UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2018
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 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 Number) |
600 RIVERPARK DRIVE NORTH READING, MASSACHUSETTS |
01864 | |
(Address of Principal Executive Offices) | (Zip Code) |
Registrants telephone number, including area code: (978) 370-2700
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class |
Name of Each Exchange on Which Registered | |
Common Stock, par value $0.125 per share | Nasdaq Stock Market LLC |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐ No ☒
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 such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405) is not contained herein, and will not be contained to the best of the registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or in any amendment to this Form 10-K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company and emerging growth company in Rule 12b-2 of the Exchange Act (check one):
Large accelerated filer ☒ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 29, 2018 was approximately $6.4 billion based upon the closing price of the registrants Common Stock on the New York Stock Exchange on that date.
The number of shares outstanding of the registrants only class of Common Stock as of February 25, 2019 was 173,629,283 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrants proxy statement in connection with its 2019 annual meeting of shareholders are incorporated by reference into Part III of this Form 10-K.
TERADYNE, INC.
TERADYNE, INC.
FORM 10-K
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act and Section 21E of the Securities Exchange Act. When used herein, the words will, would, believe, anticipate, plan, expect, estimate, project, intend, may, see, target and other words and terms of similar meaning are intended to identify forward-looking statements although not all forward looking statements contain these identifying words. Forward looking statements involve risks and uncertainties, including, but not limited to, those discussed in the section entitled Risk Factors of this annual report on Form 10-K and elsewhere, and in other reports we file with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on these forward-looking statements which reflect managements analysis only as of the date hereof and are subject to risks and uncertainties that could cause actual results to differ materially from those stated or implied. Teradyne assumes no obligation to update these forward-looking statements for any reason, except as may be required by law.
Item 1: | Business |
Teradyne, Inc. (Teradyne) was founded in 1960 and is 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 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. |
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 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. One customer drives 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.
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The sales of our products and services are dependent, to a large degree, on customers who are subject to cyclical trends in 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 and electronics industries. Historically, these demand fluctuations have resulted in significant variations in our results of operations. During the first quarter of 2018, demand outlook for mobile device test capacity in 2018 declined sharply for our Semiconductor Test business. Demand in other segments of the Semiconductor Test business, including memory test, increased in 2018.
In 2015, we acquired Universal Robots A/S (Universal Robots), the leading supplier of collaborative robots which are low-cost, easy-to-deploy and simple-to-program robots that work side by side with production workers to improve quality, increase manufacturing efficiency and decrease manufacturing costs. The acquisition of Universal Robots provides a growth engine to our business. The total purchase price for Universal Robots was approximately $315 million, which included cash paid of approximately $284 million and $32 million in fair value of contingent consideration payable upon achievement of revenue and earnings targets through 2018. Contingent consideration for 2015 was $15 million and was paid in February 2016. Contingent consideration for the period from July 2015 to December 2017 was $24.6 million and was paid in March 2018. Contingent consideration for the period from July 2015 to December 2018 was $3.9 million and is expected to be paid in March 2019.
On February 26, 2018, we acquired Energid Technologies Corporation (Energid) for a total purchase price of approximately $27.6 million. Energids technology enables and simplifies the programming of complex robotic motions used in a wide variety of end markets, ranging from heavy industry to healthcare, utilizing both traditional robots and collaborative robots.
On April 25, 2018, we acquired Mobile Industrial Robots ApS (MiR), a Danish limited liability company. MiR is the leading maker of collaborative autonomous mobile robots for industrial applications. The total purchase price was approximately $198 million, which included cash paid of approximately $145 million and $53 million in fair value of contingent consideration payable upon achievement of certain thresholds and targets for revenue and earnings before interest and taxes through 2020. At December 31, 2018, the maximum amount of contingent consideration that could be paid is $115 million. Contingent consideration for 2018 was $31.0 million and is expected to be paid in March 2019.
Universal Robots, MiR and Energid are included in our Industrial Automation segment.
Investor Information
We are a Massachusetts corporation incorporated on September 23, 1960. We are subject to the informational requirements of the Securities Exchange Act of 1934 (Exchange Act). We file periodic reports, proxy statements and other information with the Securities and Exchange Commission (SEC). The SEC maintains an internet site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file documents electronically.
You can access financial and other information, including the charters of our Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee, our Corporate Governance Guidelines and Code of Conduct, by clicking the Investors link on our web site at www.teradyne.com. We make available, free of charge, copies of our filings with the SEC, including our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act through our web site as soon as reasonably practicable after filing such material electronically or otherwise furnishing it to the SEC.
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Products
Semiconductor Test
We design, manufacture, sell and support Semiconductor Test products and services on a worldwide basis. The test systems we provide are used both for wafer level and device package testing. These chips are used in automotive, industrial, communications, consumer, and computer and electronic game applications, among others. Semiconductor devices span a broad range of functionality, from very simple low-cost devices such as appliance microcontrollers, operational amplifiers or voltage regulators to complex digital signal processors and microprocessors as well as memory devices. Semiconductor Test products and services are sold to IDMs that integrate the fabrication of silicon wafers into their business, Fabless companies that outsource the manufacturing of silicon wafers, Foundries that cater to the processing and manufacturing of silicon wafers, and OSATs that provide test and assembly services for the final packaged devices to both Fabless companies and IDMs. Fabless companies perform the design of integrated circuits without manufacturing capabilities, and use Foundries for wafer manufacturing and OSATs for test and assembly. These customers obtain the overall benefit of comprehensively testing devices and reducing the total costs associated with testing by using our Semiconductor Test systems to:
| improve and control product quality; |
| measure and improve product performance; |
| reduce time to market; and |
| increase production yields. |
Our FLEX Test Platform architecture advances our core technologies to produce test equipment that is designed for high efficiency multi-site testing. Multi-site testing involves the simultaneous testing of many devices in parallel. Leading semiconductor manufacturers are using multi-site testing to significantly improve their Cost of Test economics. The FLEX Test Platform architecture addresses customer requirements through the following key capabilities:
| A high efficiency multi-site architecture that reduces tester overhead such as instrument setup, synchronization and data movement, and signal processing; |
| The IG-XL software operating system which provides fast program development, including instant conversion from single to multi-site test; and |
| Broad technology coverage by instruments designed to cover the range of test parameters, coupled with a universal slot test head design that allows easy test system reconfiguration to address changing test needs. |
FLEX Test Platform purchases are being made by IDMs, OSATs, Foundries and Fabless customers. The FLEX Test Platform has become a widely used test solution at OSATs by providing versatile testers that can handle the widest range of devices, allowing OSATs to leverage their capital investments. The broad consumer, automotive and broadband markets have historically driven most of the device volume growth in the semiconductor industry. These markets include smart phones, cell phones, tablets, set top boxes, HDTVs, game controllers, computer graphics, and automotive controllers to name a few. These end use markets continue to be drivers for the FLEX Test Platform family of products because they require a wide range of technologies and instrument coverage. The UltraFLEX-M tester extends the FLEX Test Platform into the High Speed DRAM testing market. The FLEX Test Platform has an installed base of more than 6,400 systems.
Our J750 test system shares the IG-XL software environment with the family of FLEX Test Platform systems. The J750 is designed to address the highest volume semiconductor devices, such as microcontrollers, that are central to the functionality of almost every consumer electronics product, from small appliances to automobiles. J750 test systems combine compact packaging, high throughput and ease of production test. We
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extended the J750 platform technology to create the IP750 Image Sensor test system. The IP750 is focused on testing image sensor devices used in smart phones and other imaging products. We have continued to invest in the J750 platform with new instrument releases that bring new capabilities to existing market segments and expand the J750 platform to new devices that include high end microcontrollers and the latest generation of cameras. The J750 platform has an installed base of over 5,600 systems.
Our Magnum platform addresses the requirements of mass production test of memory devices such as flash memory and DRAM. Flash and DRAM memory are widely used core building blocks in modern electronic products finding wide application in consumer, industrial, and computing equipment. Magnum V, the newest member of the family, is a next generation memory test solution designed for parallel memory test in the flash, DRAM and multi-chip package markets. In 2019, we plan to introduce a high-speed DRAM test version of our Magnum platform giving us full product coverage of the memory test market. The Magnum platform has an installed base of over 2,600 systems.
Our ETS platform is used by semiconductor manufacturers and assembly and test subcontractors, primarily in the analog/mixed signal markets that cover more cost sensitive applications. Our proprietary SmartPin technology enables high efficiency multi-site testing, on an individual test system, permitting greater test throughput. Semiconductors tested by ETS platform systems are incorporated into a wide range of products in historically high-growth markets, including mobile devices, video/multimedia products, automotive electronics, computer peripherals, and notebook and desktop computers. The newest products from the platform include the ETS-88, a high performance multi-site production test system designed to test a wide variety of high volume commodity and precision devices, and the ETS-800, a high performance multi-site production test system to test high complexity power devices in automotive, industrial and consumer applications. The ETS platform has an installed base of over 4,900 systems.
System Test
Our System Test segment is comprised of three business units: Defense/Aerospace, Storage Test and Production Board Test.
Defense/Aerospace
We are a leading provider of high performance test systems, subsystems, instruments and service for the defense and aerospace markets. Our test products are used to ensure the readiness of military and commercial aerospace electronics systems. New programs, such as tactical aircraft and missile systems, as well as upgrade programs, continue to fuel the demand for high performance test systems in this market. Our test products are well-suited to the demands of defense/aerospace electronics manufacturers and repair depots worldwide. Our leadership in this market is underscored by our success with major Department of Defense programs across all U.S. military service branches and many allied defense services worldwide.
Storage Test
The Storage Test business unit addresses the high throughput, automated manufacturing test requirements of hard disk drive (HDD) and solid state disk (SSD) manufacturers and semiconductor manufacturers. Our products address the client and enterprise storage markets. The client market is driven by the needs of desktop, laptop, and external HDD and SSD storage products. The enterprise market is driven by the needs of data centers and cloud storage. During 2017, we developed a system level test product for the semiconductor production market, which shipped in 2017 and 2018. The business units products lead in addressing customer requirements related to factory density, throughput and thermal performance.
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Production Board Test
Our test systems are used by electronics manufacturers worldwide to perform In-Circuit-Test (ICT) and device programming of printed circuit board assemblies. Fast, accurate and cost-effective test capabilities are hallmark features of our Test Station and Spectrum ICT product families. We offer the Test Station in off-line and automated in-line configurations. The automated in-line configurations address the growing requirements for automating production lines for high volume applications, such as automotive electronics.
Industrial Automation
Our Industrial Automation segment is comprised of three business units: Universal Robots, Mobile Industrial Robots and Energid.
Universal Robots
Universal Robots, which we acquired in June 2015, is the leading supplier of collaborative robots, which are low-cost, easy-to-deploy and simple-to-program robots that work side by side with production workers to improve quality, increase manufacturing efficiency and decrease manufacturing costs. Collaborative robots are designed to mimic the motion of a human arm and can be fitted with task specific grippers or fixtures to support a wide range of applications. Universal Robots offers three collaborative robot models, the UR3, UR5, and UR10, each with different weight carrying capacity and arm reach. All models are easily integrated into existing production environments. Universal Robots products are differentiated by their:
| easy programming using a graphical interface which allows users to program the collaborative robot in a few hours; |
| flexibility and ease of use in allowing customers to change the task the collaborative robot is performing as their production demands dictate; |
| safe operations as collaborative robots can assist workers in side by side production environments requiring no special safety enclosures or shielding to protect workers; and |
| short payback period, on average less than 12 months. |
In 2018, Universal Robots introduced its e-series collaborative robots which include technology advances that enable faster development of applications, greater precision and improved safety.
Cumulatively, Universal Robots has sold over 30,000 collaborative robots in diverse production environments and applications.
Mobile Industrial Robots
MiR, which was acquired in April 2018, is the leading supplier of collaborative autonomous mobile robots, which are low-cost, easy-to-deploy and simple-to-program mobile robots that increase manufacturing and warehouse efficiency and decrease costs. Collaborative autonomous mobile robots are designed to move material from point to point via autonomous navigation rather than the need for traditional mobile robot guidance infrastructure such as painted or magnetic strips, and are designed to navigate safely around obstacles and people. MiR offers three collaborative autonomous mobile robot models, the MiR100, MiR200, MiR500, each with different payload carrying capacity. All models are easily integrated into existing production environments. MiRs products are differentiated by their:
| easy programming using a graphical interface which allows users to program the collaborative robot in a few hours; |
| ease of use, speed of deployment and flexibility in allowing customers to change the task as their demands dictate; |
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| reliable autonomous navigation over large manufacturing and warehouse areas; and |
| short payback period, on average less than 12 months. |
Cumulatively, MiR has sold over 1,800 collaborative autonomous mobile robots in diverse production and warehouse environments and applications.
Energid
Energid, which was acquired in February 2018, is a leading supplier of real-time advanced robot motion control software, which automation suppliers use to coordinate the control of multiple automation axes for performing tasks. Motion control software performs the complex mathematics and functions needed to enable robot motion for tasks such as grasping and moving an object. Energid offers developer and run time licenses of its Actin software. Actin is integrated by customers into the customers robot and automation solutions. Actin products are differentiated by their:
| highly flexible, adaptive, robot motion control; and |
| task optimized robotic path planning. |
Cumulatively, Energid has sold over 500 Actin developer and run time licenses deployed in diverse automation applications.
Wireless Test
Our acquisition of LitePoint in 2011 and ZTEC Instruments Inc. (ZTEC) in 2013 expanded our product offerings in the wireless test market. Under the LitePoint brand name, these products provide test solutions utilized in the development and manufacturing of wireless devices. The worlds leading makers of smart phones, tablets, notebooks, laptops, peripherals, and Internet-of-Things (IoT) devices rely on LitePoint technology to ensure their products get into consumer hands with high quality and high efficiency.
LitePoint hardware and software wireless test solutions are used in test insertions that span design verification to high volume manufacturing and are deployed across the entire production eco-system from the wireless chipset suppliers to the consumer brands. Wireless devices are often tested at multiple points along the manufacturing process that include insertions at component, system-in-package (SiP), module, PCB, SMT and finished product stages.
Design verification is an important step in the development process for evaluating product performance prior to starting production. As end market unit volumes have increased, the quantity of units and the amount of data that must be analyzed for a successful product launch continues to grow. LitePoint products provide easy to use, domain specific tools for rapid analysis of product performance. This helps to speed time to market.
In high volume manufacturing, before products are packaged and shipped, wireless test enables the calibration of each individual products wireless performance to improve range, data throughput and battery life. Testing also verifies product specifications for product quality control. As markets become increasingly competitive, product performance and quality provide brand differentiation.
Wireless standards can be thought of in two categories, connectivity and cellular. Connectivity covers many standards such as Wi-Fi, Bluetooth, and GPS. LitePoints IQxel products cover emerging Wi-Fi standards such as 802.11ax and 802.11ad as well as the existing standards 802.11a/b/g/n and 11ac, and includes a variety of other standards such as Bluetooth Classic, Bluetooth 5.0 and Bluetooth low energy, Zigbee, Z-Wave, NFC, LoRa, GPS, GLONASS and others.
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The IQxel product familys high-performance wireless and multi-device testing economics is aligned with the needs of networking equipment, Internet gateways, IoT products and embedded modules used in smartphones, tablets, and PCs. Another connectivity product, the IQnfc, addresses the growing use of NFC technology for payments with mobile devices.
Cellular standards include 2G, 3G, 4G and emerging 5G mobile phone technologies. LitePoints IQxstream is a multi-device production test optimized solution for high-speed testing of GSM, EDGE, CDMA2000, TD-SCDMA, WCDMA, HSPA+, LTE-FDD, TD_LTE, and LTE-A, and 5G technologies. It is used for calibration and verification of smartphones, tablets, small cell wireless gateways and embedded cellular modules. The IQcell, is a multi-device cellular signaling test solution which enables user experience testing of LTE cellular devices via over-the-air connections. The IQgig family provides test solution at the intermediary and millimeter wave frequencies for 5G and 802.11ad.
An important component in all wireless systems is the analog RF front end. The performance of these components is continually pushed higher as device makers add more bands, channels, antennas and higher data rates. We offer the LitePoint zSeries of modular wireless test instruments for design verification test and production testing of these wireless components. The lab-in-a-box zSeries solution provides simple and fast design verification of RF power amplifier and smart device RF front end modules. It is capable of rapid analysis of the latest digital pre-distortion and envelope tracking technologies for both LTE and Wi-Fi standards. A ruggedized version of the product is designed for high volume testing of these same devices.
To complement the test systems, LitePoint offers turnkey test software for over 350 of the most popular wireless chipsets. These optimized solutions provide rapid development of high volume manufacturing solutions with a minimum of engineering effort by customers.
Sales and Distribution
In 2018, no single customer accounted for more than 10% of our consolidated revenues. In 2017 and 2016, revenues from Taiwan Semiconductor Manufacturing Company Ltd. accounted for 13% and 12%, respectively, of our consolidated revenues. In 2016, revenues from JA Mitsui Leasing, Ltd. accounted for 12% of our consolidated revenues. Taiwan Semiconductor Manufacturing Company Ltd. and JA Mitsui Leasing, Ltd. are customers of our Semiconductor Test segment. In each of the years, 2018, 2017, and 2016, our five largest customers in aggregate accounted for 27%, 32% and 36% of our consolidated revenues, respectively.
OSAT customers, such as Taiwan Semiconductor Manufacturing Company Ltd., often purchase our test systems based upon recommendations from OEMs, IDMs and Fabless companies. In all cases when an OSAT customer purchases a test system from us, we consider the OSAT as the customer since credit risk, title and risk of loss, among other things, are between Teradyne and the OSAT. We estimate consolidated revenues driven by a single OEM customer, combining direct sales to that customer with sales to the customers OSATs (which include Taiwan Semiconductor Manufacturing Company Ltd. and its leasing company, JA Mitsui Leasing, Ltd.), accounted for approximately 13%, 22%, and 26% of our consolidated revenues in 2018, 2017, and 2016, respectively. The loss of, or significant decrease in demand from, this OEM customer, or any of our five largest direct customers, could have a material adverse effect on our business, results of operations and financial condition.
We have sales and service offices located throughout North America, Asia and Europe. We sell in these areas predominantly through a direct sales force, except for Industrial Automation products which are sold through distributors. Our manufacturing activities are primarily conducted through subcontractors and outsourced contract manufacturers with significant operations in China and Malaysia.
Sales to customers outside the United States were 87%, 88%, and 87%, respectively, of our consolidated revenues in 2018, 2017 and 2016. Sales are attributed to geographic areas based on the location of the customer site.
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See also Item 1A: Risk Factors and Note R: Operating Segment, Geographic and Significant Customer Information in Notes to Consolidated Financial Statements.
Competition
We face significant competition throughout the world in each of our reportable segments. Competitors in the Semiconductor Test segment include, among others, Advantest Corporation and Cohu, Inc.
Competitors in the System Test segment include, among others, Keysight Technologies, Inc., Advantest Corporation, Test Research, Inc. and SPEA S.p.A.
Competitors in our Industrial Automation segment include manufacturers of traditional industrial robots such as KUKA Robotics Corporation, ABB, FANUC and Yaskawa Electric Corporation, companies with emerging collaborative robot offerings such as Techman, Doosan, and AUBO Robotics, and manufacturers of autonomous mobile robots such as Omron, Fetch, and OTTO Motors.
Competitors in our Wireless Test segment include, among others, Rohde & Schwarz GmbH & Co. KG, Anritsu Company, Keysight Technologies, Inc. and National Instruments Corporation.
Some of our competitors have substantially greater financial and other resources to pursue engineering, manufacturing, marketing and distribution of their products. We also face competition from emerging Asian companies and from internal suppliers at several of our customers. Some of our competitors have introduced or announced new products with certain performance characteristics which may be considered equal or superior to those we currently offer. We expect our competitors to continue to improve the performance of their current products and to introduce new products or new technologies that provide improved cost of ownership and performance characteristics. See also Item 1A: Risk Factors.
Backlog
At December 31, 2018 and 2017, our backlog of unfilled orders in our four reportable segments was as follows:
2018 | 2017 (1) | |||||||
(in millions) | ||||||||
Semiconductor Test |
$ | 367.5 | $ | 464.2 | ||||
System Test |
149.5 | 111.9 | ||||||
Wireless Test |
32.0 | 35.5 | ||||||
Industrial Automation |
19.7 | 14.8 | ||||||
|
|
|
|
|||||
$ | 568.7 | $ | 626.4 | |||||
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(1) | December 31, 2017 backlog has not been adjusted for the new revenue standard adopted January 1, 2018. If the Wireless Test backlog was calculated based on the new revenue standard, the backlog balance would have been $21.3 million. Backlog for each of the other reportable segments was not materially affected by the adoption of the new revenue standard. |
Of the backlog at December 31, 2018, approximately 98% of the Semiconductor Test backlog, 89% of the System Test backlog, and 35% of the Industrial Automation backlog is expected to be delivered in 2019.
Customers may delay delivery of products or cancel orders suddenly and without advanced notice, subject to possible cancellation penalties. Due to possible customer changes in delivery schedules and cancellation of orders, our backlog at any particular date is not necessarily indicative of the actual sales for any succeeding period. Delays in delivery schedules or cancellations of backlog during any particular period could have a material adverse effect on our business, financial condition or results of operations.
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Raw Materials
Our products contain electronic and mechanical components that are provided by a wide range of suppliers. Some of these components are standard products, while others are manufactured to our specifications. We can experience occasional delays in obtaining timely delivery of certain items. While the majority of our components are available from multiple suppliers, certain items are obtained from sole sources. We may experience a temporary adverse impact if any of our sole source suppliers delay or cease to deliver products.
Intellectual Property and Licenses
The development of our products, both hardware and software, is based in significant part on proprietary information, our brands and technology. We protect our rights in proprietary information, brands and technology through various methods, such as:
| patents; |
| copyrights; |
| trademarks; |
| trade secrets; |
| standards of business conduct and related business practices; and |
| technology license agreements, software license agreements, non-disclosure agreements, employment agreements, and other agreements. |
However, these protections might not be effective in all circumstances. Competitors might independently develop similar technology or exploit our proprietary information and our brands in countries where we lack enforceable intellectual property rights or where enforcement of such rights through the legal system provides an insufficient deterrent. Also, intellectual property protections can lapse or be invalidated through appropriate legal processes. We do not believe that any single piece of intellectual property or proprietary rights is essential to our business.
Employees
As of December 31, 2018, we employed approximately 4,900 people. Since the inception of our business, we have experienced no work stoppages or other labor disturbances.
