Accounting Policies (Policies)

6 Months Ended

Jul. 01, 2018

Basis of Presentation

Basis of Presentation

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

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

Preparation of Financial Statements and Use of Estimates

Preparation of Financial Statements and Use of Estimates

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

Revenue from Contracts with Customers

Revenue from Contracts with Customers

Teradyne adopted Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers” (“ASC 606”) on January 1, 2018 using the modified retrospective method for all contracts not completed as of the date of adoption. The reported results for 2018 reflect the application of ASC 606 while the reported results for 2017 were prepared under the guidance of ASC 605, “Revenue Recognition” (“ASC 605”), which is also referred to herein as “Legacy GAAP” or the “previous guidance.” Teradyne recorded a net increase to retained earnings of $12.7 million as of January 1, 2018 due to the cumulative impact of adopting ASC 606. Refer to Note B: “Accounting Policies” in Teradyne’s 2017 Annual Report on Form 10-K for the policies in effect for revenue prior to January 1, 2018. The adoption of ASC 606 represents a change in accounting principle that will more closely align revenue recognition with the delivery of Teradyne’s hardware and services and will provide financial statement readers with enhanced disclosures. In accordance with ASC 606, revenue is recognized when or as a customer obtains control of promised goods or services. The amount of revenue recognized reflects the consideration to which Teradyne expects to be entitled to receive in exchange for fulfillment of the performance obligation. Teradyne’s primary source of revenue will continue to be from the sale of systems, instruments, robots, and the delivery of services.

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

Step 1: Identify the contract with the customer

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

Step 2: Identify the performance obligations in the contract

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

Step 3: Determine the transaction price

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

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

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

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

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

Revenue recognized in accordance with ASC 606 was $523.3 million and $1,006.5 million for the three and six months ended July 1, 2018, respectively. For the three and six months ended July 1, 2018, Teradyne also recognized $3.6 million and $7.9 million, respectively, in revenue on leases of Teradyne systems, which are accounted for outside of ASC 606.

Disaggregation of Revenue

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

	For the Three Months Ended July 1, 2018
	Semiconductor Test				System Test						Industrial Automation				Wireless Test		Corporate and Eliminations			Consolidated
	System on a chip (“SOC”)		Memory		Defense/ Aerospace		Storage Test		Production Board Test		Universal Robots		Mobile Industrial Robots
			(in thousands)
Americas
Point in time	$	12,111	$	2,827	$	15,256	$	5	$	1,429	$	16,053	$	1,199	$	4,716	$	(110	)	$	53,486
Over time		8,934		710		6,237		—		795		327		—		122		—			17,125
Europe, Middle East and Africa
Point in time		10,227		847		447		—		4,849		26,616		2,000		26		—			45,012
Over time		5,689		254		539		—		1,713		526		—		257		—			8,978
Asia Pacific
Point in time		218,352		59,633		385		31,824		3,741		13,895		1,310		27,663		—			356,803
Over time		34,951		2,285		258		1,428		744		131		—		2,103		—			41,900
Lease revenue		3,268		—		—		—		32		—		—		325		—			3,625
Total	$	293,532	$	66,556	$	23,122	$	33,257	$	13,303	$	57,548	$	4,509	$	35,212	$	(110	)	$	526,929

	For the Six Months Ended July 1, 2018
	Semiconductor Test				System Test						Industrial Automation				Wireless Test		Corporate and Eliminations			Consolidated
	SOC		Memory		Defense/ Aerospace		Storage Test		Production Board Test		Universal Robots		Mobile Industrial Robots
	(in thousands)
Americas
Point in time	$	21,711	$	5,691	$	26,853	$	284	$	3,189	$	30,190	$	1,199	$	9,695	$	(332	)	$	98,480
Over time		17,517		1,406		12,425		—		1,552		652		—		233		—			33,785
Europe, Middle East and Africa
Point in time		22,352		986		1,943		—		8,886		49,190		2,000		1,066		—			86,423
Over time		10,888		523		1,090		—		3,272		668		—		484		—			16,925
Asia Pacific
Point in time		446,543		125,904		487		41,946		5,603		25,478		1,310		41,329		—			688,600
Over time		68,173		4,607		466		2,961		1,479		204		—		4,399		—			82,289
Lease revenue		7,115		—		—		—		266		—		—		513		—			7,894
Total	$	594,299	$	139,117	$	43,264	$	45,191	$	24,247	$	106,382	$	4,509	$	57,719	$	(332	)	$	1,014,396

Performance Obligations

Hardware

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

Extended Warranty

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

Training and Applications Support

Teradyne sells training and applications support to customers either in standalone transactions or included with system purchases. The training and support allow the customer to use Teradyne’s systems efficiently and effectively. Training and applications support included in system orders are valued based on their standalone selling price and all training and applications support is recognized over time as the customer receives and consumes the benefit associated with each. Both are recognized using an input method of hours consumed as this best depicts the transfer of services to the customer.

