedness, among other things, could:
make it difficult to make payments on this indebtedness and our other obligations;
make it difficult to obtain any necessary future financing for working capital, capital expenditures, debt service requirements or other purposes;
require the dedication of a substantial portion of any cash flow from operations to service for indebtedness, thereby reducing the amount of cash flow available for other purposes, including capital expenditures; and
limit our flexibility in planning for, or reacting to, changes in our business and the industries in which we compete.
Restrictive covenants in the agreement governing our senior secured revolving credit facility may restrict our ability to pursue business strategies.
The agreement governing our senior secured revolving credit facility limits our ability, among other things, to: incur additional secured indebtedness; sell, transfer, license or dispose of assets; consolidate or merge; enter into transactions with our affiliates; and incur liens. In addition, our senior secured revolving credit facility contains financial and other restrictive covenants that limit our ability to engage in activities that may be in our long term best interest, such as, subject to permitted exceptions, making capital expenditures in excess of certain thresholds, making investments, loans and other advances, and prepaying any additional indebtedness while our indebtedness under our senior secured revolving credit facility is outstanding. Our failure to comply with financial and other restrictive covenants could result in an event of default, which if not cured or waived, could result in the lenders requiring immediate payment of all outstanding borrowings or foreclosing on collateral pledged to them to secure the indebtedness.
Item 2:
Unregistered Sales of Equity Securities and Use of Proceeds
In January 2020, our Board of Directors cancelled the January 2018 stock repurchase program and authorized a new stock repurchase program for up to $1.0 billion of common stock. On April 1, 2020, we suspended the repurchase program. During the threesix months ended March 29,June 28, 2020, we repurchased 1.31.5 million shares of common stock for $79.0$88.5 million at an average price of $58.81$58.33 per share. During the threesix months ended March 31,June 30, 2019, we repurchased 4.56.5 million shares of common stock for $156.5$247.2 million at an average price of $35.12$38.20 per share.
The following table includes information with respect to repurchases we made of our common stock during the three months ended March 29,June 28, 2020 (in thousands except per share price):
                 
Period
 
(a) Total
Number of
Shares
(or Units)
Purchased
  
(b) Average
Price Paid per
Share (or Unit)
  
(c) Total Number of
Shares (or Units)
Purchased as Part of
Publicly Announced
Plans or Programs
  
(d) Maximum Number
(or Approximate Dollar
Value) of Shares (or
Units) that may Yet Be
Purchased Under the
Plans or Programs
 
January 1, 2020 – January 26, 2020
  
208
  $
69.05
   
207
  $
985,700
 
January 27, 2020 – February 23, 2020
  
595
  $
69.90
   
282
  $
965,901
 
February 24, 2020 – March 29, 2020
  
858
  $
52.59
   
855
  $
920,961
 
                 
  
1,661
(1) $
60.85
(1)  
1,344
    
                 
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
 
March 30, 2020 – April 26, 2020
   174  $54.57   173   $911,535 
April 27, 2020 – May 24, 2020
   5  $57.88   —     $911,535 
May 25, 2020 – June 28, 2020
   1  $69.05   —     $911,535 
  
 
 
  
 
 
  
 
 
   
   180 (1)  $54.78 (1)   173   
  
 
 
  
 
 
  
 
 
   
(1)
Includes approximately three hundredeight thousand shares at an average price of $69.52$59.13 withheld from employees for the payment of taxes.
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We satisfy U.S. federal and state minimum withholding tax obligations due upon the vesting and the conversion of restricted stock units into shares of our common stock, by automatically withholding from the shares being issued, a number of shares with an aggregate fair market value on the date of such vesting and conversion that would satisfy the minimum withholding amount due.
Item 4:
Mine Safety Disclosures
Not Applicable
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Item 6:
Exhibits
Exhibit
Number
  
Description
  10.1  Credit Agreement, dated May 1, 2020, by and among Teradyne, Inc., as the Borrower, Truist Bank, as the administrative agent, issuing bank and swingline lender, and the several banks and other financial institutions and lenders from time to time party thereto filed as Exhibit 10.1 to Teradyne’s Current Report on Form 8-K filed May 5, 2020
  31.1  
  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  
  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  
  32.1
Certification of Principal Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)
  32.2  
  32.2
Certification of Principal Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)
101.INS  XBRL Instance Document
101.SCH  
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL  
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF  
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB  
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE  
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
104  
104
Cover Page Interactive Data File (formatted as Inline XBRL, and contained in Exhibit 101)
41
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
TERADYNE, INC.
Registrant
/s/
Sanjay Mehta SANJAY MEHTA
Sanjay Mehta
Vice President,
Chief Financial Officer and Treasurer
(Duly Authorized Officer
and Principal Financial Officer)
May 4,August 3, 2020
42
47