Environmental Affairs
We are subject to various federal, state, and local government laws and regulations relating to the protection of employee health and safety and the environment. We accrue for all known environmental liabilities when it becomes probable that we will incur cleanup costs and those costs can reasonably be estimated. Estimated environmental costs are not expected to materially affect the financial position or results of our operations in future periods. However, estimates of future costs are subject to change due to protracted cleanup periods and changing environmental remediation laws and regulations.
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OUR EXECUTIVE OFFICERS
Pursuant to General Instruction G(3) of Form 10-K, the following table is included in Part I of this Annual Report on Form 10-K in lieu of being included in the Proxy Statement for the Annual Meeting of Shareholders. The table sets forth the names of all of our executive officers and certain other information relating to their positions held with Teradyne and other business experience. Our executive officers do not have a specific term of office but rather serve at the discretion of the Board of Directors.
Executive Officer |
Age | Position |
Business Experience For The Past 5 Years | |||||
Mark E. Jagiela |
58 | Chief Executive Officer and President | Chief Executive Officer since February 2014; President of Teradyne since January 2013; President of Semiconductor Test from 2003 to February 2016; Vice President of Teradyne from 2001 to 2013. | |||||
Gregory R. Beecher |
61 | Vice President, Chief Financial Officer and Treasurer | Vice President and Chief Financial Officer of Teradyne since 2001; Treasurer of Teradyne from 2003 to 2005 and since 2006. | |||||
Charles J. Gray |
57 | Vice President, General Counsel and Secretary | Vice President, General Counsel and Secretary of Teradyne since April 2009. | |||||
Bradford B. Robbins |
60 | President of Wireless Test | President of Wireless Test since August 2014; Chief Operating Officer of LitePoint Corporation from 2012 to 2014; Vice President of Teradyne since 2001. | |||||
Gregory S. Smith |
55 | President of Semiconductor Test | President of Semiconductor Test since February 2016; Vice President, SOC Business Group and Marketing Manager for Semiconductor Test Group from January 2014 to February 2016; Business Unit Manager, Complex SOC Business Unit from 2009 to January 2014. | |||||
Walter G. Vahey |
54 | Executive Vice President, Business Development | Executive Vice President, Business Development since December 2017; President of System Test from July 2012 to December 2017; Vice President of Teradyne since 2008; General Manager of Storage Test from 2008 to December 2017; General Manager of Production Board Test from April 2013 to December 2017. |
Item 1A: | Risk Factors |
Risks Associated with Our Business
The risks described below 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.
Our business is impacted by global and industry-specific economic cycles, which are difficult to predict, and actions we have taken or may take to offset these cycles may not be sufficient.
Capital equipment providers in the electronics and semiconductor industries, such as Teradyne, have, in the past, been negatively impacted by both sudden slowdowns in the global economies and recurring cyclicality
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within those industries. These cycles have resulted in periods of over-supply; a trend we believe will continue to occur for newer generations of electronic products. Our business and results of operations depend, in significant part, upon capital expenditures of manufacturers of semiconductors and other electronics, which in turn depend upon the current and anticipated market demand for those products. Disruption or deterioration in economic conditions may reduce customer purchases of our products, thereby reducing our revenues and earnings. In addition, such adverse changes in economic conditions, and resulting slowdowns in the market for our products, may, among other things, result in increased price competition for our products, increased risk of excess and obsolete inventories, increased risk in the collectability of our accounts receivable from our customers, potential reserves for doubtful accounts and write-offs of accounts receivable, increased risk of restructuring charges, and higher operating costs as a percentage of revenues, which, in each case and together, adversely affect our operating results. We are unable to predict the likely duration, frequency and severity of disruptions in financial markets, credit availability, and adverse economic conditions throughout the world, and we cannot ensure that the level of revenues or new orders for a fiscal quarter will be sustained in subsequent quarters. We have taken actions to address the effects of general economic variability and recurring industry cyclicality, including implementing cost control and reduction measures. We cannot predict whether these measures will be sufficient to offset global or market-specific disruptions that might affect our test businesses and we may need to take additional or different measures in the future.
We are subject to intense competition.
We face significant competition throughout the world in each of our reportable segments. Some of our competitors have substantial financial and other resources to pursue engineering, manufacturing, marketing and distribution of their products. We also face competition from emerging Asian equipment companies and internal development at several of our customers. Some of our competitors have introduced or announced new products with certain performance characteristics that may be considered equal or superior to those we currently offer. We expect our competitors to continue to improve the performance of their current products and to introduce new products or new technologies that provide improved cost of ownership and performance characteristics. New product introductions by competitors could cause a decline in revenues or loss of market acceptance of our products.
The market for our products is concentrated, and our business depends, in part, on obtaining orders from a few significant customers.
The market for our products is concentrated with a limited number of significant customers accounting for a substantial portion of the purchases of test equipment. In each of the years 2018, 2017, and 2016, our five largest customers in aggregate accounted for 27%, 32%, and 36% of consolidated revenues, respectively. We estimate consolidated revenues driven by a single OEM customer, combining direct sales to that customer with sales to the customers OSATs (which include Taiwan Semiconductor Manufacturing Company Ltd. and its leasing company, JA Mitsui Leasing, Ltd.), accounted for approximately 13%, 22%, and 26% of our consolidated revenues in 2018, 2017, and 2016, respectively. In any one reporting period, a single customer or several customers may contribute even a larger percentage of our consolidated revenues. In addition, our ability to increase sales will depend, in part, on our ability to obtain orders from current or new significant customers. The opportunities to obtain orders from these customers may be limited, which may impair our ability to grow revenues. We expect that sales of our products will continue to be concentrated with a limited number of significant customers for the foreseeable future. The loss of a significant customer or any reduction in orders by these customers, including reductions due to market or competitive conditions, such as we experienced in our Wireless Test segment, would likely have a material adverse effect on our business, financial condition or results of operations.
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Our operating results are likely to fluctuate significantly.
Our operating results are affected by a wide variety of factors that could materially adversely affect revenues or profitability. The following factors could impact future operations:
| a worldwide economic slowdown or disruption in the global financial markets; |
| competitive pressures on selling prices; |
| our ability to introduce, and the market acceptance of, new products; |
| changes in product revenues mix resulting from changes in customer demand; |
| the level of orders received which can be shipped in a quarter because of the tendency of customers to wait until late in a quarter to commit to purchase due to capital expenditure approvals and constraints occurring at the end of a quarter, or the hope of obtaining more favorable pricing from a competitor seeking the business; |
| engineering and development investments relating to new product introductions, and the expansion of manufacturing, outsourcing and engineering operations in Asia; |
| provisions for excess and obsolete inventory relating to the lack of demand for and the discontinuance of products; |
| impairment charges for certain long-lived and intangible assets, and goodwill; |
| an increase in the leasing of our products to customers; |
| our ability to expand our global distribution channel for our collaborative robots; |
| parallel or multi-site testing could lead to a decrease in the ultimate size of the market for our products; and |
| the ability of our suppliers and subcontractors to meet product quality or delivery requirements needed to satisfy customer orders for our products, especially if consolidated revenues increase. |
As a result of the foregoing and other factors, we have experienced and may continue to experience material fluctuations in future operating results on a quarterly or annual basis which could materially and adversely affect our business, financial condition, operating results or stock price.
We are subject to risks of operating internationally.
A significant portion of our total revenues is derived from customers outside the United States. Our international sales and operations are subject to significant risks and difficulties, including:
| unexpected changes in legal and regulatory requirements affecting international markets; |
| changes in tariffs and exchange rates; |
| social, political and economic instability, acts of terrorism and international conflicts; |
| difficulties in protecting intellectual property; |
| difficulties in accounts receivable collection; |
| cultural differences in the conduct of business; |
| difficulties in staffing and managing international operations; |
| compliance with customs regulations; and |
| compliance with international tax laws and regulations. |
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In addition, an increasing portion of our products and the products we purchase from our suppliers are sourced or manufactured in foreign locations, including China and Malaysia, and a large portion of the devices our products test are fabricated and tested by foundries and subcontractors in Taiwan, China, Singapore and other parts of Asia. As a result, we are subject to a number of economic and other risks, particularly during times of political or financial instability in these regions. Disruption of manufacturing or supply sources in these international locations could materially adversely impact our ability to fill customer orders and potentially result in lost business.
The implementation of tariffs and export controls on our products may have a material impact on our business.
Our business operations and supply chain are global and may be disrupted by the implementation of tariffs and export controls on our products.
On July 6, 2018 and August 23, 2018, the United States Trade Representative imposed a 25% tariff on two lists of products, including certain Teradyne products that are made in China and imported into the United States. We have submitted requests for exclusion of our products from the tariff, but there is no assurance that our requests will be approved. We have implemented operational changes that will mitigate the impact of the 25% tariff on the import of our impacted products into the United States. As a result, we do not expect that the tariff will have a material adverse effect on our business, financial condition or results of operations.
On September 24, 2018, the United States Trade Representative imposed a 10% tariff on many additional products made in China and imported into the United States. The tariff rate may increase to 25% in 2019. At this time, we do not expect that this tariff will significantly impact any Teradyne products and thus the tariff should not have a material adverse effect on our business, financial condition or results of operations.
On June 29, 2018, the United States Department of Commerce announced that it has commenced a review of new export controls focusing on emerging and foundational technologies. While there is uncertainty as to the technologies that will be covered, the new export controls could cover technologies used in one or more Teradyne products and, therefore, could impact the sale of certain Teradyne products and have a material adverse effect on our business, financial condition or results of operations.
The United States Department of Commerce from time to time has taken action to restrict the access of U.S.-origin technologies to Chinese companies by adding them to the Entity List under U.S. Export Administration Regulations. The addition to the Entity List of Chinese companies who are customers or potential customers could impact the sale and/or support of certain Teradyne products to those customers or potential customers and, therefore, have a material adverse effect on our business, financial condition or results of operations.
In addition to the actions taken by the United States, China has implemented retaliatory tariffs on products made in the United States and imported into China, including certain Teradyne products. We plan to assess and implement, if appropriate, operational changes that would mitigate the impact of the retaliatory tariffs. However, notwithstanding our efforts, the retaliatory tariffs or other trade restrictions implemented by China could disrupt our business operations, sales and supply chain and, therefore, have a material adverse effect on our business, financial condition or results of operations.
If we fail to develop new technologies to adapt to our customers needs and if our customers fail to accept our new products, our revenues will be adversely affected.
We believe that our technological position depends primarily on the technical competence and creative ability of our engineers. In a rapidly evolving market, such as ours, the development or acquisition of new technologies, commercialization of those technologies into products and market acceptance and customer
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demand for those products are critical to our success. Successful product development or acquisition, introduction and acceptance depend upon a number of factors, including:
| new product selection; |
| ability to meet customer requirements; |
| development of competitive products by competitors; |
| timely and efficient completion of product design; |
| timely and efficient implementation of manufacturing and manufacturing processes; |
| timely remediation of product performance issues, if any, identified during testing; |
| assembly processes and product performance at customer locations; |
| differentiation of our products from our competitors products; |
| management of customer expectations concerning product capabilities and product life cycles; |
| transition of customers to new product platforms; |
| ability to attract and retain technical talent; and |
| innovation that does not infringe on the intellectual property rights of third parties. |
We may be subject to product recalls and warranty and product liability claims.
We invest significant resources in the design, manufacture and testing of our products. However, we may discover design or manufacturing defects in our products after they have been shipped and, as a result, we may incur development and remediation costs and be required to settle warranty and product liability claims. In addition, if any of our products contain defects or have reliability, quality or safety issues, we may need to conduct a product recall which could result in significant repair or replacement costs and substantial delays in product shipments and may damage our reputation which could make it more difficult to sell our products. Any of these results could have a material adverse effect on our business, results of operations or financial condition.
If our suppliers do not meet product or delivery requirements, we could have reduced revenues and earnings.
Certain components, including semiconductor chips, may be in short supply from time to time because of high industry demand or the inability of some vendors to consistently meet our quality or delivery requirements. If any of our suppliers were to cancel contracts or commitments or fail to meet the quality or delivery requirements needed to satisfy customer orders for our products, we could lose time-sensitive customer orders, have significantly decreased revenues and earnings and be subject to contractual penalties, which would have a material adverse effect on our business, results of operations and financial condition. In addition, we rely on contract manufacturers for certain subsystems used in our products, and our ability to meet customer orders for those products depends upon the timeliness and quality of the work performed by these subcontractors, over whom we do not exercise any control.
To a certain extent, we are dependent upon the ability of our suppliers and contractors to help meet increased product or delivery requirements. It may be difficult for certain suppliers to meet delivery requirements in a period of rapid growth, therefore impacting our ability to meet our customers demands.
We rely on the financial strength of our suppliers. There can be no assurance that the loss of suppliers either as a result of financial viability, bankruptcy or otherwise will not have a material adverse effect on our business, results of operations or financial condition.
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Our operations may be adversely impacted if our outsourced contract manufacturers or service providers fail to perform.
We depend on Flex Ltd. (Flex) to manufacture and test our FLEX and J750 family of products from its facility in China and on other contract manufacturers to manufacture other products. If for any reason these contract manufacturers cannot provide us with these products in a timely fashion, or at all, we may not be able to sell these products to our customers until we enter a similar arrangement with an alternative contract manufacturer. If we experience a problem with our supply of products from Flex or our other contract manufacturers, it may take us significant time to either manufacture the product or find an alternate contract manufacturer, which could result in substantial expense and disruption to our business.
We have also outsourced certain general and administrative functions to reputable service providers, many of which are in foreign countries, sometimes impacting communication with them because of language and time differences. Their presence in foreign countries also increases the risk they could be exposed to political risk. Additionally, there may be difficulties encountered in coordinating the outsourced operations with existing functions and operations. If we fail in successfully coordinating and managing the outsourced service providers, it may cause an adverse effect on our operations which could have a material adverse effect on our business, results of operations or financial condition.
We may not fully realize the benefits of our acquisitions or strategic alliances.
In June 2015, we acquired Universal Robots, and, in 2018, we acquired Energid and MiR. We may not be able to realize the benefit of acquiring or successfully growing these businesses. We may continue to acquire additional businesses, form strategic alliances or create joint ventures with third parties that we believe will complement or augment our existing businesses. We may not be able to realize the expected synergies and cost savings from the integration with our existing operations of other businesses or technologies that we may acquire. In addition, the integration process for our acquisitions may be complex, costly and time consuming and include unanticipated issues, expenses and liabilities. We may have difficulty in developing, manufacturing and marketing the products of a newly acquired company in a manner that enhances the performance of our combined businesses or product lines and allows us to realize value from expected synergies. Following an acquisition, we may not achieve the revenue or net income levels that justify the acquisition. Acquisitions may also result in one-time charges (such as acquisition-related expenses, write-offs or restructuring charges) or in the future, impairment of goodwill or acquired intangible assets that adversely affect our operating results. Additionally, we may fund acquisitions of new businesses, strategic alliances or joint ventures by utilizing our cash, incurring debt, issuing shares of our common stock, or by other means.
We may incur significant liabilities if we fail to comply with environmental regulations.
We are subject to both domestic and international environmental regulations and statutory strict liability relating to the use, storage, discharge, site cleanup and disposal of hazardous chemicals used in our manufacturing processes. If we fail to comply with present and future regulations, or are required to perform site remediation, we could be subject to future liabilities or cost, including penalties or the suspension of production. Present and future regulations may also:
| restrict our ability to expand facilities; |
| restrict our ability to ship certain products; |
| require us to modify our operations logistics; |
| require us to acquire costly equipment; or |
| require us to incur other significant costs and expenses. |
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Pursuant to present regulations and agreements, we are conducting groundwater and subsurface assessment and monitoring and are implementing remediation and corrective action plans for facilities located in Massachusetts and New Hampshire which are no longer conducting manufacturing operations. As of December 31, 2018, we have not incurred material costs as a result of the monitoring and remediation steps taken at the Massachusetts and New Hampshire sites.
On January 27, 2003, the European Union adopted the following directives: (i) the directive on the Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment (the RoHS Directive); and (ii) the directive on Waste Electrical and Electronic Equipment (the WEEE Directive). The WEEE Directive became effective August 13, 2005 and the RoHS Directive became effective on July 6, 2006. Both the RoHS Directive and the WEEE Directive alter the form and manner in which electronic equipment is imported, sold and handled in the European Union. Other jurisdictions, such as China, have followed the European Unions lead in enacting legislation with respect to hazardous substances and waste removal. Ensuring compliance with the RoHS Directive, the WEEE Directive and similar legislation in other jurisdictions, and integrating compliance activities with our suppliers and customers could result in additional costs and disruption to operations and logistics and thus, could have a negative impact on our business, operations or financial condition.
We currently are, and in the future may be, subject to litigation or regulatory proceedings that could have an adverse effect on our business.
From time to time, we may be subject to litigation or other administrative, regulatory or governmental proceedings, including tax audits and resulting claims that could require significant management time and resources and cause us to incur expenses and, in the event of an adverse decision, pay damages or incur costs in an amount that could have a material adverse effect on our financial position or results of operations.
Third parties may claim we are infringing their intellectual property and we could suffer significant litigation costs, licensing expenses or be prevented from selling our products.
We have been sued for patent infringement in the past and receive notifications from time to time that we may be in violation of patents held by others. An assertion of patent infringement against us, if successful, could have a material adverse effect on our ability to sell our products or it could force us to seek a license to the intellectual property rights of others or alter such products so that they no longer infringe the intellectual property rights of others. A license could be very expensive to obtain or may not be available at all. Similarly, changing our products or processes to avoid infringing the rights of others may be costly or impractical. Additionally, patent litigation could require a significant use of management resources and involve a lengthy and expensive defense, even if we eventually prevail. If we do not prevail, we might be forced to pay significant damages, obtain licenses, modify our products, or stop making our products; each of which could have a material adverse effect on our financial condition, operating results or cash flows.
If we are unable to protect our intellectual property (IP), we may lose a valuable asset or may incur costly litigation to protect our rights.
We protect the technology that is incorporated in our products in several ways, including through patent, copyright, trademark and trade secret protection and by contractual agreement. However, even with these protections, our IP may still be challenged, invalidated or subject to other infringement actions. While we believe that our IP has value in the aggregate, no single element of our IP is in itself essential. If a significant portion of our IP is invalidated or ineffective, our business could be materially adversely affected.
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We may incur higher tax rates than we expect and may have exposure to additional international tax liabilities and costs.
We are subject to paying income taxes in the United States and various other countries where we operate. Our effective tax rate is dependent on where our earnings are generated and the tax regulations and the interpretation and judgment of administrative tax or revenue entities in the United States and other countries. We have pursued a global tax strategy which could be adversely affected by the mix of earnings and tax rates in the countries where we operate, changes to tax laws, tax regulations or an adverse tax ruling by administrative entities. We are also subject to tax audits in the countries where we operate. Any material change in our tax liability resulting from changes in tax laws, tax regulations, administrative ruling or from an audit from an administrative tax or revenue entity could negatively affect our financial results.
As a multinational corporation, we are subject to income taxes as well as non-income based taxes, in both the United States and various foreign jurisdictions. In certain foreign jurisdictions, we qualify for tax incentives and tax holidays based on our ability to meet, on a continuing basis, various tests relating to our employment levels, research and development expenditures and other qualification requirements in a particular foreign jurisdiction. While we intend to operate in such a manner to maintain and maximize our tax incentives, no assurance can be given that we have so qualified or that we will so qualify for any particular year or jurisdiction. If we fail to qualify and to remain qualified for certain foreign tax incentives and tax holidays, we may be subject to further taxation or an increase in our effective tax rate which would adversely impact our financial results. In December 2015, we entered into an agreement with the Singapore Economic Development Board which extended our Singapore tax holiday under substantially similar terms to the agreement which expired on December 31, 2015. The new tax holiday is scheduled to expire on December 31, 2020. The tax savings attributable to the Singapore tax holiday for the years ended December 31, 2018, 2017 and 2016 were $11.9 million or $0.06 per diluted share, $24.8 million or $0.12 per diluted share and $17.0 million or $0.08 per diluted share, respectively. These tax savings may not be achievable in subsequent years due to changes in Singapores tax laws or the expiration of the tax holiday.
In addition, we may incur additional costs, including headcount expenses, in order to maintain or obtain a foreign tax incentive in a particular foreign jurisdiction.
We have significant guarantees, indemnification and customer confidentiality obligations.
From time to time, we make guarantees to customers regarding the delivery, price and performance of our products and guarantee certain indebtedness, performance obligations or lease commitments of our subsidiary and affiliate companies. We also have agreed to provide indemnification to our officers, directors, employees and agents, to the extent permitted by law, arising from certain events or occurrences while the officer, director, employee or agent, is or was serving at our request in such capacity. Additionally, we have confidentiality obligations to certain customers and if breached would require the payment of significant penalties. If we become liable under any of these obligations, it could materially and adversely affect our business, financial condition or operating results. For additional information see Note K: Commitments and ContingenciesGuarantees and Indemnification Obligations in Notes to Consolidated Financial Statements.
We may discontinue or reduce our quarterly cash dividend or share repurchase program.
In January 2014, our Board of Directors initiated a quarterly cash dividend of $0.06 per share. In January 2017, our Board of Directors increased our quarterly cash dividend to $0.07 per share and in January 2018, our Board of Directors increased our quarterly cash dividend to $0.09 per share. In January 2018, our Board of Directors approved a new $1.5 billion share repurchase authorization. In 2018 and 2017, we repurchased $823 million and $200 million of common stock, respectively. We intend to repurchase $500 million in 2019. Holders of our common stock are only entitled to receive dividends when and if they are declared by our Board of Directors. Future cash dividends and share repurchases are subject to the discretion of our Board of Directors
17
and will depend, among other things, upon our earnings, capital requirements and financial condition. While we have declared a quarterly cash dividend on our common stock and authorized a share repurchase program, we are not required to do either and may reduce or eliminate our cash dividend or share repurchase program in the future. The reduction or elimination of our cash dividend or our share repurchase program could adversely affect the market price of our common stock.
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 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 April 27, 2015, we entered into a five-year, senior secured revolving credit facility of up to $350.0 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.
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. |
Our convertible note hedge and warrant transactions could impact the value of our stock.
Concurrent with the offering of the Notes, we 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 our common stock that underlie the Notes, with a strike price equal to the conversion price of the Notes of $31.70. The Note Hedge Transactions cover, subject to customary anti-dilution adjustments, approximately 14.5 million shares of our common stock.