Service Agreements

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

Post-Contract Customer Support (“PCS”)

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

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

Contract Balances

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

	July 1, 2018		January 1, 2018 (as adjusted)		Increase/ (Decrease)
	(in thousands)
Deferred revenue and customer advances	$	82,491	$	76,638	$	5,853
Long-term deferred revenue and customer advances		25,375		20,848		4,527

The amount of revenue recognized during the three and six months ended July 1, 2018 that was included within the deferred revenue and customer advances balance at January 1, 2018 was $24.7 million and $46.5 million, respectively, and primarily relates to extended warranties, training, application support, and PCS. Each of these represents a distinct performance obligation. Customers typically pay for these services net 30 to 60 days from the date that transfer of control of the associated system or product occurs.

Remaining Performance Obligations

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

Significant Judgments

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

Practical Expedients

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

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

Impacts

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

Condensed Consolidated Balance Sheet:

	July 1, 2018
	As Reported		Adjustments to Recognize Under Legacy GAAP			Legacy GAAP
	(in thousands, except per share amount)
ASSETS
Accounts receivable, less allowance for doubtful accounts	$	454,122	$	(95,102	)	$	359,020
Inventories, net		135,550		33,830			169,380
Deferred tax assets		73,574		(3,494	)		70,080
LIABILITIES
Deferred revenue and customer advances	$	82,491	$	(7,254	)	$	75,237
Income taxes payable		32,226		(9,002	)		23,224
Long-term deferred revenue and customer advances		25,375		(9,836	)		15,539
SHAREHOLDERS’ EQUITY
Retained earnings	$	74,270	$	(38,674	)	$	35,596

Condensed Consolidated Statement of Operation:

	For the Three Months ended July 1, 2018
	As Reported		Adjustments to Recognize Under Legacy GAAP			Legacy GAAP
	(in thousands, except per share amount)
Total revenues	$	526,929	$	(28,626	)	$	498,303
Total cost of revenues		219,595		(6,081	)		213,514
Income tax provision		18,975		(4,569	)		14,406
Net income		101,037		(17,976	)		83,061
Net income per common share:
Basic	$	0.53	$	(0.09	)	$	0.44
Diluted	$	0.52	$	(0.09	)	$	0.43

	For the Six Months ended July 1, 2018
	As Reported		Adjustments to Recognize Under Legacy GAAP			Legacy GAAP
	(in thousands, except per share amount)
Total revenues	$	1,014,396	$	(94,268	)	$	920,128
Total cost of revenues		437,230		(33,830	)		403,400
Income tax provision		27,821		(9,084	)		18,737
Net income		188,010		(51,354	)		136,656
Net income per common share:
Basic	$	0.97	$	(0.27	)	$	0.71
Diluted	$	0.94	$	(0.26	)	$	0.69

Retirement Benefits

Retirement Benefits

In March 2017, the Financial Accounting Standards Board (“FASB”) issued ASU 2017-07, “Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” Teradyne retrospectively adopted the new accounting guidance on presentation of net periodic pension costs and net periodic postretirement benefit costs in the first quarter of 2018. This guidance requires the service cost component of net benefit costs to be reported in the same line item in the consolidated statement of operations as other employee compensation costs. The non-service components of net benefit costs such as interest cost, expected return on assets, amortization of prior service cost, and actuarial gains or losses, are required to be reported separately outside of income or loss from operations. Following the adoption of this guidance, Teradyne continues to record the service cost component in the same line item as other employee compensation costs and the non-service components of net benefit costs such as interest cost, expected return on assets, amortization of prior service cost, and actuarial gains or losses are reported within other (income) expense, net. The retrospective adoption of this standard decreased income from operations by $2.1 million and $1.7 million in the three and six months ended July 2, 2017, respectively, due to the removal of net actuarial pension gains and increased non-operating (income) expense by the same amount with no impact to net income.

Financial Assets and Financial Liabilities

Financial Assets and Financial Liabilities

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

Contingencies and Litigation

Contingencies and Litigation

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