Separately and concurrent with the pricing of the Notes, we entered into warrant transactions with the Option Counterparties (the Warrant Transactions) in which we sold net-share-settled (or, at our election subject to certain conditions, cash-settled) warrants to the Option Counterparties. The Warrant Transactions cover, subject to customary anti-dilution adjustments, approximately 14.5 million shares of our common stock. The strike price of the warrants is $39.78 per share. The Warrant Transactions could have a dilutive effect to our common stock to the extent that the market price per share of our common stock, as measured under the terms of the Warrant Transactions, exceeds the applicable strike price of the warrants.
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The Note Hedge Transactions are expected to reduce the potential dilution to our 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 our common stock exceeds the applicable strike price of the warrants. 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 our common stock and/or purchase shares of our 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 our common stock or by selling our 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 impact the value of our common stock and the Notes.
We may not be able to pay our debt and other obligations.
If our cash flow is inadequate to meet our obligations, we could face substantial liquidity problems. If we are unable to generate sufficient cash flow or otherwise obtain funds necessary to make required payments on the Notes or certain of our other obligations, we would be in default under the terms thereof, which would permit the holders of those obligations to accelerate their maturity and also could cause defaults under future indebtedness we may incur. Any such default could have a material adverse effect on our business, prospects, financial position and operating results. In addition, we cannot be certain that we would be able to repay amounts due on the Notes if those obligations were to be accelerated following the occurrence of any other event of default as defined in the instruments creating those obligations, or if the holders of the Notes require us to repurchase the Notes upon the occurrence of a fundamental change involving us. Moreover, we cannot be certain that we will have sufficient funds or will be able to arrange for financing to pay the principal amount due on the Notes at maturity.
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.
Our business may suffer if we are unable to attract and retain key employees.
Competition for employees with skills we require is intense in the high technology industry. Our success will depend on our ability to attract and retain key technical employees. The loss of one or more key or other employees, a decrease in our ability to attract additional qualified employees, or the delay in hiring key personnel could each have a material adverse effect on our business, results of operations or financial condition.
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Our operations, and the operations of our customers and suppliers, are subject to risks of natural catastrophic events, widespread health epidemics, acts of war, terrorist attacks and the threat of domestic and international terrorist attacks, any one of which could result in cancellation of orders, delays in deliveries or other business activities, or loss of customers and could negatively affect our business and results of operations.
Our business is international in nature, with our sales, service and administrative personnel and our customers and suppliers located in numerous countries throughout the world. Our operations, and those of our customers and suppliers, are subject to disruption for a variety of reasons, including work stoppages, acts of war, terrorism, health epidemics, fires, earthquakes, hurricanes, volcanic eruptions, energy shortages, telecommunication failures, tsunamis, flooding or other natural disasters. Such disruption could materially increase our costs and expenses as well as cause delays in, among other things, shipments of products to our customers, our ability to perform services requested by our customers, or the installation and acceptance of our products at customer sites. Any of these conditions could have a material adverse effect on our business, financial condition or results of operations.
A breach of our operational or security systems could negatively affect our business and results of operations.
We rely on various information technology networks and systems, some of which are managed by third parties, to process, transmit and store electronic information, including confidential data, and to carry out and support a variety of business activities, including manufacturing, research and development, supply chain management, sales and accounting. A failure in or a breach of our operational or security systems or infrastructure, or those of our suppliers and other service providers, including as a result of cyber attacks, could disrupt our business, result in the disclosure or misuse of proprietary or confidential information, damage our reputation, cause losses and increase our costs.
We may face risks associated with shareholder activism.
Publicly traded companies have increasingly become subject to campaigns by shareholders advocating corporate actions such as financial restructuring, increased borrowing, special dividends, stock repurchases or divestitures. We may become subject in the future to such shareholder activity and demands. Such activities could interfere with our ability to execute our business plans, be costly and time-consuming, disrupt our operations, divert the attention of management or result in our initiating borrowing or increasing our share repurchase plan or dividend, any of which could have an adverse effect on our business or stock price.
Provisions of our charter and by-laws and Massachusetts law may make a takeover of Teradyne more difficult.
There are provisions in our basic corporate documents and under Massachusetts law that could discourage, delay or prevent a change in control, even if a change in control may be regarded as beneficial to some or all of our stockholders.
Item 1B: | Unresolved Staff Comments |
None.
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Item 2: | Properties |
The following table provides information as to our principal facilities:
Location |
Operating Segment |
Major Activity (1) |
Approximate Square Feet of Floor Space |
|||||||
Properties owned: |
||||||||||
North Reading, Massachusetts |
Semiconductor Test & System Test | 1-2-3-4-5 | 422,000 | |||||||
Agoura Hills, California |
Semiconductor Test | 3-4 | 120,000 | |||||||
Kumamoto, Japan |
Semiconductor Test | 2-3-4-5 | 60,300 | |||||||
|
|
|||||||||
602,300 | ||||||||||
Properties leased: |
||||||||||
Odense, Denmark |
Industrial Automation | 2-3-4-5 | 247,000 | |||||||
Cebu, Philippines |
Semiconductor Test | 1-2-5 | 209,000 | |||||||
San Jose, California |
Semiconductor Test & Wireless Test | 2-3-4-5 | 185,700 | |||||||
Shanghai, China |
Semiconductor Test, System Test, Wireless Test & Industrial Automation |
3-4-5 | 103,000 | |||||||
Buffalo Grove, Illinois |
Semiconductor Test | 2-3-4-5 | 95,000 | |||||||
Sunnyvale, California |
Wireless Test & Semiconductor Test | 2-3-4-5 | 71,300 | |||||||
Heredia, Costa Rica |
Semiconductor Test | 1-5 | 63,000 | |||||||
Hsinchu, Taiwan |
Semiconductor Test & System Test | 4 | 43,000 | |||||||
Seoul, Korea |
Semiconductor Test & Industrial Automation | 4 | 34,000 | |||||||
Singapore, Singapore |
Semiconductor Test & Industrial Automation | 1-3-4 | 32,700 | |||||||
|
|
|||||||||
1,083,700 |
(1) | Major activities have been separated into the following categories: 1. Corporate Administration, 2. Manufacturing, 3. Engineering, 4. Sales and Marketing, 5. Storage and Distribution. |
Item 3: | Legal Proceedings |
We are subject to legal proceedings, claims and investigations that arise 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 results of operations, financial condition or cash flows.
Item 4: | Mine Safety Disclosure |
Not Applicable.
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Item 5: | Market for Registrants Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities |
Our common stock is traded on the Nasdaq Global Select Market under the trading symbol TER. Before November 27, 2018, our common stock traded on the New York Stock Exchange.
See Item 7: Managements Discussion and Analysis of Financial Condition and Results of Operations, for information on the frequency and amounts of our quarterly cash dividends, equity compensation plans and performance graph.
The following table includes information with respect to repurchases we made of our common stock during the three months ended December 31, 2018 (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 |
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October 1, 2018 October 28, 2018 |
3,115 | $ | 33.87 | 3,113 | $ | 832,309 | ||||||||||
October 29, 2018 November 25, 2018 |
2,386 | $ | 34.54 | 2,383 | $ | 750,000 | ||||||||||
November 26, 2018 December 31, 2018 |
2,300 | $ | 31.95 | 2,300 | $ | 676,522 | ||||||||||
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7,801 | (1) | $ | 33.51 | (1) | 7,796 | |||||||||||
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(1) | Includes approximately five thousand shares at an average price of $36.24 withheld from employees for the payment of taxes. |
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 6: | Selected Financial Data |
Years Ended December 31, | ||||||||||||||||||||
2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||||||||
(dollars in thousands, except per share amounts) | ||||||||||||||||||||
Consolidated Statement of Operations Data (1)(2)(3)(4)(5): |
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Revenues |
$ | 2,100,802 | $ | 2,136,606 | $ | 1,753,250 | $ | 1,639,578 | $ | 1,647,824 | ||||||||||
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Net income (loss) |
$ | 451,779 | $ | 257,692 | $ | (43,421 | ) | $ | 206,477 | $ | 81,272 | |||||||||
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Net income (loss) per common share-basic |
$ | 2.41 | $ | 1.30 | $ | (0.21 | ) | $ | 0.98 | $ | 0.40 | |||||||||
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Net income (loss) per common share-diluted |
$ | 2.35 | $ | 1.28 | $ | (0.21 | ) | $ | 0.97 | $ | 0.37 | |||||||||
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Cash dividend declared per common share |
$ | 0.36 | $ | 0.28 | $ | 0.24 | $ | 0.24 | $ | 0.18 | ||||||||||
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Consolidated Balance Sheet Data: |
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Total assets |
$ | 2,706,606 | $ | 3,109,545 | $ | 2,762,493 | $ | 2,548,674 | $ | 2,538,520 | ||||||||||
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Long-term debt obligations |
$ | 379,981 | $ | 365,987 | $ | 352,669 | $ | | $ | | ||||||||||
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(1) | The year ended December 31, 2018 includes $49.5 million of tax benefit related to the finalization of the U.S. transition tax liability, $3.3 million of pension actuarial gains, and the results of operations of Mobile Industrial Robots and Energid from April 25, 2018 and February 26, 2018, respectively. |
22
(2) | The year ended December 31, 2017 includes $186.0 million of provisional tax expense related to the Tax Reform Act and $6.6 million of pension actuarial gains. |
(3) | The year ended December 31, 2016 includes a $254.9 million goodwill impairment charge and an $83.3 million acquired intangible assets impairment charge related to the Wireless Test segment, and $3.2 million of pension actuarial gains. |
(4) | The year ended December 31, 2015 includes $17.7 million of pension actuarial losses, a $5.4 million gain from the sale of an equity investment and the results of operations of Universal Robots from June 12, 2015. |
(5) | The year ended December 31, 2014 includes a $98.9 million goodwill impairment charge related to the Wireless Test segment and $46.6 million of pension actuarial losses. |
Item 7: | Managements Discussion and Analysis of Financial Condition and Results of Operations |
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 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. |
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 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. One customer drives 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.
The sales of our products and services are dependent, to a large degree, on customers who are subject to cyclical trends in the demand for their products. These cyclical periods have had, and will continue to have, a significant effect on our business because our customers often delay or accelerate purchases in reaction to changes in their businesses and to demand fluctuations in the semiconductor and electronics industries. Historically, these demand fluctuations have resulted in significant variations in our results of operations. During the first quarter of 2018, demand outlook for mobile device test capacity in 2018 declined sharply for our Semiconductor Test business. Demand in other segments of the Semiconductor Test business, including memory test, increased in 2018.
23
In 2015, we acquired Universal Robots A/S (Universal Robots), the leading supplier of collaborative robots which are low-cost, easy-to-deploy and simple-to-program robots that work side by side with production workers to improve quality, increase manufacturing efficiency and decrease manufacturing costs. The acquisition of Universal Robots provides a growth engine to our business. The total purchase price for Universal Robots was approximately $315 million, which included cash paid of approximately $284 million and $32 million in fair value of contingent consideration payable upon achievement of revenue and earnings targets through 2018. Contingent consideration for 2015 was $15 million and was paid in February 2016. Contingent consideration for the period from July 2015 to December 2017 was $24.6 million and was paid March 2018. Contingent consideration for the period from July 2015 to December 2018 was $3.9 million and it is expected to be paid in March 2019.
On February 26, 2018, we acquired Energid Technologies Corporation (Energid) for a total purchase price of approximately $27.6 million. Energids technology enables and simplifies the programming of complex robotic motions used in a wide variety of end markets, ranging from heavy industry to healthcare, utilizing both traditional robots and collaborative robots.
On April 25, 2018, we acquired Mobile Industrial Robots ApS (MiR), a Danish limited liability company. MiR is the leading maker of collaborative autonomous mobile robots for industrial applications. The total purchase price was approximately $198 million, which included cash paid of approximately $145 million and $53 million in fair value of contingent consideration payable upon achievement of certain thresholds and targets for revenue and earnings before interest and taxes through 2020. At December 31, 2018, the maximum amount of contingent consideration that could be paid is $115 million. Contingent consideration for 2018 was $31.0 million and is expected to be paid in March 2019.
Universal Robots, MiR and Energid are 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.
Critical Accounting Policies and Estimates
We have identified the policies discussed below as critical to understanding our business and our results of operations and financial condition. The impact and any associated risks related to these policies on our business operations is discussed throughout Managements Discussion and Analysis of Financial Condition and Results of Operations where such policies affect our reported and expected financial results.
Revenue from Contracts with Customers
We adopted Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers 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, which is also referred to herein as Legacy GAAP or the previous guidance. We 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. The adoption of ASC 606 represents a change in accounting principle that will more closely align revenue recognition with the delivery of Teradynes 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. Teradynes primary source of revenue will continue to be from the sale of systems, instruments, robots, and the delivery of services.
24
In accordance with ASC 606, we recognize revenues, when or as control is transferred to a customer. Our determination of revenue is dependent upon a five step process outlined below.
Step 1: Identify the contract with the customer
We account 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
We periodically enter into contracts with customers in which a customer may purchase a combination of goods and services, such as products with extended warranty obligations. We determine 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
We consider the amount stated on the face of the purchase order to be the transaction price. We do not have variable consideration which could impact the stated purchase price agreed to by us 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. We use standalone transactions when available to value each performance obligation. If standalone transactions are not available, we 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, we first determine if the transaction meets any of three criteria for over time recognition. If the transaction meets the criteria for over time recognition, we recognize revenue as the good or service is delivered. We use 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, we will recognize revenue at a point in time based on an assessment of the five criteria for transfer of control. We have concluded that revenue should be recognized when shipped or delivered based on contractual terms. Typically acceptance of our products and services is a formality as we deliver similar systems, instruments and robots to standard specifications. In cases where acceptance is not deemed a formality, we will defer revenue recognition until customer acceptance.
Translation of Non-U.S. Currencies
The functional currency for all non-U.S. subsidiaries is the U.S. dollar, except for the Industrial Automation segment for which the local currency is its functional currency. All foreign currency denominated monetary assets and liabilities are remeasured on a monthly basis into the functional currency using exchange rates in effect at the end of the period. All foreign currency denominated non-monetary assets and liabilities are remeasured into the functional currency using historical exchange rates. Net foreign exchange gains and losses resulting from remeasurement are included in other (income) expense, net. For Industrial Automation, assets and liabilities are translated into U.S. dollars using exchange rates in effect at the end of the period. Revenues and expense amounts are translated using an average of exchange rates in effect during the period. Translation adjustments are recorded within accumulated other comprehensive income (loss).
25
Retirement and Postretirement Plans
We recognize net actuarial gains and losses and the change in the fair value of the plan assets in our operating results in the year in which they occur or upon any interim remeasurement of the plans. We calculate the expected return on plan assets using the fair value of the plan assets. Actuarial gains and losses are generally measured annually as of December 31 and, accordingly, recorded during the fourth quarter of each year or upon any interim remeasurement of the plans.
In March 2017, the Financial Accounting Standards Board (FASB) issued ASU 2017-07, CompensationRetirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. We 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, we continue 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. In 2017 and 2016, the retrospective adoption of this standard decreased income from operations by $5.0 million and $3.0 million, respectively, due to the reclass of net actuarial pension gains and increased non-operating (income) expense by the same amount with no impact to net income (loss).
Inventories
Inventories are stated at the lower of cost (first-in, first-out basis) or net realizable value. On a quarterly basis, we use consistent methodologies to evaluate all inventories for net realizable value. We record a provision for both excess and obsolete inventory when such write-downs or write-offs are identified through the quarterly review process. The inventory valuation is based upon assumptions about future demand, product mix, and possible alternative uses.
Equity Incentive and Stock Purchase Plans
Stock-based compensation expense is based on the grant-date fair value estimated in accordance with the provisions of ASC 718, CompensationStock Compensation. Upon adoption of ASU 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, in the first quarter of 2017, we made an accounting policy election to continue accounting for forfeitures by applying an estimated forfeiture rate and recognizing compensation costs only for those stock-based compensation awards expected to vest. In accordance with ASU 2016-09, starting in the first quarter of 2017, excess tax benefits or tax deficiencies are recognized as a discrete tax benefit or discrete tax expense to the current income tax provision in our consolidated statements of operations and are reported as cash flows from operating activities. On January 1, 2017, a cumulative effect adjustment of $39.1 million for any prior year excess tax benefits or tax deficiencies not previously recorded was recorded as an increase to retained earnings and deferred tax assets. All cash payments made to taxing authorities on the employees behalf for withheld shares are presented as financing activities on the statement of cash flows. In 2018 and 2017, we recognized a discrete tax benefit of $7.6 million and $6.3 million, respectively, related to net excess tax benefit.
Income Taxes
Deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The measurement of deferred tax assets is reduced by a valuation allowance
26
if it is more likely than not that some or all of the deferred tax assets will not be realized. We performed the required assessment of positive and negative evidence regarding the realization of the net deferred tax assets in accordance with ASC 740, Accounting for Income Taxes. This assessment included the evaluation of scheduled reversals of deferred tax liabilities, estimates of projected future taxable income and tax-planning strategies. Although realization is not assured, based on our assessment, we concluded that it is more likely than not that such assets, net of the existing valuation allowance, will be realized.
Investments
We account for our investments in debt and equity securities in accordance with the provisions of ASC 320-10, InvestmentsDebt and Equity Securities. On a quarterly basis, we review our investments to identify and evaluate those that have an indication of a potential other-than-temporary impairment. Factors considered in determining whether a loss is other-than-temporary include:
| The length of time and the extent to which the market value has been less than cost; |
| The financial condition and near-term prospects of the issuer; and |
| The intent and ability to retain the investment in the issuer for a period of time sufficient to allow for any anticipated recovery in market value. |
Financial Assets and Financial Liabilities
In January 2016, the FASB issued ASU 2016-01, Financial InstrumentsOverall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. We 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 marketable securities be accounted for directly in earnings. Previously, the changes in fair value of equity marketable securities were recorded in accumulated other comprehensive income on the balance sheet. We continue 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.
Goodwill, Intangible and Long-Lived Assets
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. If the book value of a reporting unit exceeds its fair value, the implied fair value of goodwill is compared with the carrying amount of goodwill. If the carrying amount of goodwill exceeds the implied fair value, an impairment charge is recorded in an amount equal to that excess.
In the second quarter of 2016, the Wireless Test reporting unit (which is our Wireless Test operating and reportable segment) reduced headcount by 11% as a result of a sharp decline in projected demand attributable to an estimated smaller future wireless test market. The decrease in projected demand was due to lower forecasted buying from our largest Wireless Test segment customer (who had previously contributed between 51% and 73% of annual Wireless Test sales since the LitePoint acquisition in 2011) as a result of the customers numerous operational efficiencies; slower smartphone growth rates; and a slowdown of new wireless technology adoption. We considered the headcount reduction and sharp decline in projected demand to be a triggering event for an interim goodwill impairment test. Following the interim goodwill impairment test, we recorded a goodwill impairment charge of $254.9 million, with approximately $8.0 million of goodwill remaining.
No goodwill impairment was identified in the fourth quarter of 2018, 2017, and 2016, as part of the annual goodwill impairment test.
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We assess the impairment of intangible and long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important in the determination of an impairment include significant underperformance relative to historical or projected future operating results, significant changes in the manner that we use the acquired asset and significant negative industry or economic trends.
As a result of the interim goodwill impairment test in the second quarter of 2016 described above, we performed an impairment test of the Wireless Test segments intangible and long-lived assets based on the comparison of the estimated undiscounted cash flows to the recorded value of the assets and recorded an $83.3 million acquired intangible assets impairment charge, with approximately $2.2 million of intangible assets remaining at December 31, 2018. There were no events or circumstances indicating that the carrying value of acquired intangible and long-lived assets may not be recoverable in 2018 and 2017; as such no impairment test was performed. When we determine that the carrying value of intangible and long-lived assets may not be recoverable based upon the existence of one or more of the above indicators of impairment, we measure any impairment based on a projected discounted cash flow method using a discount rate commensurate with the associated risks.
Results of Operations
The following table sets forth the percentage of total net revenues included in our consolidated statements of operations:
Years Ended December 31, | ||||||||||||
2018 | 2017 | 2016 | ||||||||||
Percentage of revenues: |
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Revenues: |
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Products |
82.3 | % | 83.5 | % | 82.9 | % | ||||||
Services |
17.7 | 16.5 | 17.1 | |||||||||
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Total revenues |
100.0 | 100.0 | 100.0 | |||||||||
Cost of revenues: |
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Cost of products |
34.6 | 35.6 | 37.6 | |||||||||
Cost of services |
7.3 | 7.2 | 7.7 | |||||||||
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Total cost of revenues (exclusive of acquired intangible assets amortization shown separately below) |
41.9 | 42.8 | 45.3 | |||||||||
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Gross profit |
58.1 | 57.2 | 54.7 | |||||||||
Operating expenses: |
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Selling and administrative |
18.6 | 16.3 | 18.1 | |||||||||
Engineering and development |
14.4 | 14.4 | 16.7 | |||||||||
Acquired intangible assets amortization |
1.9 | 1.4 | 3.0 | |||||||||
Restructuring and other |
0.7 | 0.4 | 1.3 | |||||||||
Goodwill impairment |
| | 14.5 | |||||||||
Acquired intangible assets impairment |
| | 4.8 | |||||||||
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Total operating expenses |
35.5 | 32.6 | 58.3 | |||||||||
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Income (loss) from operations |
22.6 | 24.6 | (3.6 | ) | ||||||||
Non-operating (income) expenses: |
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Interest income |
(1.3 | ) | (0.8 | ) | (0.5 | ) | ||||||
Interest expense |
1.5 | 1.0 | 0.2 | |||||||||
Other (income) expense, net |
0.1 | (0.1 | ) | (0.1 | ) | |||||||
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Income (loss) before income taxes |
22.3 | 24.5 | (3.1 | ) | ||||||||
Income tax provision (benefit) |
0.8 | 12.5 | (0.7 | ) | ||||||||
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Net income (loss) |
21.5 | % | 12.1 | % | (2.5 | )% | ||||||
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Revenues
Revenues for our reportable segments were as follows:
2018 | 2017 | 2016 | 2017-2018 Dollar Change |
2016-2017 Dollar Change |
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(in millions) | ||||||||||||||||||||
Semiconductor Test |
$ | 1,492.4 | $ | 1,662.5 | $ | 1,368.2 | $ | (170.1 | ) | $ | 294.3 | |||||||||
Industrial Automation |
261.5 | 170.1 | 99.0 | 91.4 | 71.1 | |||||||||||||||
System Test |
216.1 | 192.1 | 189.8 | 24.0 | 2.3 | |||||||||||||||
Wireless Test |
132.0 | 111.9 | 96.2 | 20.1 | 15.7 | |||||||||||||||
Corporate and Other |
(1.2 | ) | | | (1.2 | ) | | |||||||||||||
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$ | 2,100.8 | $ | 2,136.6 | $ | 1,753.3 | $ | (35.8 | ) | $ | 383.3 | ||||||||||
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The decrease in Semiconductor Test revenues of $170.1 million, or 10%, from 2017 to 2018 was driven primarily by a decrease in sales in the mobility and microcontroller test segments, partially offset by increased sales in memory and analog test segments and an increase in service revenues. The increase in Semiconductor Test revenues of $294.3 million, or 22%, from 2016 to 2017 was driven primarily by increased sales in the microcontroller, power management, flash memory, and automotive safety test segments and an increase in service revenues.
The increase in Industrial Automation revenues of $91.4 million, or 54%, from 2017 to 2018 was due to higher demand for collaborative robotic arms and the acquisition of MiR, completed in April 2018. MiR added revenues of $24.1 million in 2018. The increase in Industrial Automation revenues of $71.1 million, or 72%, from 2016 to 2017 was due to higher demand for collaborative robotic arms.
The increase in System Test revenues of $24.0 million, or 12%, from 2017 to 2018 was primarily due to higher system sales in Production Board Test and higher sales of 3.5 hard disk drive and system level testers in Storage Test. The increase in System Test revenues of $2.3 million, or 1%, from 2016 to 2017 was primarily due to higher service revenue in Defense/Aerospace test instrumentation and systems.
The increase in Wireless Test revenues of $20.1 million, or 18%, from 2017 to 2018 was primarily due to higher demand for next generation wireless products. The increase in Wireless Test revenues of $15.7 million, or 16%, from 2016 to 2017 was primarily due to higher demand for connectivity test systems and higher service revenue.
Our reportable segments accounted for the following percentages of consolidated revenues:
2018 | 2017 | 2016 | ||||||||||
Semiconductor Test |
71 | % | 78 | % | 78 | % | ||||||
Industrial Automation |
12 | 8 | 6 | |||||||||
System Test |
10 | 9 | 11 | |||||||||
Wireless Test |
6 | 5 | 5 | |||||||||
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100 | % | 100 | % | 100 | % | |||||||
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Revenues by country as a percentage of total revenues were as follows (1):
2018 | 2017 | 2016 | ||||||||||
Taiwan |
25 | % | 32 | % | 37 | % | ||||||
China |
17 | 12 | 10 | |||||||||
United States |
13 | 12 | 13 | |||||||||
Europe |
11 | 8 | 7 | |||||||||
Korea |
8 | 10 | 8 | |||||||||
Japan |
8 | 8 | 8 | |||||||||
Malaysia |
6 | 6 | 6 | |||||||||
Singapore |
5 | 5 | 4 | |||||||||
Philippines |
4 | 5 | 3 | |||||||||
Thailand |
3 | 1 | 3 | |||||||||
Rest of the World |
| 1 | 1 | |||||||||
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100 | % | 100 | % | 100 | % | |||||||
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(1) | Revenues attributable to a country are based on the location of the customer site. |
The breakout of product and service revenues was as follows:
2018 | 2017 | 2016 | 2017-2018 Dollar Change |
2016-2017 Dollar Change |
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(in millions) | ||||||||||||||||||||
Product revenues |
$ | 1,729.6 | $ | 1,784.7 | $ | 1,453.2 | $ | (55.1 | ) | $ | 331.5 | |||||||||
Service revenues |
371.2 | 351.9 | 300.0 | 19.3 | 51.9 | |||||||||||||||
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$ | 2,100.8 | $ | 2,136.6 | $ | 1,753.3 | $ | (35.8 | ) | $ | 383.3 | ||||||||||
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Our product revenues decreased $55.1 million, or 3%, in 2018 from 2017 primarily due to lower sales in Semiconductor Test mobility test segment, partially offset by higher sales in Industrial Automation, System Test and Wireless Test. Service revenues increased $19.3 million, or 5%.
Our product revenues increased $331.5 million, or 23%, in 2017 from 2016 primarily due to higher sales across all Semiconductor Test products and higher sales in Industrial Automation. Service revenues, which are derived from the servicing of our installed base of products and include equipment maintenance contracts, repairs, extended warranties, parts sales, and applications support increased $51.9 million, or 17%.
In 2018, no single customer accounted for more than 10% of our consolidated revenues. In 2017 and 2016, revenues from one customer accounted for 13% and 12%, respectively, of our consolidated revenues. In 2016, a different customer accounted for 12% of our consolidated revenues. In each of the years, 2018, 2017, and 2016, our five largest customers in aggregate accounted for 27%, 32%, and 36%, respectively, of our consolidated revenues. We estimate consolidated revenues driven by a single OEM customer, combining direct sales to that customer with sales to the customers OSATs, accounted for approximately 13%, 22%, and 26% of our consolidated revenues in 2018, 2017, and 2016, respectively.
Gross Profit
2018 | 2017 | 2016 | 2017-2018 Dollar / Point Change |
2016-2017 Dollar / Point Change |
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(dollars in millions) | ||||||||||||||||||||
Gross profit |
$ | 1,220.4 | $ | 1,221.5 | $ | 958.6 | $ | (1.1 | ) | $ | 262.9 | |||||||||
Percent of total revenues |
58.1 | % | 57.2 | % | 54.7 | % | 0.9 | 2.5 |
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Gross profit as a percent of total revenues increased from 2017 to 2018 by 0.9 points, primarily due to favorable product mix in System Test, Semiconductor Test, and lower product costs in Industrial Automation.
Gross profit as a percent of total revenues increased from 2016 to 2017 by 2.5 points, as a result of a 1.5 point increase related to favorable product mix in Semiconductor Test and a 1.0 point increase due to higher sales primarily in Semiconductor Test and Industrial Automation.
The breakout of product and service gross profit was as follows:
2018 | 2017 | 2016 | 2017-2018 Dollar / Point Change |
2016-2017 Dollar / Point Change |
||||||||||||||||
(dollars in millions) | ||||||||||||||||||||
Product gross profit |
$ | 1,002.5 | $ | 1,023.7 | $ | 793.2 | $ | (21.2 | ) | $ | 230.5 | |||||||||
Percent of product revenues |
58.0 | % | 57.4 | % | 54.6 | % | 0.6 | 2.8 | ||||||||||||
Service gross profit |
$ | 217.9 | $ | 197.7 | $ | 165.4 | $ | 20.2 | $ | 32.3 | ||||||||||
Percent of service revenues |
58.7 | % | 56.2 | % | 55.1 | % | 2.5 | 1.1 |
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 revenues information is obtained from the sales and marketing groups and incorporates factors such as backlog and future consolidated revenues. 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, Industrial Automation and System Test segments and next four quarters for our Wireless Test segment, is written-down to estimated net realizable value.
During the year ended December 31, 2018, we recorded an inventory provision of $11.2 million included in cost of revenues, primarily due to downward revisions to previously forecasted demand levels for certain products. Of the $11.2 million of total excess and obsolete provisions, $6.8 million was related to Semiconductor Test, $2.5 million was related to Wireless Test, $1.2 million was related to System Test, and $0.7 million was related to Industrial Automation.
During the year ended December 31, 2017, we recorded an inventory provision of $8.8 million included in cost of revenues, primarily due to downward revisions to previously forecasted demand levels for certain products. Of the $8.8 million of total excess and obsolete provisions, $4.6 million was related to Semiconductor Test, $2.2 million was related to Wireless Test, and $1.9 million was related to System Test.
During the year ended December 31, 2016, we recorded an inventory provision of $17.5 million included in cost of revenues, primarily due to downward revisions to previously forecasted demand levels. Of the $17.5 million of total excess and obsolete provisions, $9.7 million was related to Semiconductor Test, $7.2 million was related to Wireless Test, and $0.6 million was related to System Test.
During the years ended December 31, 2018, 2017 and 2016, we scrapped $7.0 million, $14.4 million and $15.2 million of inventory, respectively, and sold $6.7 million, $7.5 million and $10.0 million of previously written-down or written-off inventory, respectively. As of December 31, 2018, we had inventory related reserves for amounts which had been written-down or written-off totaling $100.8 million. We have no pre-determined timeline to scrap the remaining inventory.
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Selling and Administrative
Selling and administrative expenses were as follows:
2018 | 2017 | 2016 | 2017-2018 Change |
2016-2017 Change |
||||||||||||||||
(dollars in millions) | ||||||||||||||||||||
Selling and administrative |
$ | 390.7 | $ | 348.9 | $ | 316.5 | $ | 41.8 | $ | 32.4 | ||||||||||
Percent of total revenues |
18.6 | % | 16.3 | % | 18.1 | % |
The increase of $41.8 million in selling and administrative expenses from 2017 to 2018 was due primarily to higher spending in Industrial Automation related to higher sales and marketing spending in Universal Robots and due to the acquisitions of MiR and Energid in 2018, partially offset by lower variable compensation across all segments.
The increase of $32.4 million in selling and administrative expenses from 2016 to 2017 was due primarily to higher variable compensation across all segments and higher spending in Universal Robots, partially offset by lower spending in Wireless Test.
Engineering and Development
Engineering and development expenses were as follows:
2018 | 2017 | 2016 | 2017-2018 Change |
2016-2017 Change |
||||||||||||||||
(dollars in millions) | ||||||||||||||||||||
Engineering and development |
$ | 301.5 | $ | 307.3 | $ | 292.2 | $ | (5.8 | ) | $ | 15.1 | |||||||||
Percent of total revenues |
14.4 | % | 14.4 | % | 16.7 | % |
The decrease of $5.8 million in engineering and development expenses from 2017 to 2018 was due primarily to lower spending in System Test and Semiconductor Test, and lower variable compensation, partially offset by higher spending in Industrial Automation.
The increase of $15.1 million in engineering and development expenses from 2016 to 2017 was due primarily to higher variable compensation across all segments and higher spending in System Test and Industrial Automation, partially offset by lower spending in Wireless Test and Semiconductor Test.
Acquired Intangible Assets Amortization
Acquired intangible assets amortization expense was as follows:
2018 | 2017 | 2016 | 2017-2018 Change |
2016-2017 Change |
||||||||||||||||
(dollars in millions) | ||||||||||||||||||||
Acquired intangible assets amortization |
$ | 39.2 | $ | 30.5 | $ | 52.6 | $ | 8.7 | $ | (22.1 | ) | |||||||||
Percent of total revenues |
1.9 | % | 1.4 | % | 3.0 | % |
Acquired intangible assets amortization expense increased from 2017 to 2018 primarily due to Industrial Automation segment acquisitions of MiR and Energid in 2018.
Acquired intangible assets amortization expense decreased from 2016 to 2017 primarily in the Wireless Test segment due to the impairment of acquired intangible assets in the second quarter of 2016 and in the Industrial Automation segment due to intangible assets that became fully amortized in June 2017.
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Goodwill Impairment
We assess goodwill for impairment at least annually, in the fourth quarter, as of December 31, or on an interim basis between annual tests when events or circumstances indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying value. In the second quarter of 2016, the Wireless Test reporting unit (which is our Wireless Test operating and reportable segment) reduced headcount by 11% as a result of a sharp decline in projected demand attributable to an estimated smaller future wireless test market. The decrease in projected demand was due to lower forecasted buying from our largest Wireless Test segment customer (which had contributed between 51% and 73% of annual Wireless Test sales since the LitePoint acquisition in 2011 through 2015) as a result of the customers numerous operational efficiencies; slower smartphone growth rates; and a slowdown of new wireless technology adoption. We considered the headcount reduction and sharp decline in projected demand to be a triggering event for an interim goodwill impairment test. Following the interim goodwill impairment test, we recorded a goodwill impairment charge of $254.9 million in the second quarter of 2016. The fourth quarter 2018, 2017 and 2016 goodwill impairment tests did not identify any goodwill impairments.
Acquired Intangible Assets Impairment
We review 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. If undiscounted cash flows for the asset are less than the carrying amount, the asset is written down to its estimated fair value based on a discounted cash flow analysis. The cash flow estimates used to determine the impairment contain managements best estimates using appropriate assumptions and projections at that time. As a result of the Wireless Test segment goodwill impairment charge in the second quarter of 2016, we performed an impairment test of the Wireless Test segments intangible and long-lived assets based on a comparison of the estimated undiscounted cash flows to the recorded value of the assets. As a result of the analysis, we recorded an $83.3 million impairment charge in the second quarter of 2016 in acquired intangible assets impairment on the statements of operations.
Restructuring and Other
During the year ended December 31, 2018, we recorded an expense of $17.7 million for the increase in the fair value of the MiR contingent consideration liability, $8.7 million of severance charges related to headcount reductions primarily in Semiconductor Test, and $4.5 million for acquisition related expenses and compensation, partially offset by a gain of $16.7 million from the decrease in the fair value of the Universal Robots contingent consideration liability.
During the year ended December 31, 2017, we recorded an expense of $7.8 million for the increase in the fair value of the Universal Robots contingent consideration liability, $3.8 million of severance charges related to headcount reductions primarily in Semiconductor Test, $1.1 million for an impairment of fixed assets in Semiconductor Test, $1.0 million for a lease impairment of a Wireless Test facility in Sunnyvale, CA, which was terminated in September 2017, and $0.8 million of expenses related to an earthquake in Kumamoto, Japan, partially offset by $5.1 million of property insurance recovery related to the Japan earthquake.
During the year ended December 31, 2016, we recorded an expense of $15.9 million for the increase in the fair value of the contingent consideration liability, of which $15.3 million was related to Universal Robots and $0.6 million was related to Avionics Interface Technologies, LLC (AIT), $6.0 million of severance charges related to headcount reductions primarily in Wireless Test, $4.2 million for an impairment of fixed assets, and $0.9 million for expenses related to an earthquake in Kumamoto, Japan, partially offset by $5.1 million of property insurance recovery related to the Japan earthquake.
33
The remaining accrual for severance of $1.0 million is reflected in the accrued employees compensation and withholdings on the balance sheet and is expected to be paid by April 2019.
Interest and Other
2018 | 2017 | 2016 | 2017-2018 Change |
2016-2017 Change |
||||||||||||||||
(in millions) | ||||||||||||||||||||
Interest income |
$ | (26.7 | ) | $ | (17.8 | ) | $ | (9.3 | ) | $ | (8.9 | ) | $ | (8.5 | ) | |||||
Interest expense |
31.3 | 21.7 | 3.6 | 9.6 | 18.1 | |||||||||||||||
Other (income) expense, net |
1.4 | (2.9 | ) | (2.3 | ) | 4.3 | (0.6 | ) |
Interest income increased by $8.9 million from 2017 to 2018 due primarily to higher interest rates and realized gains on sales of marketable securities. Interest income increased by $8.5 million from 2016 to 2017 due primarily to higher cash and marketable securities balances and higher interest rates.
Interest expense increased by $9.6 million from 2017 to 2018 due primarily to recognizing unrealized losses on equity marketable securities, and by $18.1 million from 2016 to 2017 due primarily to interest expense related to our convertible senior notes.
Other (income) expense, net changed by $4.3 million, from $2.9 million income in 2017 to $1.4 million expense in 2018 due primarily to lower pension actuarial gains in 2018, and higher foreign exchange losses, partially offset by lower non service pension costs. Other (income) expense, net decreased by $0.6 million from 2016 to 2017 due primarily to pension actuarial gains.
Income (Loss) Before Income Taxes
2018 | 2017 | 2016 | 2017-2018 Change |
2016-2017 Change |
||||||||||||||||
(in millions) | ||||||||||||||||||||
Semiconductor Test |
$ | 397.6 | $ | 491.4 | $ | 311.9 | $ | (93.8 | ) | $ | 179.5 | |||||||||
System Test |
48.9 | 10.3 | 28.9 | 38.6 | (18.6 | ) | ||||||||||||||
Wireless Test |
29.1 | 17.4 | (371.4 | ) | 11.7 | 388.8 | ||||||||||||||
Industrial Automation |
7.7 | 8.8 | (16.8 | ) | (1.1 | ) | 25.6 | |||||||||||||
Corporate and Other (1) |
(15.4 | ) | (3.4 | ) | (7.7 | ) | (12.1 | ) | 4.4 | |||||||||||
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$ | 467.8 | $ | 524.4 | $ | (55.1 | ) | $ | (56.6 | ) | $ | 579.5 | |||||||||
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(1) | Included in Corporate and Other are the following: contingent consideration adjustments, pension and postretirement plans actuarial (gains) and losses, impairment of fixed assets and expenses related to the Japan earthquake, property insurance recovery and proceeds, interest (income) and expense, net foreign exchange (gains) and losses, intercompany eliminations and acquisition related charges. |
The decrease in income before income taxes in Semiconductor Test from 2017 to 2018 was driven primarily by a decrease in sales in the mobility and microcontroller test segments, partially offset by an increase in memory and analog test segments sales and an increase in service revenues. The increase in income before income taxes in System Test from 2017 to 2018 was primarily due to higher system sales in Production Board Test, and higher sales of 3.5 hard disk drive and system level testers in Storage Test. The increase in income before income taxes in Wireless Test from 2017 to 2018 was primarily due to higher demand for next generation wireless products. The decrease in income before income taxes in Industrial Automation from 2017 to 2018 was due primarily to increased intangible assets amortization expense from the acquisitions of MiR and Energid in 2018.
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The increase in income before income taxes in Semiconductor Test from 2016 to 2017 was driven primarily by increased sales and higher gross margin due to favorable product mix. The increase in income before income taxes in Wireless Test from 2016 to 2017 was primarily due to goodwill and intangible assets impairment charges in 2016, lower intangible assets amortization, lower operating expenses, higher demand for connectivity test systems and higher service revenue in 2017. The decrease in income before income taxes in System Test from 2016 to 2017 was primarily due to lower sales in Storage Test of 3.5 hard disk drive testers for cloud storage and increased spending for new product development. The increase in income before income taxes in Industrial Automation was due primarily to higher demand for collaborative robots.
Income Taxes
Income tax expense for 2018 and 2017 totaled $16.0 and $266.7 million, respectively. Income tax benefit for 2016 totaled $11.6 million. The effective tax rate for 2018, 2017 and 2016 was 3.4%, 50.9%, and 21.1%, respectively.
The increase in the effective tax rate from 2016 to 2017 and the decrease in the effective tax rate from 2017 to 2018 are primarily attributable to the effect of changes in U.S. Federal tax law. On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act of 2017 (the Tax Reform Act), making significant changes to the Internal Revenue Code. Among other changes, the Tax Reform Act permanently reduces the corporate tax rate from 35% to 21% effective for tax years beginning after December 31, 2017, shifts the U.S. tax regime from a worldwide system to a modified territorial tax system and requires companies to pay a transition tax on earnings of certain foreign subsidiaries that were previously tax deferred.
We recorded a provisional amount of $186.0 million of additional income tax expense in the fourth quarter of 2017 which represented our best estimate of the impact of the Tax Reform Act in accordance with our understanding of the Tax Reform Act and available guidance as of that date. The $186.0 million is primarily composed of expense of $161.0 million related to the one-time transition tax on the mandatory deemed repatriation of foreign earnings, $33.6 million of expense related to the remeasurement of certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, and benefit of $10.3 million associated with the impact of correlative adjustments on uncertain tax positions. In accordance with the requirements of SEC Staff Accounting Bulletin (SAB) No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act, in the fourth quarter of 2018, we completed our analysis of the effect of the Tax Reform Act based on the application of the most recently available guidance as of December 31, 2018 and recorded $49.5 million of net income tax benefit. The net benefit consisted of $51.7 million of benefit resulting from a reduction in the estimate of the one-time transition tax on the mandatory deemed repatriation of foreign earnings and an expense of $2.2 million associated with the impact of correlative adjustments on uncertain tax positions.
The change in the effective tax rate from 2017 to 2018 was also impacted by a shift in the geographic distribution of income which increased income subject to taxation in the U.S. relative to lower tax rate jurisdictions, the benefit of the U.S. foreign derived intangible income deduction and increases in discrete benefit from non-taxable foreign exchange gains and losses.
The change in the effective rate from 2016 to 2017 was also impacted by the U.S. non-deductible goodwill impairment charge recorded in 2016, a shift in the geographic distribution of income which increased income subject to taxation in the U.S. relative to lower tax rate jurisdictions, decreases in the discrete benefits from tax reserve releases, increases in discrete expense from non-taxable foreign exchange gains and losses and an increase in the discrete benefit from stock-based compensation.
We qualify 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 attributable to the Singapore tax holiday for the years ended December 31, 2018, 2017 and 2016 were $11.9 million or $0.06 per diluted share, $24.8 million or $0.12 per diluted share and $17.0 million or $0.08 per diluted share, respectively. The tax holiday is scheduled to expire on December 31, 2020.
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Contractual Obligations
The following table reflects our contractual obligations as of December 31, 2018:
Payments Due by Period | ||||||||||||||||||||||||
Total | Less than 1 year |
1-3 years |
3-5 years |
More than 5 years |
Other | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Convertible debt |
$ | 460,000 | $ | | $ | | $ | 460,000 | $ | | $ | | ||||||||||||
Purchase obligations |
242,052 | 232,533 | 9,519 | | | | ||||||||||||||||||
Retirement plans contributions |
122,294 | 4,919 | 10,455 | 10,136 | 96,784 | | ||||||||||||||||||
Transition tax payable (1) |
91,186 | 7,295 | 14,590 | 14,590 | 54,711 | |||||||||||||||||||
Operating lease obligations |
76,055 | 19,570 | 31,871 | 15,142 | 9,472 | | ||||||||||||||||||
Interest on long term debt |
28,750 | 5,750 | 11,500 | 11,500 | | | ||||||||||||||||||
Fair value of contingent consideration |
70,543 | 34,865 | 35,678 | | | | ||||||||||||||||||
Other long-term liabilities reflected on the balance sheet under GAAP (2) |
90,959 | | 27,631 | 5,119 | | 58,209 | ||||||||||||||||||
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Total |
$ | 1,181,839 | $ | 304,932 | $ | 141,244 | $ | 516,487 | $ | 160,967 | $ | 58,209 | ||||||||||||
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(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 balance decreased by $699 million from 2017 to 2018 to $1,205 million.
Operating activities during 2018 provided cash of $476.9 million. Changes in operating assets and liabilities used cash of $163.5 million. This was due to a $105.8 million increase in operating assets and a $57.7 million decrease in operating liabilities.
The increase in operating assets was due to a $58.4 million increase in prepayments and other assets due primarily to payments to our contract manufacturers, a $29.5 million increase in inventories, and a $17.9 million increase in accounts receivable due to higher sales in the fourth quarter of 2018 comparing to 2017.
The decrease in operating liabilities was due to a $80.4 million decrease in income taxes, primarily related to a decrease in our transitional tax liability associated with our accumulated foreign earnings under the U.S. Tax Reform Act, a $5.5 million decrease in other accrued liabilities and $4.3 million of retirement plans contributions, partially offset by a $13.4 million increase in customer advance payments and deferred revenue, a $12.9 million increase in accounts payable, and a $6.3 million increase in accrued employee compensation due primarily to variable compensation.
Investing activities during 2018 provided cash of $923.0 million, due to $1,270.4 million and $846.1 million in proceeds from maturities and sales of marketable securities, respectively, proceeds from a government subsidy of $7.9 million for property, plant and equipment, and proceeds from life insurance of $1.1 million related to the cash surrender value from the cancellation of a Teradyne owned life insurance policy, partially offset by $918.7 million used for purchase of marketable securities, $169.5 million used for acquisition of MiR and Energid, and $114.4 million used for purchases of property, plant and equipment.
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Financing activities during 2018 used cash of $903.4 million, due to $823.5 million used for the repurchase of 21.6 million shares of common stock at an average price of $38.06 per share, $67.3 million used for dividend payments, $20.0 million used for payments related to net settlement of employee stock compensation awards, and $13.6 million used for a payment related to Universal Robots acquisition contingent consideration, partially offset by $21.0 million from the issuance of common stock under employee stock purchase and stock option plans.
Operating activities during 2017 provided cash of $626.5 million. Changes in operating assets and liabilities provided cash of $183.1 million. This was due to a $33.4 million increase in operating assets and a $216.5 million increase in operating liabilities.
The increase in operating assets was due to an $80.6 million increase in accounts receivable due to higher sales, partially offset by a $45.0 million decrease in inventories and a $2.3 million decrease in prepayments and other assets.
The increase in operating liabilities was due to a $173.8 million increase in income taxes, primarily related to the estimated impact of U.S. Tax Reform Act, a $30.9 million increase in accrued employee compensation due primarily to variable compensation, a $24.0 million increase in other accrued liabilities, and a $5.0 million increase in customer advance payments and deferred revenue, partially offset by an $11.3 million decrease in accounts payable and $5.9 million of retirement plans contributions.
Investing activities during 2017 used cash of $262.8 million, due to $1,391.9 million used for purchases of marketable securities and $105.4 million used for purchases of property, plant and equipment, partially offset by proceeds from maturities and sales of marketable securities of $701.7 million and $527.7 million, respectively, and proceeds from property insurance of $5.1 million related to the Japan earthquake.
Financing activities during 2017 used cash of $245.2 million, due to $200.3 million used for repurchase of 5.8 million shares of common stock at an average price of $34.30 per share, $55.4 million used for dividend payments, $12.9 million used for payments related to net settlement of employee stock compensation awards, and $1.1 million used for a payment related to AIT acquisition contingent consideration, partially offset by $24.5 million from the issuance of common stock under employee stock purchase and stock option plans.
Operating activities during 2016, provided cash of $455.2. Changes in operating assets and liabilities provided cash of $49.0 million. This was due to a $33.4 million decrease in operating assets and a $15.6 million increase in operating liabilities.
The decrease in operating assets was due to an $18.3 million decrease in accounts receivable due to increased collections and a $34.3 million decrease in inventories, partially offset by a $19.2 million increase in prepayments and other assets.
The increase in operating liabilities was due to an $18.4 million increase in income taxes, a $3.9 million increase in accounts payable, and a $6.7 million increase in other accrued liabilities, partially offset by a $3.8 million decrease in accrued employee compensation due primarily to variable compensation, $6.0 million of retirement plans contributions and a $3.6 million decrease in customer advance payments and deferred revenue.
Investing activities during 2016 used cash of $640.5 million, due to $1,656.3 million used for purchases of marketable securities and $85.3 million used for purchases of property, plant and equipment, partially offset by proceeds from maturities and sales of marketable securities of $243.2 million and $852.8 million, respectively, and proceeds from property insurance of $5.1 million related to the Japan earthquake.
Financing activities during 2016 provided cash of $228.4 million, due to $450.8 million of proceeds from the issuance of senior convertible notes, net of issuance costs, $67.9 million of proceeds from the issuance of
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warrants, $20.5 million from the issuance of common stock under employee stock purchase and stock option plans, and $6.2 million from the tax benefit related to employee stock compensation awards, partially offset by $146.3 million used for the repurchase of 6.8 million shares of common stock at an average price of $21.39 per share, $100.8 million used for the purchase of convertible note hedges, $48.6 million used for dividend payments, $11.7 million used for a payment related to the Universal Robots acquisition contingent consideration and $9.4 million used for payments related to net settlement of employee stock compensation awards.
In January 2018, May 2018, August 2018 and November 2018, our Board of Directors declared a quarterly cash dividend of $0.09 per share. Total dividend payments in 2018 were $67.3 million.
In January 2017, May 2017, August 2017 and November 2017, our Board of Directors declared a quarterly cash dividend of $0.07 per share. Total dividend payments in 2017 were $55.4 million.
In January 2016, May 2016, August 2016 and November 2016, our Board of Directors declared a quarterly cash dividend of $0.06 per share. Total dividend payments in 2016 were $48.6 million.
In January 2019, our Board of Directors declared a quarterly cash dividend of $0.09 per share to be paid on March 22, 2019 to shareholders of record as of February 22, 2019. Payment of future cash dividends are subject to the discretion of our Board of Directors and will depend, among other things, upon our earnings, capital requirements and financial condition.
In January 2015, our Board of Directors cancelled the November 2010 stock repurchase program and authorized a new stock repurchase program for up to $500 million of common stock. In 2016, we repurchased 6.8 million shares of common stock at an average price of $21.39, for a total cost of $146.3 million. The cumulative repurchases as of December 31, 2016 totaled 22.5 million shares of common stock for $446 million at an average price per share of $19.87.
In December 2016, our Board of Directors cancelled the January 2015 stock repurchase program and approved a new $500 million share repurchase authorization which commenced on January 1, 2017. The cumulative repurchases as of December 31, 2017 totaled 5.8 million shares of common stock for $200.3 million at an average price per share of $34.30.
In January 2018, our Board of Directors cancelled the December 2016 stock repurchase program and authorized a new stock repurchase program for up to $1.5 billion of common stock. The cumulative repurchases as of December 31, 2018 totaled 21.6 million shares of common stock for $823.5 million at an average price per share of $38.06. We intend to repurchase $500 million in 2019.
We believe our cash, cash equivalents and marketable securities balance will be sufficient to pay our quarterly dividend, execute our authorized share repurchase program and meet our working capital and expenditure needs for at least the next twelve months. We also have a $350 million revolving credit facility. As of March 1, 2019 we have not borrowed any funds under this credit facility. Inflation has not had a significant long-term impact on earnings.
Retirement Plans
ASC 715-20, CompensationRetirement BenefitsDefined Benefit Plans, requires an employer with defined benefit plans or other postretirement benefit plans to recognize an asset or a liability on its balance sheet for the overfunded or underfunded status of the plans as defined by ASC 715-20. The pension asset or liability represents the difference between the fair value of the pension plans assets and the projected benefit obligation as of December 31. For other postretirement benefit plans, the liability is the difference between the fair value of the plans assets and the accumulated postretirement benefit obligation as of December 31.
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For the year ended December 31, 2018, our pension expense, which includes the U.S. Qualified Pension Plan (U.S. Plan), certain qualified plans for non-U.S. subsidiaries, and a U.S. Supplemental Executive Defined Benefit Plan, was approximately $0.3 million. Pension expense or income is calculated based upon a number of actuarial assumptions. Discount rate and expected return on assets are two assumptions which are important elements of pension plan expense (income) and asset/liability measurement. We evaluate our discount rate and expected rate of return on assets assumptions annually on a plan and country specific basis. We evaluate other assumptions related to demographic factors, such as retirement age, mortality and turnover periodically, and update them to reflect our experience and expectations for the future.
In developing the expected return on U.S. Plan assets assumption, we evaluated input from our investment manager and pension consultants, including their forecast of asset class return expectations. We believe that 4.25% was an appropriate rate of return on assets to use for 2018. The December 31, 2018 asset allocation for our U.S. Plan was 94% invested in fixed income securities, 5% invested in equity securities, and 1% invested in other securities. Our investment manager regularly reviews the actual asset allocation and periodically rebalances the portfolio to ensure alignment with our target allocations.
We recognize net actuarial gains and losses and the change in the fair value of plans assets in our operating results in the year in which they occur or upon any interim remeasurement of the plans. We calculate the expected return on plan assets using the fair value of the plan assets. Actuarial gains and losses are generally measured annually as of December 31 and, accordingly, recorded during the fourth quarter of each year or upon any interim remeasurement of the plans.
The discount rate that we utilized for determining future pension obligations for the U.S. Plan is based on the FTSE Pension Index adjusted for the U.S. Plans expected cash flows and was 4.15% at December 31, 2018, up from 3.40% at December 31, 2017. We estimate that in 2019 we will recognize approximately $0.4 million of pension expense for the U.S. Plan. The U.S. Plan pension expense estimate for 2019 is based on a 4.15% discount rate and a 4.25% return on assets. Future pension expense or income will depend on future investment performance, changes in future discount rates and various other factors related to the employee population participating in our pension plans.
As of December 31, 2018, our pension plans had unrecognized pension prior service cost of $0.1 million.
We performed a sensitivity analysis, which expresses the potential U.S. Plan (income) expense for the year ending December 31, 2019, which would result from changes to either the discount rate or the expected return on plan assets. The below estimates exclude the impact of any potential actuarial gains or losses. It is difficult to reliably forecast or predict whether there will be any actuarial gains or losses in 2019 as they are primarily driven by events and circumstances beyond our control, such as changes in interest rates and the performance of the financial markets.
Discount Rate | ||||||||||||
Return on Plan Assets |
3.65% | 4.15% | 4.65% | |||||||||
(in millions) | ||||||||||||
3.75% |
$ | 0.9 | $ | 1.1 | $ | 1.2 | ||||||
4.25% |
0.2 | 0.4 | 0.5 | |||||||||
4.75% |
(0.5 | ) | (0.3 | ) | (0.2 | ) |
The assets of the U.S. Plan consist substantially of fixed income securities. U.S. Plan assets have decreased from $324.5 million at December 31, 2017 to $144.3 million at December 31, 2018 while the U.S. Plans liability decreased from $307.0 million at December 31, 2017 to $127.4 million at December 31, 2018. The decrease in assets and liabilities for the U.S. Plan is due primarily to the purchase of a group annuity insurance contract in 2018. Under the group annuity, the accrued pension obligations for approximately 1,700 retiree participants were transferred to an insurance company. The reduction in the pension benefit obligation and pension assets was $151.3 million. We recorded a settlement loss of $0.3 million related to the retiree group annuity transaction.
39
Our funding policy is to make contributions to our pension plans in accordance with local laws and to the extent that such contributions are tax deductible. During 2018, we made contributions of $2.6 million to the U.S. supplemental executive defined benefit pension plan, and $0.8 million to certain qualified plans for non-U.S. subsidiaries. In 2019, we expect to contribute approximately $2.7 million to the U.S. supplemental executive defined benefit pension plan. Contributions to be made in 2019 to certain qualified plans for non-U.S. subsidiaries are based on local statutory requirements and are estimated at approximately $0.9 million.
Equity Compensation Plans
In addition to our 1996 Employee Stock Purchase Plan discussed in Note O: Stock-Based Compensation in Notes to Consolidated Financial Statements, we have a 2006 Equity and Cash Compensation Incentive Plan (the 2006 Equity Plan) under which equity securities are authorized for issuance. The 2006 Equity Plan was initially approved by stockholders on May 25, 2006.
At our annual meeting of stockholders held May 21, 2013, our stockholders approved an amendment to the 2006 Equity Plan to increase the number of shares issuable thereunder by 10.0 million, for an aggregate of 32.0 million shares issuable thereunder, and our stockholders also approved an amendment to our 1996 Employee Stock Purchase Plan to increase the number of shares issuable thereunder by 5.0 million, for an aggregate of 30.4 million shares issuable thereunder. At our annual meeting of stockholders held May 12, 2015, our stockholders approved an amendment to the 2006 Equity Plan to extend its term until May 12, 2025.
The following table presents information about these plans as of December 31, 2018 (share numbers in thousands):
Plan category |
Number of securities to be issued upon exercise of outstanding options, warrants and rights |
Weighted-average exercise price of outstanding options, warrants and rights |
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column one) |
|||||||||
Equity plans approved by shareholders |
2,785 | (1) | $ | 27.82 | 10,377 | (2) | ||||||
Equity plans not approved by shareholders (3) |
175 | 2.49 | | |||||||||
|
|
|
|
|
|
|||||||
Total |
2,960 | 19.06 | 10,377 | |||||||||
|
|
|
|
|
|
(1) | Includes 2,454,259 shares of restricted stock units that are not included in the calculation of the weighted average exercise price. |
(2) | Consists of 7,873,477 securities available for issuance under the 2006 Equity Plan and 2,504,492 of securities available for issuance under the Employee Stock Purchase Plan. |
(3) | In connection with the 2011 acquisition of LitePoint Corporation (the LitePoint Acquisition), we assumed the options granted under the LitePoint Corporation 2002 Stock Plan (the LitePoint Plan). Upon the consummation of the LitePoint Acquisition, these options were converted automatically into options to purchase an aggregate of 2,828,344 shares of our common stock. No additional awards were granted under the LitePoint Plan. As of December 31, 2018, there were outstanding options exercisable for an aggregate of 175,168 shares of our common stock pursuant to the LitePoint Plan, with a weighted average exercise price of $2.49 per share. |
The purpose of the 2006 Equity Plan is to motivate employees, officers and directors by providing equity ownership and compensation opportunities in Teradyne. The aggregate number of shares available under the 2006 Equity Plan as of December 31, 2018 was 7,873,477 shares of our common stock. The 2006 Equity Plan authorizes the grant of stock-based awards in the form of (1) non-qualified and incentive stock options, (2) stock appreciation rights, (3) restricted stock awards and restricted stock unit awards, (4) phantom stock, and (5) other stock-based awards. Awards may be tied to time-based vesting schedules and/or performance-based vesting
40
measured by reference to performance criteria chosen by the Compensation Committee of the Board of Directors, which administers the 2006 Equity Plan. Awards may be made to any employee, officer, consultant and advisor of Teradyne and our subsidiaries, as well as, to our directors. The maximum number of shares of stock-based awards that may be granted to one participant during any one fiscal year is 2,000,000 shares of common stock.
As of December 31, 2018, total unrecognized compensation expense related to non-vested restricted stock units and options was $44 million, and is expected to be recognized over a weighted average period of 2.4 years.
Performance Graph
The following graph compares the change in our cumulative total shareholder return in our common stock with (i) the NYSE Composite Index and (ii) the Morningstar Semiconductor Equipment & Materials Industry Group (compiled by Morningstar, Inc.). The comparison assumes $100.00 was invested on December 31, 2013 in our common stock and in each of the foregoing indices and assumes reinvestment of dividends, if any. Historic stock price performance is not necessarily indicative of future price performance.
Recently Issued Accounting Pronouncements
On January 26, 2017, the FASB issued ASU 2017-04, IntangiblesGoodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment. The new guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Goodwill impairment will now be the amount by which a reporting units carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance will remain largely unchanged. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. The same one-step impairment test will be applied to goodwill at all reporting units, even those with zero or negative carrying amounts. Entities will be required to disclose the amount of goodwill at reporting units with zero or negative carrying amounts. The revised guidance will be applied prospectively, and is effective in 2020. Early adoption is permitted for any impairment tests performed after January 1, 2017. We are currently evaluating the impact of this ASU on our financial position, results of operations and statements of cash flows.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The guidance in this ASU supersedes the lease recognition requirements in ASC Topic 840, Leases. The new standard establishes a right- of-use (ROU) model that requires a lessee to record an ROU asset and a lease liability on the balance sheet for all
41
leases with terms longer than twelve months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the statements of operations. The new standard is effective for annual periods beginning after December 15, 2018 with early adoption permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which amends ASU 2016-02. The new ASU offers an additional transition method by which entities may elect not to recast the comparative periods presented in financial statements in the period of adoption and allows lessors to elect a practical expedient to not separate lease and non-lease components when certain conditions are met. This ASU has the same transition requirements and effective date as ASU 2016-02. We elected not to recast the comparative periods presented in financial statements in the period of adoption. We adopted this guidance in January 2019; as a result we recorded between $50 and $60 million of operating lease right-of-use assets and operating lease liabilities. Adoption had an immaterial impact on our results of operations.
Item 7A: | Quantitative and Qualitative Disclosures about Market Risks |
Concentration of Credit Risk
Financial instruments which potentially subject us to concentrations of credit risk consist principally of cash equivalents, marketable securities, forward currency contracts and accounts receivable. Our cash equivalents consist primarily of money market funds invested in U.S. Treasuries and government agencies. Our fixed income available-for-sale marketable securities have a minimum rating of AA by one or more of the major credit rating agencies. We place forward currency contracts with high credit-quality financial institutions in order to minimize credit risk exposure. Concentrations of credit risk with respect to accounts receivable are limited due to the large number of geographically dispersed customers. We perform ongoing credit evaluations of our customers financial condition and from time to time may require customers to provide a letter of credit from a bank to secure accounts receivable. There were no customers who accounted for more than 10% of our accounts receivable balance as of December 31, 2018 and December 31, 2017.
In addition to market risks, 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 December 31, 2018, the Notes had a fair value of $547.1 million. The table below provides a sensitivity analysis of hypothetical 10% changes of Teradynes stock price as of the end of 2018 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 Teradynes 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 Teradynes 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.
42
Hypothetical Change in Teradyne Stock Price |
Fair Value | Estimated change in fair value |
Hypothetical percentage increase (decrease) in fair value |
|||||||||
10% Increase |
$ | 581,716 | $ | 34,603 | 6.3 | % | ||||||
No Change |
547,113 | | | |||||||||
10% Decrease |
514,703 | (32,410 | ) | (5.9 | ) |
See Note H: Debt for further information.
Exchange Rate Risk Management
We regularly enter into foreign currency forward contracts to hedge the value of our monetary assets and liabilities in Japanese Yen, British Pound, Korean Won, Taiwan Dollar, Singapore Dollar, Euro, Philippine Peso and Chinese Yuan. These foreign currency forward contracts have maturities of approximately one month. These contracts are used to minimize the effect of exchange rate fluctuations associated with the remeasurement of monetary assets and liabilities. We do not engage in currency speculation.
We performed a sensitivity analysis assuming a hypothetical 10% fluctuation in foreign exchange rates to the hedging contracts and the underlying exposures described above. As of December 31, 2018, 2017, and 2016, the analysis indicated that these hypothetical market movements would not have a material effect on our consolidated financial position, results of operations or cash flows.
Interest Rate Risk Management
We are exposed to potential losses due to changes in interest rates. Our interest rate exposure is primarily in the Netherlands, United States and Singapore related to short-term and long-term marketable securities.
In order to estimate the potential loss due to interest rate risk, a fluctuation in interest rates of 25 basis points was assumed. Market risk for the short and long-term marketable securities was estimated as the potential change in the fair value resulting from a hypothetical change in interest rates for securities contained in the investment portfolio. The potential change in the fair value from changes in interest rates is immaterial as of December 31, 2018 and 2017.
43
Item 8: | Financial Statements and Supplementary Data |
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Teradyne, Inc.:
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Teradyne, Inc. and its subsidiaries (the Company) as of December 31, 2018 and 2017, and the related consolidated statements of operations, comprehensive income (loss), shareholders equity and cash flows for each of the three years in the period ended December 31, 2018, including the related notes and schedule of valuation and qualified accounts for each of the three years in the period ended December 31, 2018 appearing under Item 15(c) (collectively referred to as the consolidated financial statements). We also have audited the Companys internal control over financial reporting as of December 31, 2018, based on criteria established in Internal ControlIntegrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal ControlIntegrated Framework (2013) issued by the COSO.
Change in Accounting Principle
As discussed in Note B to the consolidated financial statements, the Company changed the manner in which it accounts for revenue from contracts with customers in 2018.
Basis for Opinions
The Companys management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Managements Annual Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Companys consolidated financial statements and on the Companys internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
44
Definition and Limitations of Internal Control over Financial Reporting
A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
March 1, 2019
We have served as the Companys auditor since 1968.
45
CONSOLIDATED BALANCE SHEETS
December 31, | ||||||||
2018 | 2017 | |||||||
(in thousands, except per share information) |
||||||||
ASSETS | ||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 926,752 | $ | 429,843 | ||||
Marketable securities |
190,096 | 1,347,979 | ||||||
Accounts receivable, less allowance for doubtful accounts of $1,673 and $2,219 in 2018 and 2017, respectively |
291,267 | 272,783 | ||||||
Inventories, net |
153,541 | 107,525 | ||||||
Prepayments and other current assets |
170,826 | 112,151 | ||||||
|
|
|
|
|||||
Total current assets |
1,732,482 | 2,270,281 | ||||||
Property, plant and equipment, net |
279,821 | 268,447 | ||||||
Marketable securities |
87,731 | 125,926 | ||||||
Deferred tax assets |
70,848 | 84,026 | ||||||
Retirement plans assets |
16,883 | 17,491 | ||||||
Other assets |
11,509 | 12,275 | ||||||
Acquired intangible assets, net |
125,482 | 79,088 | ||||||
Goodwill |
381,850 | 252,011 | ||||||
|
|
|
|
|||||
Total assets |
$ | 2,706,606 | $ | 3,109,545 | ||||
|
|
|
|
|||||
LIABILITIES | ||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 100,688 | $ | 86,393 | ||||
Accrued employees compensation and withholdings |
148,566 | 141,694 | ||||||
Deferred revenue and customer advances |
77,711 | 83,614 | ||||||
Other accrued liabilities |
78,272 | 59,083 | ||||||
Contingent consideration |
34,865 | 24,497 | ||||||
Income taxes payable |
36,185 | 59,055 | ||||||
|
|
|
|
|||||
Total current liabilities |
476,287 | 454,336 | ||||||
Retirement plans liabilities |
117,456 | 119,776 | ||||||
Long-term deferred revenue and customer advances |
32,750 | 30,127 | ||||||
Long-term contingent consideration |
35,678 | 20,605 | ||||||
Deferred tax liabilities |
20,662 | 6,720 | ||||||
Long-term other accrued liabilities |
37,547 | 10,273 | ||||||
Long-term income taxes payable |
83,891 | 148,075 | ||||||
Long-term debt |
379,981 | 365,987 | ||||||
|
|
|
|
|||||
Total liabilities |
1,184,252 | 1,155,899 | ||||||
|
|
|
|
|||||
Commitments and contingencies (Note K) |
||||||||
SHAREHOLDERS EQUITY | ||||||||
Common stock, $0.125 par value, 1,000,000 shares authorized, 175,522 and 195,548 shares issued and outstanding at December 31, 2018 and 2017, respectively |
21,940 | 24,444 | ||||||
Additional paid-in capital |
1,671,645 | 1,638,413 | ||||||
Accumulated other comprehensive (loss) income |
(13,040 | ) | 18,776 | |||||
(Accumulated deficit) Retained earnings |
(158,191 | ) | 272,013 | |||||
|
|
|
|
|||||
Total shareholders equity |
1,522,354 | 1,953,646 | ||||||
|
|
|
|
|||||
Total liabilities and shareholders equity |
$ | 2,706,606 | $ | 3,109,545 | ||||
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
46
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, | ||||||||||||
2018 | 2017 | 2016 | ||||||||||
(in thousands, except per share amounts) | ||||||||||||
Revenues: |
||||||||||||
Products |
$ | 1,729,621 | $ | 1,784,695 | $ | 1,453,248 | ||||||
Services |
371,181 | 351,911 | 300,002 | |||||||||
|
|
|
|
|
|
|||||||
Total revenues |
2,100,802 | 2,136,606 | 1,753,250 | |||||||||
Cost of revenues: |
||||||||||||
Cost of products |
727,138 | 760,967 | 660,056 | |||||||||
Cost of services |
153,270 | 154,186 | 134,586 | |||||||||
|
|
|
|
|
|
|||||||
Total cost of revenues (exclusive of acquired intangible assets amortization shown separately below) |
880,408 | 915,153 | 794,642 | |||||||||
|
|
|
|
|
|
|||||||
Gross profit |
1,220,394 | 1,221,453 | 958,608 | |||||||||
Operating expenses: |
||||||||||||
Selling and administrative |
390,669 | 348,913 | 316,544 | |||||||||
Engineering and development |
301,505 | 307,305 | 292,159 | |||||||||
Acquired intangible assets amortization |
39,191 | 30,530 | 52,648 | |||||||||
Restructuring and other |
15,232 | 9,362 | 21,942 | |||||||||
Goodwill impairment |
| | 254,946 | |||||||||
Acquired intangible assets impairment |
| | 83,339 | |||||||||
|
|
|
|
|
|
|||||||
Total operating expenses |
746,597 | 696,110 | 1,021,578 | |||||||||
|
|
|
|
|
|
|||||||
Income (loss) from operations |
473,797 | 525,343 | (62,970 | ) | ||||||||
Non-operating (income) expenses: |
||||||||||||
Interest income |
(26,704 | ) | (17,805 | ) | (9,296 | ) | ||||||
Interest expense |
31,269 | 21,663 | 3,637 | |||||||||
Other (income) expense, net |
1,431 | (2,927 | ) | (2,251 | ) | |||||||
|
|
|
|
|
|
|||||||
Income (loss) before income taxes |
467,801 | 524,412 | (55,060 | ) | ||||||||
Income tax provision (benefit) |
16,022 | 266,720 | (11,639 | ) | ||||||||
|
|
|
|
|
|
|||||||
Net income (loss) |
$ | 451,779 | $ | 257,692 | $ | (43,421 | ) | |||||
|
|
|
|
|
|
|||||||
Net income (loss) per common share: |
||||||||||||
Basic |
$ | 2.41 | $ | 1.30 | $ | (0.21 | ) | |||||
|
|
|
|
|
|
|||||||
Diluted |
$ | 2.35 | $ | 1.28 | $ | (0.21 | ) | |||||
|
|
|
|
|
|
|||||||
Weighted average common sharesbasic |
187,672 | 198,069 | 202,578 | |||||||||
|
|
|
|
|
|
|||||||
Weighted average common sharesdiluted |
192,605 | 201,641 | 202,578 | |||||||||
|
|
|
|
|
|
|||||||
Cash dividend declared per common share |
$ | 0.36 | $ | 0.28 | $ | 0.24 | ||||||
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
47
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Years Ended December 31, | ||||||||||||
2018 | 2017 | 2016 | ||||||||||
(in thousands) | ||||||||||||
Net income (loss) |
$ | 451,779 | $ | 257,692 | $ | (43,421 | ) | |||||
Other comprehensive (loss) income, net of tax: |
||||||||||||
Foreign currency translation adjustment, net of tax of $0, $0, $0 |
(28,442 | ) | 37,840 | (13,162 | ) | |||||||
Available-for-sale marketable securities: |
||||||||||||
Unrealized (losses) gains on marketable securities arising during period, net of tax of $(722), $1,903, $923, respectively |
(2,110 | ) | 1,863 | 2,037 | ||||||||
Less: Reclassification adjustment for losses (gains) included in net income, net of tax of $(21), $(297), $(255), respectively |
1,337 | (441 | ) | (683 | ) | |||||||
|
|
|
|
|
|
|||||||
(773 | ) | 1,422 | 1,354 | |||||||||
Defined benefit pension and post-retirement plans: |
||||||||||||
Amortization of prior service benefit included in net periodic pension and post-retirement benefit, net of tax $(71), $(154), $(190), respectively |
(245 | ) | (272 | ) | (321 | ) | ||||||
Prior service benefit arising during period, net of tax of $0, $0, $34, respectively |
| | 59 | |||||||||
|
|
|
|
|
|
|||||||
(245 | ) | (272 | ) | (262 | ) | |||||||
|
|
|
|
|
|
|||||||
Other comprehensive (loss) income |
(29,460 | ) | 38,990 | (12,070 | ) | |||||||
|
|
|
|
|
|
|||||||
Comprehensive income (loss) |
$ | 422,319 | $ | 296,682 | $ | (55,491 | ) | |||||
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
48
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
Years Ended December 31, 2018, 2017 and 2016
Common Stock Shares Issued |
Common Stock Par Value |
Additional Paid-in Capital |
Accumulated Other Comprehensive (Loss) Income |
Retained Earnings (Accumulated Deficit) |
Total Shareholders Equity |
|||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Balance, December 31, 2015 |
203,641 | $ | 25,455 | $ | 1,480,647 | $ | (8,144 | ) | $ | 467,828 | $ | 1,965,786 | ||||||||||||
Issuance of stock to employees under benefit plans, net of shares withheld for payroll tax of $9,398 |
2,377 | 297 | 10,368 | 10,665 | ||||||||||||||||||||
Equity component of convertible debt |
100,836 | 100,836 | ||||||||||||||||||||||
Equity component of convertible notes issuance cost |
(2,017 | ) | (2,017 | ) | ||||||||||||||||||||
Purchase of convertible notes hedges |
(100,834 | ) | (100,834 | ) | ||||||||||||||||||||
Proceeds from issuance of warrants |
67,852 | 67,852 | ||||||||||||||||||||||
Stock-based compensation expense |
30,745 | 30,745 | ||||||||||||||||||||||
Repurchase of common stock |
(6,841 | ) | (855 | ) | (145,476 | ) | (146,331 | ) | ||||||||||||||||
Tax benefit related to stock options and restricted stock units |
6,087 | 6,087 | ||||||||||||||||||||||
Cash dividends |
(48,639 | ) | (48,639 | ) | ||||||||||||||||||||
Net loss |
(43,421 | ) | (43,421 | ) | ||||||||||||||||||||
Foreign currency translation adjustment |
(13,162 | ) | (13,162 | ) | ||||||||||||||||||||
Unrealized gains on marketable securities: |
||||||||||||||||||||||||
Unrealized gains on marketable securities, net of tax of $923 |
2,037 | 2,037 | ||||||||||||||||||||||
Less: reclassification adjustment for gains included in net income, net of tax $(255) |
(683 | ) | (683 | ) | ||||||||||||||||||||
Amortization of prior service (credit) cost, net of tax of $(190) |
(321 | ) | (321 | ) | ||||||||||||||||||||
Prior service income arising during period, net of tax of $34 |
59 | 59 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Balance, December 31, 2016 |
199,177 | 24,897 | 1,593,684 | (20,214 | ) | 230,292 | 1,828,659 | |||||||||||||||||
Issuance of stock to employees under benefit plans, net of shares withheld for payroll tax of $12,881 |
2,211 | 277 | 10,747 | 11,024 | ||||||||||||||||||||
Stock-based compensation expense |
33,982 | 33,982 | ||||||||||||||||||||||
Repurchase of common stock |
(5,840 | ) | (730 | ) | (199,574 | ) | (200,304 | ) | ||||||||||||||||
Cumulative effect adjustment for prior year tax benefits related to stock options and restricted stock units |
39,081 | 39,081 | ||||||||||||||||||||||
Cash dividends |
(55,478 | ) | (55,478 | ) | ||||||||||||||||||||
Net income |
257,692 | 257,692 | ||||||||||||||||||||||
Foreign currency translation adjustment |
37,840 | 37,840 | ||||||||||||||||||||||
Unrealized gains on marketable securities: |
||||||||||||||||||||||||
Unrealized gains on marketable securities, net of tax of $1,903 |
1,863 | 1,863 | ||||||||||||||||||||||
Less: reclassification adjustment for gains included in net income, net of tax of $(297) |
(441 | ) | (441 | ) | ||||||||||||||||||||
Amortization of prior service benefit, net of tax of $(154) |
(272 | ) | (272 | ) | ||||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Balance, December 31, 2017 |
195,548 | 24,444 | 1,638,413 | 18,776 | 272,013 | 1,953,646 | ||||||||||||||||||
Issuance of stock to employees under benefit plans, net of shares withheld for payroll tax of $20,025 |
1,613 | 201 | (72 | ) | 129 | |||||||||||||||||||
Stock-based compensation expense |
33,304 | 33,304 | ||||||||||||||||||||||
Repurchase of common stock |
(21,639 | ) | (2,705 | ) | (829,651 | ) | (832,356 | ) | ||||||||||||||||
Cash dividends |
(67,367 | ) | (67,367 | ) | ||||||||||||||||||||
Net income |
451,779 | 451,779 | ||||||||||||||||||||||
Foreign currency translation adjustment |
(28,442 | ) | (28,442 | ) | ||||||||||||||||||||
Unrealized losses on marketable securities: |
||||||||||||||||||||||||
Unrealized losses on marketable securities, net of tax of $(722) |
(2,110 | ) | (2,110 | ) | ||||||||||||||||||||
Less: reclassification adjustment for losses included in net income, net of tax $(21) |
1,337 | 1,337 | ||||||||||||||||||||||
Reclassification of unrealized gains on equity securities, net of tax of $(902) |
(3,125 | ) | 3,125 | | ||||||||||||||||||||
Amortization of prior service benefit, net of tax of $(71) |
(245 | ) | (245 | ) | ||||||||||||||||||||
Reclassification of tax effects resulting from the Tax Reform Act, net of tax of $769 |
769 | (769 | ) | | ||||||||||||||||||||
Cumulative effect of changes in accounting principle related to revenue recognition |
12,679 | 12,679 | ||||||||||||||||||||||
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|||||||||||||
Balance, December 31, 2018 |
175,522 | $ | 21,940 | $ | 1,671,645 | $ | (13,040 | ) | $ | (158,191 | ) | $ | 1,522,354 | |||||||||||
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The accompanying notes are an integral part of the consolidated financial statements.
49
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, | ||||||||||||
2018 | 2017 | 2016 | ||||||||||
(in thousands) | ||||||||||||
Cash flows from operating activities: |
||||||||||||
Net income (loss) |
$ | 451,779 | $ | 257,692 | $ | (43,421 | ) | |||||
Adjustments to reconcile net income (loss) from operations to net cash provided by operating activities: |
||||||||||||
Depreciation |
67,415 | 66,122 | 64,782 | |||||||||
Amortization |
45,809 | 41,953 | 55,227 | |||||||||
Stock-based compensation |
33,577 | 34,097 | 30,750 | |||||||||
Deferred taxes |
28,340 | 37,105 | (62,936 | ) | ||||||||
Provision for excess and obsolete inventory |
11,242 | 8,844 | 17,493 | |||||||||
Contingent consideration fair value adjustment |
987 | 7,820 | 15,896 | |||||||||
Losses (gains) on investments |
3,494 | (878 | ) | (1,050 | ) | |||||||
Retirement plans actuarial gains |
(3,316 | ) | (6,624 | ) | (3,203 | ) | ||||||
Property insurance recovery, net |
| (4,309 | ) | | ||||||||
Goodwill impairment |
| | 254,946 | |||||||||
Acquired intangible assets impairment |
| | 83,339 | |||||||||
Tax benefit related to employee stock compensation awards |
| | (6,198 | ) | ||||||||
Other |
1,083 | 1,585 | 602 | |||||||||
Changes in operating assets and liabilities, net of businesses acquired: |
||||||||||||
Accounts receivable |
(17,938 | ) | (80,584 | ) | 18,325 | |||||||
Inventories |
(29,498 | ) | 44,960 | 34,263 | ||||||||
Prepayments and other assets |
(58,402 | ) | 2,254 | (19,194 | ) | |||||||
Accounts payable and other accrued expenses |
13,693 | 43,574 | 6,820 | |||||||||
Deferred revenue and customer advances |
13,379 | 4,984 | (3,634 | ) | ||||||||
Retirement plan contributions |
(4,334 | ) | (5,902 | ) | (6,044 | ) | ||||||
Income taxes |
(80,429 | ) | 173,802 | 18,434 | ||||||||
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|
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|
|||||||
Net cash provided by operating activities |
476,881 | 626,495 | 455,197 | |||||||||
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|
|
|
|||||||
Cash flows from investing activities: |
||||||||||||
Purchases of property, plant and equipment |
(114,379 | ) | (105,375 | ) | (85,272 | ) | ||||||
Proceeds from government subsidy for property, plant and equipment |
7,920 | | | |||||||||
Purchases of marketable securities |
(918,744 | ) | (1,391,917 | ) | (1,656,267 | ) | ||||||
Proceeds from maturities of marketable securities |
1,270,439 | 701,681 | 243,232 | |||||||||
Proceeds from sales of marketable securities |
846,122 | 527,746 | 852,794 | |||||||||
Proceeds from insurance |
1,126 | 5,064 | 5,051 | |||||||||
Acquisition of businesses, net of cash acquired |
(169,474 | ) | | | ||||||||
|
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|
|||||||
Net cash provided by (used for) investing activities |
923,010 | (262,801 | ) | (640,462 | ) | |||||||
|
|
|
|
|
|
|||||||
Cash flows from financing activities: |
||||||||||||
Issuance of common stock under stock purchase and stock option plans |
20,973 | 24,493 | 20,473 | |||||||||
Repurchase of common stock |
(823,478 | ) | (200,304 | ) | (146,331 | ) | ||||||
Dividend payments |
(67,322 | ) | (55,447 | ) | (48,619 | ) | ||||||
Payments related to net settlement of employee stock compensation awards |
(20,023 | ) | (12,881 | ) | (9,398 | ) | ||||||
Payments of contingent consideration |
(13,571 | ) | (1,050 | ) | (11,697 | ) | ||||||
Proceeds from issuance of convertible notes, net of issuance costs |
| | 450,800 | |||||||||
Purchase of convertible note hedges |
| | (100,834 | ) | ||||||||
Proceeds from issuance of warrants |
| | 67,852 | |||||||||
Tax benefit related to employee stock compensation awards |
| | 6,198 | |||||||||
|
|
|
|
|
|
|||||||
Net cash (used for) provided by financing activities |
(903,421 | ) | (245,189 | ) | 228,444 | |||||||
|
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|
|
|
|
|||||||
Effects of exchange rate changes on cash and cash equivalents |
439 | 3,454 | | |||||||||
|
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|
|
|
|||||||
Increase in cash and cash equivalents |
496,909 | 121,959 | 43,179 | |||||||||
Cash and cash equivalents at beginning of year |
429,843 | 307,884 | 264,705 | |||||||||
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|||||||
Cash and cash equivalents at end of year |
$ | 926,752 | $ | 429,843 | $ | 307,884 | ||||||
|
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|
|
|
|||||||
Supplementary disclosure of cash flow information: |
||||||||||||
Cash paid for: |
||||||||||||
Interest |
$ | 6,205 | $ | 6,446 | $ | 446 | ||||||
Income taxes |
$ | 72,811 | $ | 53,775 | $ | 40,424 |
The accompanying notes are an integral part of the consolidated financial statements.
50
TERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. Teradynes 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. Teradynes automatic test equipment and industrial automation products and services include:
| semiconductor test (Semiconductor Test) systems; |
| defense/aerospace (Defense/Aerospace) test instrumentation and systems, storage test (Storage Test) systems, and circuit-board test and inspection (Production Board Test) systems (collectively these products represent System Test); |
| industrial automation (Industrial Automation) products; and |
| wireless test (Wireless Test) systems. |
On June 11, 2015, Teradyne acquired Universal Robots A/S (Universal Robots) for approximately $284 million of cash plus up to an additional $65 million of cash if certain performance targets are met extending through 2018. Universal Robots is the leading supplier of collaborative robots which are low-cost, easy-to-deploy and simple-to-program robots that work side by side with production workers. Universal Robots is a separate operating and reportable segment, Industrial Automation.
On February 26, 2018, Teradyne acquired Energid Technologies Corporation (Energid) for a total purchase price of approximately $28 million. Energids technology enables and simplifies the programming of complex robotic motions used in a wide variety of end markets, ranging from heavy industry to healthcare, utilizing both traditional robots and collaborative robots.
On April 25, 2018, Teradyne acquired Mobile Industrial Robots ApS (MiR), a Danish limited liability company, for a total purchase price of approximately $198 million, which included $145 million of cash paid and $53 million of contingent consideration measured at fair value. The contingent consideration is payable upon achievement of certain thresholds and targets for revenue and earnings before interest and taxes through 2020. At December 31, 2018, the maximum amount of contingent consideration that could be paid is $115 million. MiR is the leading maker of collaborative autonomous mobile robots for industrial applications.
Universal Robots, MiR and Energid are included in Teradynes Industrial Automation segment.
B. ACCOUNTING POLICIES
The consolidated financial statements include the accounts of Teradyne and its wholly-owned subsidiaries. All significant intercompany balances and transactions are eliminated. Certain prior years amounts were reclassified to conform to the current year presentation.
Preparation of Financial Statements and Use of Estimates
The preparation of consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. On an on-going basis, management evaluates its estimates, including those related to inventories, investments, goodwill, intangible and other long-lived assets, accounts receivable, income taxes, deferred tax
51
assets and liabilities, pensions, warranties, and loss contingencies. Management bases its estimates on historical experience and on appropriate and customary assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ significantly from these estimates.
Revenue Recognition
Revenue from Contracts with Customers
Teradyne adopted Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers 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, 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. The adoption of ASC 606 represents a change in accounting principle that will more closely align the timing of revenue recognition with the delivery of Teradynes 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. Teradynes 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. Teradynes 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 customers in which a customer may purchase a combination of goods and 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.
52
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 Teradynes 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 $2,088.8 million for the twelve months ended December 31, 2018. For the twelve months ended December 31, 2018, Teradyne also recognized $12.0 million in revenue on leases of Teradyne systems, which are accounted for outside of ASC 606.
Disaggregation of Revenue
The following table provides information about disaggregated revenue by primary geographical market, major product line and timing of revenue recognition.
For the Year Ended December 31, 2018 | ||||||||||||||||||||||||||||||||||||||||||||
Semiconductor Test | System Test | Industrial Automation | Wireless Test |
Corporate and Other |
Consolidated | |||||||||||||||||||||||||||||||||||||||
System on a Chip |
Memory | Defense/ Aerospace |
Storage Test |
Production Board Test |
Universal Robots |
Mobile Industrial Robots |
Energid | |||||||||||||||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||||||||||||||
Americas |
||||||||||||||||||||||||||||||||||||||||||||
Point in time |
$ | 43,398 | $ | 14,579 | $ | 59,246 | $ | 767 | $ | 9,082 | $ | 68,289 | $ | 7,326 | $ | 543 | $ | 17,730 | $ | (1,205 | ) | $ | 219,755 | |||||||||||||||||||||
Over time |
35,100 | 2,774 | 24,577 | | 3,091 | 649 | | 997 | 1,436 | | 68,624 | |||||||||||||||||||||||||||||||||
Europe, Middle East and Africa |
||||||||||||||||||||||||||||||||||||||||||||
Point in time |
50,988 | 9,726 | 3,056 | | 16,733 | 105,776 | 10,839 | | 3,821 | | 200,939 | |||||||||||||||||||||||||||||||||
Over time |
21,584 | 1,125 | 2,124 | | 6,467 | 1,000 | | 1,591 | 1,147 | | 35,038 | |||||||||||||||||||||||||||||||||
Asia Pacific |
||||||||||||||||||||||||||||||||||||||||||||
Point in time |
916,107 | 235,061 | 2,769 | 58,004 | 17,761 | 57,830 | 5,950 | 10 | 100,985 | | 1,394,477 | |||||||||||||||||||||||||||||||||
Over time |
140,887 | 10,203 | 965 | 7,877 | 3,221 | 551 | | 101 | 6,127 | | 169,932 | |||||||||||||||||||||||||||||||||
Lease revenue |
10,885 | | | | 392 | | | | 760 | | 12,037 | |||||||||||||||||||||||||||||||||
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Total |
$ | 1,218,949 | $ | 273,468 | $ | 92,737 | $ | 66,648 | $ | 56,747 | $ | 234,095 | $ | 24,115 | $ | 3,242 | $ | 132,006 | $ | (1,205 | ) | $ | 2,100,802 | |||||||||||||||||||||
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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. Teradynes hardware is recognized at a point in time upon transfer of control to the customer.
53
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 Teradynes 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.
December 31, 2018 |
January 1, 2018 (as adjusted) |
Increase | ||||||||||
(in thousands) | ||||||||||||
Deferred revenue and customer advances |
$ | 77,711 | $ | 76,638 | $ | 1,073 | ||||||
Long-term deferred revenue and customer advances |
32,750 | 20,848 | 11,902 |
The amount of revenue recognized during the twelve months ended December 31, 2018 that was previously included within the deferred revenue and customer advances balance was $69.9 million and primarily relates to extended warranties, training, application support and PCS. Each of these represents a distinct performance obligation. Customers typically pay for these services net 30 to 60 days from the date that transfer of control of the associated system or product occurs. Teradyne expects to recognize 70% of the remaining performance obligation in the next 12 months, 25% in 1-3 years, and the remainder thereafter.
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.
54
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 Teradynes 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 Teradynes 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:
December 31, 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 |
$ | 291,267 | $ | (37,348 | ) | $ | 253,919 | |||||
Inventories, net |
153,541 | 10,759 | 164,300 | |||||||||
Deferred tax assets |
70,848 | (3,874 | ) | 66,974 | ||||||||
Liabilities |
||||||||||||
Deferred revenue and customer advances |
$ | 77,711 | $ | (4,118 | ) | $ | 73,593 | |||||
Income taxes payable |
36,185 | (4,495 | ) | 31,690 | ||||||||
Long-term deferred revenue and customer advances |
32,750 | (10,303 | ) | 22,447 | ||||||||
Shareholders equity |
||||||||||||
Accumulated deficit |
$ | (158,191 | ) | $ | (11,547 | ) | $ | (169,738 | ) |
Condensed Consolidated Statement of Operation:
For the Year Ended December 31, 2018 | ||||||||||||
As Reported |
Adjustments to Recognize under Legacy GAAP |
Legacy GAAP |
||||||||||
(in thousands, except per share amount) | ||||||||||||
Total revenues |
$ | 2,100,802 | $ | (39,184 | ) | $ | 2,061,618 | |||||
Total cost of revenues |
880,408 | (10,760 | ) | 869,648 | ||||||||
Income tax provision |
16,022 | (4,197 | ) | 11,825 | ||||||||
Net income |
451,779 | (24,227 | ) | 427,552 | ||||||||
Net income per common share: |
||||||||||||
Basic |
$ | 2.41 | $ | (0.13 | ) | $ | 2.28 | |||||
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Diluted |
$ | 2.35 | $ | (0.13 | ) | $ | 2.22 | |||||
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55
As of December 31, 2018 and 2017, deferred revenue and customer advances consisted of the following and are included in the short and long-term deferred revenue and customer advances:
2018 | 2017 | |||||||
(in thousands) | ||||||||
Maintenance and training |
$ | 58,362 | $ | 57,256 | ||||
Extended warranty |
27,422 | 24,438 | ||||||
Customer advances, undelivered elements and other |
24,677 | 32,047 | ||||||
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|
|||||
Total deferred revenue and customer advances |
$ | 110,461 | $ | 113,741 | ||||
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|
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:
Amount | ||||
(in thousands) | ||||
Balance at December 31, 2015 |
$ | 6,925 | ||
Accruals for warranties issued during the period |
14,291 | |||
Accruals related to pre-existing warranties |
(1,354 | ) | ||
Settlements made during the period |
(12,659 | ) | ||
|
|
|||
Balance at December 31, 2016 |
7,203 | |||
Accruals for warranties issued during the period |
14,223 | |||
Accruals related to pre-existing warranties |
(379 | ) | ||
Settlements made during the period |
(12,847 | ) | ||
|
|
|||
Balance at December 31, 2017 |
8,200 | |||
Acquisition |
41 | |||
Accruals for warranties issued during the period |
13,045 | |||
Accruals related to pre-existing warranties |
921 | |||
Settlements made during the period |
(14,298 | ) | ||
|
|
|||
Balance at December 31, 2018 |
$ | 7,909 | ||
|
|
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:
Amount | ||||
(in thousands) | ||||
Balance at December 31, 2015 |
$ | 30,024 | ||
Deferral of new extended warranty revenue |
19,909 | |||
Recognition of extended warranty deferred revenue |
(21,733 | ) | ||
|
|
|||
Balance at December 31, 2016 |
28,200 | |||
Deferral of new extended warranty revenue |
20,513 | |||
Recognition of extended warranty deferred revenue |
(24,275 | ) | ||
|
|
|||
Balance at December 31, 2017 |
24,438 | |||
Deferral of new extended warranty revenue |
23,753 | |||
Recognition of extended warranty deferred revenue |
(20,769 | ) | ||
|
|
|||
Balance at December 31, 2018 |
$ | 27,422 | ||
|
|
56
Accounts Receivable and Allowance for Doubtful Accounts
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The volatility of the industries that Teradyne serves can cause certain of its customers to experience shortages of cash flows, which can impact their ability to make required payments. Teradyne maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. Estimated allowances for doubtful accounts are reviewed periodically taking into account the customers recent payment history, the customers current financial statements and other information regarding the customers credit worthiness. Account balances are written off against the allowance when it is determined the receivable will not be recovered.
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 $52.2 million and $5.4 million during 2018 and 2017, respectively. Factoring fees for the sales of receivables were recorded in interest expense and were not material.
Inventories
Inventories are stated at the lower of cost (first-in, first-out basis) or net realizable value. On a quarterly basis, Teradyne uses consistent methodologies to evaluate all inventories for net realizable value. Teradyne records a provision for both excess and obsolete inventory when such write-downs or write-offs are identified through the quarterly review process. The inventory valuation is based upon assumptions about future demand, product mix and possible alternative uses.
Investments
Teradyne accounts for its investments in debt and equity securities in accordance with the provisions of ASC 320-10, InvestmentsDebt and Equity Securities. ASC 320-10 requires that certain debt and equity securities be classified into one of three categories; trading, available-for-sale or held-to-maturity securities. On a quarterly basis, Teradyne reviews its investments to identify and evaluate those that have an indication of a potential other-than-temporary impairment. Factors considered in determining whether a loss is other-than-temporary include:
| The length of time and the extent to which the market value has been less than cost; |
| The financial condition and near-term prospects of the issuer; and |
| The intent and ability to retain the investment in the issuer for a period of time sufficient to allow for any anticipated recovery in market value. |
Teradyne uses the market and income approach techniques to value its financial instruments and there were no changes in valuation techniques during the twelve months ended December 31, 2018 and 2017. As defined in ASC 820-10, Fair Value Measurements and Disclosures, fair value is the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. ASC 820-10 requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:
Level 1: Quoted prices in active markets for identical assets as of the reporting date;
Level 2: Inputs other than Level 1, that are observable either directly or indirectly as of the reporting date. For example, a common approach for valuing fixed income securities is the use of matrix pricing. Matrix pricing is a mathematical technique used to value securities by relying on the securities relationship to other benchmark quoted prices, and is considered a Level 2 input; or
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Level 3: Unobservable inputs that are not supported by market data. Unobservable inputs are developed based on the best information available, which might include Teradynes own data.
In accordance with ASC 820-10, Teradyne measures its debt and equity investments at fair value. Teradynes debt investments are classified as Level 2, and equity investments are classified as Level 1. Acquisition-related contingent consideration is classified as Level 3. Teradyne determines the fair value of acquisition-related contingent consideration using a Monte Carlo simulation model. Assumptions utilized in the model include forecasted revenues, revenue volatility, earnings before interest and taxes, and discount rate.
Financial Assets and Financial Liabilities
In January 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-01, Financial InstrumentsOverall (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.
Prepayments
Prepayments consist of the following and are included in prepayments and other current assets on the balance sheet:
2018 | 2017 | |||||||
(in thousands) | ||||||||
Contract manufacturer and supplier prepayments |
$ | 131,642 | $ | 82,503 | ||||
Prepaid taxes |
9,646 | 5,039 | ||||||
Prepaid maintenance and other services |
8,487 | 8,189 | ||||||
Other prepayments |
12,744 | 12,386 | ||||||
|
|
|
|
|||||
Total prepayments |
$ | 162,519 | $ | 108,117 | ||||
|
|
|
|
Retirement and Postretirement Plans
Teradyne recognizes net actuarial gains and losses and the change in the fair value of the plan assets in its operating results in the year in which they occur or upon any interim remeasurement of the plans. Teradyne calculates the expected return on plan assets using the fair value of the plan assets. Actuarial gains and losses are generally measured annually as of December 31 and, accordingly, recorded during the fourth quarter of each year or upon any interim remeasurement of the plans.
Retirement Benefits
In March 2017, the FASB issued ASU 2017-07, CompensationRetirement 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
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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. In the twelve months ended December 31, 2017 and 2016, the retrospective adoption of this standard decreased income from operations by $5.0 million and $3.0 million, 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.
Goodwill, Intangible and Long-Lived Assets
Teradyne accounts for goodwill and intangible assets in accordance with ASC 350-10, Intangibles-Goodwill and Other. Intangible assets are amortized over their estimated useful economic life and are carried at cost less accumulated amortization. Goodwill is assessed 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. In accordance with ASC 350-10, Teradyne has the option to perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If Teradyne determines this is the case, Teradyne is required to perform the two-step goodwill impairment test to identify potential goodwill impairment and measure the amount of goodwill impairment loss to be recognized. If Teradyne determines that it is more likely than not that the fair value of the reporting unit is greater than its carrying amounts, the two-step goodwill impairment test is not required.
In accordance with ASC 360-10, Impairment or Disposal of Long-Lived 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. Each impairment test is based on a comparison of the estimated undiscounted cash flows to the recorded value of the asset. If impairment is indicated, the asset is written down to its estimated fair value based on a discounted cash flow analysis. The cash flow estimates used to determine the impairment, if any, contain managements best estimates using appropriate assumptions and projections at that time.
Property, Plant and Equipment
Property, plant and equipment are stated at cost and depreciated over the estimated useful lives of the assets. Leasehold improvements and major renewals are capitalized and included in property, plant and equipment accounts while expenditures for maintenance and repairs and minor renewals are charged to expense. When assets are retired, the assets and related accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in the consolidated statements of operations.
Teradyne provides for depreciation of its assets principally on the straight-line method with the cost of the assets being charged to expense over their useful lives as follows:
Buildings |
40 years | |
Building improvements |
5 to 10 years | |
Leasehold improvements |
Lesser of lease term or 10 years | |
Furniture and fixtures |
10 years | |
Test systems manufactured internally |
6 years | |
Machinery and equipment |
3 to 5 years | |
Software |
3 to 5 years |
Test systems manufactured internally are used by Teradyne for customer evaluations and manufacturing and support of its customers. Teradyne depreciates the test systems manufactured internally over a six-year life to cost of revenues, engineering and development, and selling and administrative expenses. Teradyne often sells internally manufactured test equipment to customers. Upon the sale of an internally manufactured test system,
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the net book value of the system is transferred to inventory and expensed as cost of revenues. The net book value of internally manufactured test systems sold in the years ended December 31, 2018, 2017, and 2016 was $3.8 million, $3.6 million, and $11.4 million, respectively.
Engineering and Development Costs
Teradynes products are highly technical in nature and require a large and continuing engineering and development effort. Software development costs incurred prior to the establishment of technological feasibility are charged to expense. Software development costs incurred subsequent to the establishment of technological feasibility are capitalized until the product is available for release to customers. To date, the period between achieving technological feasibility and general availability of the product has been short and software development costs eligible for capitalization have not been material. Engineering and development costs are expensed as incurred and consist primarily of salaries, contractor fees including non-recurring engineering charges related to product design, allocated facility costs, depreciation, and tooling costs.
Stock Compensation Plans and Employee Stock Purchase Plan
Stock-based compensation expense is based on the grant-date fair value estimated in accordance with the provisions of ASC 718-10, Compensation-Stock Compensation.
In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. Teradyne adopted this ASU in the first quarter of 2017. This ASU changes how Teradyne accounts for certain aspects of share-based payment awards to employees, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statements of cash flows.
Adoption of this ASU required recognition of a cumulative effect adjustment to retained earnings for any prior year excess tax benefits or tax deficiencies not previously recorded. The cumulative effect adjustment of $39 million was recorded in the first quarter of 2017 as an increase to retained earnings and deferred tax assets.
This ASU also required a change in how Teradyne recognizes the excess tax benefits or tax deficiencies related to stock-based compensation. Prior to adopting ASU 2016-09, these excess tax benefits or tax deficiencies were credited or charged to additional paid-in capital in Teradynes consolidated balance sheets. In accordance with ASU 2016-09, starting in the first quarter of 2017, these excess tax benefits or tax deficiencies are recognized as a discrete tax benefit or discrete tax expense to the current income tax provision in Teradynes consolidated statements of operations.
ASU 2016-09 requires companies to adopt the amendment related to accounting for excess tax benefits or tax deficiencies on a prospective basis. In 2017, Teradyne recognized a discrete tax benefit of $6.3 million related to net excess tax benefit.
In addition, under ASU 2016-09, all excess tax benefits related to share-based payments are reported as cash flows from operating activities. Previously, excess tax benefits from share-based payment arrangements were reported as cash flows from financing activities. The classification amendment was applied prospectively. This ASU also clarifies that all cash payments made to taxing authorities on the employees behalf for withheld shares should be presented as financing activities on the statement of cash flows. Previously, Teradyne reported cash payments made to taxing authorities as operating activities on the statement of cash flows. This change was applied retrospectively.
Upon adoption of ASU 2016-09, Teradyne made an accounting policy election to continue accounting for forfeitures by applying an estimated forfeiture rate and to continue to recognize compensation costs only for those stock-based compensation awards expected to vest.
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Under its stock compensation plans, Teradyne has granted stock options, restricted stock units and performance-based restricted stock units, and employees are eligible to purchase Teradynes common stock through its Employee Stock Purchase Plan (ESPP).
Income Taxes
Deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The measurement of deferred tax assets is reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax assets will not be realized. Teradyne performed the required assessment of positive and negative evidence regarding the realization of the net deferred tax assets in accordance with ASC 740, Accounting for Income Taxes. This assessment included the evaluation of scheduled reversals of deferred tax liabilities, estimates of projected future taxable income and tax-planning strategies. Although realization is not assured, based on its assessment, Teradyne concluded that it is more likely than not that such assets, net of the existing valuation allowance, will be realized.
Advertising Costs
Teradyne expenses all advertising costs as incurred. Advertising costs were $15.4 million, $9.1 million, and $6.4 million in 2018, 2017, and 2016, respectively.
Translation of Non-U.S. Currencies
The functional currency for all subsidiaries is the U.S. dollar, except for the Universal Robots and MiR reporting units for which the local currency is its functional currency. All foreign currency denominated monetary assets and liabilities are remeasured on a monthly basis into the functional currency using exchange rates in effect at the end of the period. All foreign currency denominated non-monetary assets and liabilities are remeasured into the functional currency using historical exchange rates. Net foreign exchange gains and losses resulting from remeasurement are included in other (income) expense, net. For Industrial Automation, assets and liabilities are translated into U.S. dollars using exchange rates in effect at the end of the period. Revenue and expense amounts are translated using an average of exchange rates in effect during the period. Translation adjustments are recorded within accumulated other comprehensive income (loss).
Net foreign exchange gains and losses resulting from remeasurement are included in other (income) expense, net. For the years ended December 31, 2018, 2017, and 2016, (gains) losses from the remeasurement of the monetary assets and liabilities denominated in foreign currencies were $(2.4) million, $2.9 million, and $(8.0) million, respectively.
These amounts do not reflect the corresponding (gains) losses from foreign exchange contracts. See Note G: Financial Instruments regarding foreign exchange contracts.
Net Income (Loss) per Common Share
Basic net income (loss) per common share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Except where the result would be anti-dilutive, diluted net income (loss) per common share is calculated by dividing net income (loss) by the sum of the weighted average number of common shares plus common stock equivalents, if applicable.
With respect to its convertible debt issued in 2016, Teradyne has determined that it has the ability and intent to settle the principal of the convertible debt in cash; accordingly, the principal amount is excluded from the determination of diluted earnings per share. As a result, Teradyne is accounting for the conversion spread using the treasury stock method.
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Comprehensive Income (Loss)
Comprehensive income (loss) includes net income, unrealized pension and postretirement prior service costs and benefits, unrealized gains and losses on investments in debt marketable securities and foreign currency translation adjustment. Prior to 2018, comprehensive income (loss) included unrealized gains and losses on investments in equity marketable securities.
C. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
On January 26, 2017, the FASB issued ASU 2017-04, IntangiblesGoodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment. The new guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Goodwill impairment will now be the amount by which a reporting units carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance will remain largely unchanged. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. The same one-step impairment test will be applied to goodwill at all reporting units, even those with zero or negative carrying amounts. Entities will be required to disclose the amount of goodwill at reporting units with zero or negative carrying amounts. The revised guidance will be applied prospectively, and is effective in 2020. Early adoption is permitted for any impairment tests performed after January 1, 2017. Teradyne is currently evaluating the impact of this ASU on its financial position, results of operations and statements of cash flows.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The guidance in this ASU supersedes the lease recognition requirements in ASC Topic 840, Leases. The new standard establishes a right- of-use (ROU) model that requires a lessee to record an ROU asset and a lease liability on the balance sheet for all leases with terms longer than twelve months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the statements of operations. The new standard is effective for annual periods beginning after December 15, 2018 with early adoption permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which amends ASU 2016-02. The new ASU offers an additional transition method by which entities may elect not to recast the comparative periods presented in financial statements in the period of adoption and allows lessors to elect a practical expedient to not separate lease and non-lease components when certain conditions are met. This ASU has the same transition requirements and effective date as ASU 2016-02. Teradyne elected not to recast the comparative periods presented in financial statements in the period of adoption. Teradyne adopted this guidance in January 2019; as a result it recorded between $50 and $60 million of operating lease right-of-use assets and operating lease liabilities. Adoption had an immaterial impact on Teradynes results of operations.
D. ACQUISITIONS
Business
Mobile Industrial Robots
On April 25, 2018, Teradyne acquired all the issued and outstanding shares of MiR, a Danish limited liability company located in Odense, Denmark. MiR is the leading maker of collaborative autonomous mobile robots for industrial applications. MiR is part of Teradynes Industrial Automation segment.
The total purchase price of $197.8 million included $145.2 million of cash paid and $52.6 million of contingent consideration measured at fair value. The contingent consideration is payable in Euros upon the achievement of certain thresholds and targets for revenue and earnings before interest and taxes for periods from January 1, 2018 to December 31, 2018; January 1, 2018 to December 31, 2019; and January 1, 2018 to December 31, 2020. At December 31, 2018, the maximum amount of contingent consideration that could be paid is $115 million. Contingent consideration for the period from January 1, 2018 to December 31, 2018 was $31.0 million and is expected to be paid in March 2019.
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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 MiR acquisition was accounted for as a business combination and, accordingly, the results have been included in Teradynes consolidated results of operations from the date of acquisition. MiRs products will help expand the Industrial Automation segment, which is a key component of our growth strategy. The allocation of the total purchase price to MiRs net tangible liabilities 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 liabilities in the amount of $136.0 million was allocated to goodwill, which is not deductible for tax purposes. MiRs results have been included in Teradynes 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 |
$ | 135,976 | ||
Intangible assets |
80,670 | |||
Tangible assets acquired and liabilities assumed: |
||||
Current assets |
6,039 | |||
Non-current assets |
1,336 | |||
Accounts payable and current liabilities |
(7,336 | ) | ||
Long-term deferred tax liabilities |
(18,007 | ) | ||
Other long-term liabilities |
(900 | ) | ||
|
|
|||
Total purchase price |
$ | 197,778 | ||
|
|
Teradyne estimated the fair value of intangible assets using the income and cost approaches. Acquired intangible assets are amortized on a straight-line basis over their estimated useful 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 |
$ | 58,900 | 7.0 | |||||
Trademarks and tradenames |
13,240 | 11.0 | ||||||
Customer relationships |
8,500 | 2.5 | ||||||
Backlog |
30 | 0.2 | ||||||
|
|
|||||||
Total intangible assets |
$ | 80,670 | 7.2 | |||||
|
|
For the period from April 25, 2018 to December 31, 2018, MiR contributed $24.1 million of revenues and had a $(7.6) million loss before income taxes.
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The following unaudited pro forma information gives effect to the acquisition of MiR as if the acquisition occurred on January 1, 2017. 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 Year Ended | ||||||||
December 31, 2018 | December 31, 2017 | |||||||
(in thousands, except per share amounts) |
||||||||
Revenues |
$ | 2,107,600 | $ | 2,148,320 | ||||
Net income |
$ | 450,559 | $ | 243,399 | ||||
Net income per common share: |
||||||||
Basic |
$ | 2.40 | $ | 1.23 | ||||
|
|
|
|
|||||
Diluted |
$ | 2.34 | $ | 1.21 | ||||
|
|
|
|
Pro forma results for the year ended December 31, 2018 were adjusted to exclude $2.9 million of acquisition related costs and $0.4 million of non-recurring expense related to fair value adjustment to acquisition-date inventory.
Pro forma results for the year ended December 31, 2017 were adjusted to include $2.9 million of acquisition related costs and $0.4 million of non-recurring expense related to fair value adjustment to acquisition-date inventory.
Energid Technologies Corporation
On February 26, 2018, Teradyne acquired all of the issued and outstanding shares of Energid for a total purchase price of approximately $27.6 million. Energids technology enables and simplifies the programming of complex robotic motions used in a wide variety of end markets, ranging from heavy industry to healthcare, utilizing both traditional robots and collaborative robots. The Energid acquisition was accounted for as a business combination and, accordingly, Energids results have been included in Teradynes Industrial Automation segment from the date of acquisition. As of the acquisition date, Teradynes purchase price allocation was goodwill of $14.4 million which is deductible for tax purposes, acquired intangible assets of $12.3 million with an average estimated useful life of 7.7 years, and $1.0 million of net tangible assets. The acquisition was not material to Teradynes condensed consolidated financial statements.
E. INVENTORIES
Inventories, net consisted of the following at December 31, 2018 and 2017:
2018 | 2017 | |||||||
(in thousands) | ||||||||
Raw material |
$ | 89,365 | $ | 62,668 | ||||
Work-in-process |
31,014 | 19,464 | ||||||
Finished goods |
33,162 | 25,393 | ||||||
|
|
|
|
|||||
$ | 153,541 | $ | 107,525 | |||||
|
|
|
|
Inventory reserves for the years ended December 31, 2018 and 2017 were $100.8 million and $102.9 million, respectively.
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F. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, net consisted of the following at December 31, 2018 and 2017:
2018 | 2017 | |||||||
(in thousands) | ||||||||
Land |
$ | 16,561 | $ | 16,561 | ||||
Buildings |
105,935 | 98,369 | ||||||
Machinery and equipment |
689,770 | 647,961 | ||||||
Furniture and fixtures, and software |
90,384 | 88,539 | ||||||
Leasehold improvements |
52,536 | 49,540 | ||||||
Construction in progress |
6,276 | 13,522 | ||||||
|
|
|
|
|||||
961,462 | 914,492 | |||||||
Less: accumulated depreciation |
681,641 | 646,045 | ||||||
|
|
|
|
|||||
$ | 279,821 | $ | 268,447 | |||||
|
|
|
|
Depreciation of property, plant and equipment for the years ended December 31, 2018, 2017, and 2016 was $67.4 million, $66.1 million, and $64.8 million, respectively. As of December 31, 2018 and 2017, the gross book value included in machinery and equipment for internally manufactured test systems being leased by customers was $5.5 million and $18.1 million, respectively. As of December 31, 2018 and 2017, the accumulated depreciation on these test systems was $5.2 million and $13.7 million, respectively.
G. FINANCIAL INSTRUMENTS
Cash Equivalents
Teradyne considers all highly liquid investments with maturities of three months or less at the date of acquisition to be cash equivalents.
Marketable Securities
Effective January 1, 2018, Teradyne adopted ASU 2016-01, Financial InstrumentsOverall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, using the modified retrospective approach. This guidance requires that changes in fair value of equity securities be accounted for directly in earnings. Prior to 2018, the changes in fair value of equity securities were recorded in accumulated other comprehensive income (loss) on the balance sheet.
Teradynes available-for-sale debt securities are classified as Level 2 and equity securities 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 years ended December 31, 2018 and 2017, there were no transfers in or out of Level 1, Level 2, or Level 3 financial instruments.
Realized gains recorded in 2018, 2017, and 2016 were $4.0 million, $1.1 million, and $1.6 million, respectively. Realized losses recorded in 2018, 2017, and 2016 were $1.6 million, $0.3 million, and $0.5 million, respectively. Realized gains are included in interest income and realized losses are included in interest expense. Unrealized gains and losses on available-for-sale debt securities are included in accumulated other comprehensive income (loss) on the balance sheet.
Unrealized gains related to equity securities are included in interest income and unrealized losses are included in interest expense. Unrealized losses related to equity securities recognized in 2018 were $6.0 million.
The cost of securities sold is based on the specific identification method.
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The following table sets forth by fair value hierarchy Teradynes financial assets and liabilities that were measured at fair value on a recurring basis as of December 31, 2018 and 2017:
December 31, 2018 | ||||||||||||||||
Quoted Prices in Active Markets for Identical Instruments (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
Total | |||||||||||||
(in thousands) | ||||||||||||||||
Assets |
||||||||||||||||
Cash |
$ | 312,512 | $ | | $ | | $ | 312,512 | ||||||||
Cash equivalents |
253,525 | 360,715 | | 614,240 | ||||||||||||
Available for sale securities: |
||||||||||||||||
U.S. Treasury securities |
| 109,721 | | 109,721 | ||||||||||||
Commercial paper |
| 86,117 | | 86,117 | ||||||||||||
Corporate debt securities |
| 40,020 | | 40,020 | ||||||||||||
U.S. government agency securities |
| 9,611 | | 9,611 | ||||||||||||
Certificates of deposit and time deposits |
| 7,604 | | 7,604 | ||||||||||||
Debt mutual funds |
3,187 | | | 3,187 | ||||||||||||
Non-U.S. government securities |
| 376 | | 376 | ||||||||||||
Equity securities: |
||||||||||||||||
Mutual funds |
21,191 | | | 21,191 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
590,415 | 614,164 | | 1,204,579 | |||||||||||||
Derivative assets |
| 79 | | 79 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 590,415 | $ | 614,243 | $ | | $ | 1,204,658 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Liabilities |
||||||||||||||||
Contingent consideration |
$ | | $ | | $ | 70,543 | $ | 70,543 | ||||||||
Derivative liabilities |
| 514 | | 514 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | | $ | 514 | $ | 70,543 | $ | 71,057 | ||||||||
|
|
|
|
|
|
|
|
Reported as follows:
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
(in thousands) | ||||||||||||||||
Assets |
||||||||||||||||
Cash and cash equivalents |
$ | 566,037 | $ | 360,715 | $ | | $ | 926,752 | ||||||||
Marketable securities |
| 190,096 | | 190,096 | ||||||||||||
Long-term marketable securities |
24,378 | 63,353 | | 87,731 | ||||||||||||
Prepayments |
| 79 | | 79 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 590,415 | $ | 614,243 | $ | | $ | 1,204,658 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Liabilities |
||||||||||||||||
Other current liabilities |
$ | | $ | 514 | $ | | $ | 514 | ||||||||
Contingent consideration |
| | 34,865 | 34,865 | ||||||||||||
Long-term contingent consideration |
| | 35,678 | 35,678 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | | $ | 514 | $ | 70,543 | $ | 71,057 | ||||||||
|
|
|
|
|
|
|
|
66
December 31, 2017 | ||||||||||||||||
Quoted Prices in Active Markets for Identical Instruments (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
Total | |||||||||||||
(in thousands) | ||||||||||||||||
Assets |
||||||||||||||||
Cash |
$ | 197,955 | $ | | $ | | $ | 197,955 | ||||||||
Cash equivalents |
206,335 | 25,553 | | 231,888 | ||||||||||||
Available for sale securities: |
||||||||||||||||
U.S. Treasury securities |
| 855,795 | | 855,795 | ||||||||||||
Commercial paper |
| 282,840 | | 282,840 | ||||||||||||
Certificates of deposit and time deposits |
| 167,342 | | 167,342 | ||||||||||||
Corporate debt securities |
| 133,186 | | 133,186 | ||||||||||||
Equity and debt mutual funds |
23,430 | | | 23,430 | ||||||||||||
U.S. government agency securities |
| 10,726 | | 10,726 | ||||||||||||
Non-U.S. government securities |
| 586 | | 586 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
427,720 | 1,476,028 | | 1,903,748 | |||||||||||||
Derivative assets |
| 389 | | 389 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 427,720 | $ | 1,476,417 | $ | | $ | 1,904,137 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Liabilities |
||||||||||||||||
Contingent consideration |
$ | | $ | | $ | 45,102 | $ | 45,102 | ||||||||
Derivative liabilities |
| 446 | | 446 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | | $ | 446 | $ | 45,102 | $ | 45,548 | ||||||||
|
|
|
|
|
|
|
|
Reported as follows:
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
(in thousands) | ||||||||||||||||
Assets |
||||||||||||||||
Cash and cash equivalents |
$ | 404,290 | $ | 25,553 | $ | | $ | 429,843 | ||||||||
Marketable securities |
| 1,347,979 | | 1,347,979 | ||||||||||||
Long-term marketable securities |
23,430 | 102,496 | | 125,926 | ||||||||||||
Prepayments |
| 389 | | 389 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 427,720 | $ | 1,476,417 | $ | | $ | 1,904,137 | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Liabilities |
||||||||||||||||
Other current liabilities |
$ | | $ | 446 | $ | | $ | 446 | ||||||||
Contingent consideration |
| | 24,497 | 24,497 | ||||||||||||
Long-term contingent consideration |
| | 20,605 | 20,605 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | | $ | 446 | $ | 45,102 | $ | 45,548 | |||||||||
|
|
|
|
|
|
|
|
67
Changes in the fair value of Level 3 contingent consideration for the years ended December 31, 2018 and 2017 were as follows:
Contingent Consideration | ||||
(in thousands) | ||||
Balance at December 31, 2016 |
$ | 38,332 | ||
Payments (1) |
(1,050 | ) | ||
Fair value adjustment (2) |
7,820 | |||
|
|
|||
Balance at December 31, 2017 |
45,102 | |||
Acquisition of MiR |
52,547 | |||
Foreign currency impact |
(3,540 | ) | ||
Payments (3) |
(24,553 | ) | ||
Fair value adjustment (4) |
987 | |||
|
|
|||
Balance at December 31, 2018 |
$ | 70,543 | ||
|
|
(1) | During the year ended December 31, 2017, Teradyne paid $1.1 million of contingent consideration for the earn-out in connection with the acquisition of Avionics Interface Technologies, LLC (AIT). |
(2) | During the year ended December 31, 2017, the fair value of contingent consideration for the earn-out in connection with the acquisition of Universal Robots was increased by $7.8 million primarily due to an increase in forecasted revenues and decrease in discount rate. |
(3) | During the year ended December 31, 2018, Teradyne paid $24.6 million of contingent consideration for the earn-out in connection with the acquisition of Universal Robots. |
(4) | During the year ended December 31, 2018, the fair value of contingent consideration for the earn-out in connection with the acquisition of MiR was increased by $17.7 million primarily due to an increase in forecasted revenues. During the year ended December 31, 2018, the fair value of contingent consideration for the earn-out in connection with the acquisition of Universal Robots was decreased by $16.7 million primarily due to a decrease in forecasted revenues. |
The following table provides quantitative information associated with the fair value measurement of Teradynes Level 3 financial instrument:
Liability |
December 31, 2018 Fair Value |
Valuation Technique |
Unobservable Inputs | Weighted Average |
||||||||
(in thousands) | ||||||||||||
Contingent consideration (MiR) |
$ | 66,672(1) | Monte Carlo simulation | Revenue volatility | 18.0% | |||||||
Discount rate | 1.1% | |||||||||||
Contingent consideration (Universal Robots) |
$3,871(1) |
(1) | Contingent consideration related to MiR and Universal Robots acquisitions of $31.0 million and $3.9 million, respectively, is expected to be paid in March 2019. |
As of December 31, 2018, the significant unobservable inputs used in the Monte Carlo simulation to fair value the 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 December 31, 2018, the maximum amount of contingent consideration that could be paid in connection with the acquisition of MiR is $115 million. The earn-out periods end on December 31, 2018, December 31, 2019, and December 31, 2020.
68
The carrying amounts and fair values of Teradynes financial instruments at December 31, 2018 and 2017 were as follows:
December 31, 2018 | December 31, 2017 | |||||||||||||||
Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||||
(in thousands) | ||||||||||||||||
Assets |
||||||||||||||||
Cash and cash equivalents |
$ | 926,752 | $ | 926,752 | $ | 429,843 | $ | 429,843 | ||||||||
Marketable securities |
277,827 | 277,827 | 1,473,905 | 1,473,905 | ||||||||||||
Derivative assets |
79 | 79 | 389 | 389 | ||||||||||||
Liabilities |
||||||||||||||||
Contingent consideration |
70,543 | 70,543 | 45,102 | 45,102 | ||||||||||||
Derivative liabilities |
514 | 514 | 446 | 446 | ||||||||||||
Convertible debt (1) |
379,981 | 547,113 | 365,987 | 659,525 |
(1) | The carrying value represents the bifurcated debt component only, while the fair value is based on quoted market prices for the convertible note which includes the equity conversion features. |
The fair values of accounts receivable, net and accounts payable approximate the carrying amount due to the short term nature of these instruments.
The following tables summarize the composition of available-for-sale marketable securities at December 31, 2018 and 2017:
December 31, 2018 | ||||||||||||||||||||
Available-for-Sale | Fair Market Value of Investments with Unrealized Losses |
|||||||||||||||||||
Cost | Unrealized Gain |
Unrealized (Loss) |
Fair Market Value |
|||||||||||||||||
(in thousands) | ||||||||||||||||||||
U.S. Treasury securities |
$ | 110,969 | $ | 112 | $ | (1,360 | ) | $ | 109,721 | $ | 75,040 | |||||||||
Commercial paper |
86,130 | 13 | (26 | ) | 86,117 | 85,094 | ||||||||||||||
Corporate debt securities |
41,133 | 432 | (1,545 | ) | 40,020 | 24,767 | ||||||||||||||
U.S. government agency securities |
9,646 | 1 | (36 | ) | 9,611 | 7,077 | ||||||||||||||
Certificates of deposit and time deposits |
7,604 | | | 7,604 | | |||||||||||||||
Debt mutual funds |
3,153 | 34 | | 3,187 | | |||||||||||||||
Non-U.S. government securities |
376 | | | 376 | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
$ | 259,011 | $ | 592 | $ | (2,967 | ) | $ | 256,636 | $ | 191,978 | ||||||||||
|
|
|
|
|
|
|
|
|
|
Reported as follows:
Cost | Unrealized Gain |
Unrealized (Loss) |
Fair Market Value |
Fair Market Value of Investments with Unrealized Losses |
||||||||||||||||
(in thousands) | ||||||||||||||||||||
Marketable securities |
$ | 190,100 | $ | 88 | $ | (92 | ) | $ | 190,096 | $ | 140,262 | |||||||||
Long-term marketable securities |
68,911 | 504 | (2,875 | ) | 66,540 | 51,716 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
$ | 259,011 | $ | 592 | $ | (2,967 | ) | $ | 256,636 | $ | 191,978 | ||||||||||
|
|
|
|
|
|
|
|
|
|
69
December 31, 2017 | ||||||||||||||||||||
Available-for-Sale | Fair Market Value of Investments with Unrealized Losses |
|||||||||||||||||||
Cost | Unrealized Gain |
Unrealized (Loss) |
Fair Market Value |
|||||||||||||||||
(in thousands) | ||||||||||||||||||||
U.S. Treasury securities |
$ | 858,258 | $ | 72 | $ | (2,535 | ) | $ | 855,795 | $ | 850,163 | |||||||||
Commercial paper |
283,009 | 18 | (187 | ) | 282,840 | 258,933 | ||||||||||||||
Certificates of deposit and time deposits |
167,523 | 6 | (187 | ) | 167,342 | 138,340 | ||||||||||||||
Corporate debt securities |
131,179 | 2,380 | (373 | ) | 133,186 | 91,010 | ||||||||||||||
Equity and debt mutual funds |
19,403 | 4,102 | (75 | ) | 23,430 | 1,723 | ||||||||||||||
U.S. government agency securities |
10,775 | | (49 | ) | 10,726 | 10,727 | ||||||||||||||
Non-U.S. government securities |
582 | 4 | | 586 | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
$ | 1,470,729 | $ | 6,582 | $ | (3,406 | ) | $ | 1,473,905 | $ | 1,350,896 | ||||||||||
|
|
|
|
|
|
|
|
|
|
Reported as follows:
Cost | Unrealized Gain |
Unrealized (Loss) |
Fair Market Value |
Fair Market Value of Investments with Unrealized Losses |
||||||||||||||||
(in thousands) | ||||||||||||||||||||
Marketable securities |
$ | 1,349,970 | $ | 38 | $ | (2,029 | ) | $ | 1,347,979 | $ | 1,288,844 | |||||||||
Long-term marketable securities |
120,759 | 6,544 | (1,377 | ) | 125,926 | 62,052 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
$ | 1,470,729 | $ | 6,582 | $ | (3,406 | ) | $ | 1,473,905 | $ | 1,350,896 | ||||||||||
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018, the fair market value of investments with unrealized losses totaled $192.0 million. Of this value, $28.5 million had unrealized losses of $1.6 million greater than one year and $163.5 million had unrealized losses of $1.4 million for less than one year.
As of December 31, 2017, the fair market value of investments with unrealized losses totaled $1,350.9 million. Of this value, $141.0 million had unrealized losses of $1.2 million greater than one year and $1,209.9 million had unrealized losses of $2.2 million for less than one year.
Teradyne reviews its investments to identify and evaluate investments that have an indication of possible impairment. Based on this review, Teradyne determined that the unrealized losses related to these investments at December 31, 2018 and 2017, were temporary.
The contractual maturities of investments in available-for-sale marketable securities held at December 31, 2018 were as follows:
Cost | Fair Value | |||||||
(in thousands) | ||||||||
Due within one year |
$ | 190,100 | $ | 190,096 | ||||
Due after 1 year through 5 years |
9,199 | 9,144 | ||||||
Due after 5 years through 10 years |
14,081 | 13,405 | ||||||
Due after 10 years |
42,478 | 40,804 | ||||||
|
|
|
|
|||||
Total |
$ | 255,858 | $ | 253,449 | ||||
|
|
|
|
Contractual maturities of investments is available-for-sale marketable securities held at December 31, 2018 exclude $3.2 million of debt mutual funds as they do not have a contractual maturity date.
70
Derivatives
Teradyne conducts business in a number of foreign countries, with certain transactions denominated in local currencies. The purpose of Teradynes foreign currency management is to minimize the effect of exchange rate fluctuations on certain foreign currency denominated monetary assets and liabilities. Teradyne does not use derivative financial instruments for trading or speculative purposes.
To minimize the effect of exchange rate fluctuations associated with the remeasurement of monetary assets and liabilities denominated in foreign currencies, Teradyne enters into foreign currency forward contracts. The change in fair value of these derivatives is recorded directly in earnings, and is used to offset the change in value of the monetary assets and liabilities denominated in foreign currencies.
At December 31, 2018 and 2017, Teradyne had the following contracts to buy and sell non-U.S. currencies for U.S. dollars and other non-U.S. currencies with the following notional amounts:
December 31, 2018 | December 31, 2017 | |||||||||||||||||||||||
Buy Position |
Sell Position |
Net Total |
Buy Position |
Sell Position |
Net Total |
|||||||||||||||||||
(in millions) | ||||||||||||||||||||||||
Japanese Yen |
$ | (35.0 | ) | $ | | $ | (35.0 | ) | $ | (35.7 | ) | $ | | $ | (35.7 | ) | ||||||||
Taiwan Dollar |
(11.2 | ) | | (11.2 | ) | (9.9 | ) | | (9.9 | ) | ||||||||||||||
Korean Won |
(9.6 | ) | | (9.6 | ) | (8.9 | ) | | (8.9 | ) | ||||||||||||||
British Pound Sterling |
(1.4 | ) | | (1.4 | ) | (1.4 | ) | | (1.4 | ) | ||||||||||||||
Euro |
| 82.2 | 82.2 | | 27.4 | 27.4 | ||||||||||||||||||
Singapore Dollar |
| 15.7 | 15.7 | | 33.5 | 33.5 | ||||||||||||||||||
Philippine Peso |
| 5.2 | 5.2 | | | | ||||||||||||||||||
Chinese Yuan |
| 2.8 | 2.8 | | | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | (57.2 | ) | $ | 105.9 | $ | 48.7 | $ | (55.9 | ) | $ | 60.9 | $ | 5.0 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of the outstanding contracts was a loss of $0.4 million and $0.1 million, respectively, at December 31, 2018 and 2017.
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 December 31, 2018 and 2017:
Balance Sheet Location |
December
31, 2018 |
December
31, 2017 |
||||||||
(in thousands) | ||||||||||
Derivatives not designated as hedging instruments: |
||||||||||
Foreign exchange contracts |
Prepayments | $ | 79 | $ | 389 | |||||
Foreign exchange contracts |
Other current liabilities | (514 | ) | (446 | ) | |||||
|
|
|
|
|||||||
Total derivatives |
$ | (435 | ) | $ | (57 | ) | ||||
|
|
|
|
71
The following table summarizes the effect of derivative instruments in the statements of operations recognized for the years ended December 31, 2018, 2017, and 2016.
Location of (Gains) Losses Recognized in Statement of Operations |
2018 | 2017 | 2016 | |||||||||||
(in thousands) | ||||||||||||||
Derivatives not designated as hedging instruments: |
||||||||||||||
Foreign exchange contracts |
Other (income) expense, net | $ | 7,257 | $ | (1,133 | ) | $ | 8,671 |
(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 years ended December 31, 2018 and 2016, net gains from the remeasurement of monetary assets and liabilities denominated in foreign currencies were $2.4 million and $8.0 million, respectively. |
(3) | For the year ended December 31, 2017, net losses from the remeasurement of monetary assets and liabilities denominated in foreign currencies were $2.9 million. |
See Note H: Debt regarding derivatives related to the convertible senior notes.
Concentration of Credit Risk
Financial instruments which potentially subject Teradyne to concentrations of credit risk consist principally of cash equivalents, marketable securities, forward currency contracts and accounts receivable. Teradynes cash equivalents consist primarily of money market funds invested in U.S. Treasuries and government agencies. Teradynes fixed income available-for-sale marketable securities have a minimum rating of AA by one or more of the major credit rating agencies. Teradyne places foreign currency forward contracts with high credit-quality financial institutions in order to minimize credit risk exposure. Concentrations of credit risk with respect to accounts receivable are limited due to the large number of geographically dispersed customers. Teradyne performs ongoing credit evaluations of its customers financial condition and from time to time may require customers to provide a letter of credit from a bank to secure accounts receivable. There were no customers who accounted for more than 10% of Teradynes accounts receivable balance as of December 31, 2018 and December 31, 2017.
H. 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 Teradynes 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 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, beginning on June 15, 2017. The Notes will be convertible at the option of the noteholders at any time prior to the close of business on the business day immediately preceding September 15, 2023, 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 Teradynes common stock, for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than 130% of the conversion price on each applicable trading day; (2) during the five business day period after any five consecutive trading day period (the measurement period) in which the trading price (as defined in the Indenture) per $1,000 principal amount of Notes for each trading day of the measurement period was less
72
than 98% of the product of the closing sale price of the Teradynes common stock and the conversion rate on each such trading day; and (3) upon the occurrence of specified corporate events. On or after September 15, 2023 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their Notes at any time, regardless of the foregoing circumstances. Teradyne may satisfy its conversion obligation by paying or delivering cash, shares of its common stock or a combination of cash and shares of its common stock, at Teradynes election. As of December 31, 2018, the conversion price was approximately $31.70 per share of Teradynes common stock. The conversion rate is subject to adjustment under certain circumstances.
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 $31.70. The Note Hedge Transactions cover, subject to customary anti-dilution adjustments, approximately 14.5 million shares of Teradynes common stock.
Separately and concurrent with the pricing of the Notes, Teradyne entered into warrant transactions with the Option Counterparties (the Warrant Transactions) in which it sold net-share-settled (or, at its election subject to certain conditions, cash-settled) warrants to the Option Counterparties. The Warrant Transactions cover, subject to customary anti-dilution adjustments, approximately 14.5 million shares of common stock. As of December 31, 2018, the strike price of the warrants was approximately $39.78 per share. The strike price is subject to adjustment under certain circumstances. The Warrant Transactions could have a dilutive effect to Teradynes common stock to the extent that the market price per share of Teradynes 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 Teradynes 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 Teradynes 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 Teradynes common stock and/or purchased shares of Teradynes 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 Teradynes common stock or by selling Teradynes 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 Teradynes common stock and the Notes.
Teradyne considered the guidance of ASC 815-40, Derivatives and HedgingContracts in Entitys Own Equity, and concluded that the convertible note hedge is both indexed to Teradynes stock and should be classified in stockholders equity in its statements of financial position. The convertible note hedge is considered indexed to Teradynes 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 Teradynes shares and a fixed strike price. Because the only variable that can affect the settlement amount is Teradynes 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 Teradynes stock.
73
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.
Teradyne analyzed the Warrant Transactions under ASC 815-40, Derivatives and HedgingContracts in Entitys Own Equity, and other relevant literature, and determined that it met the criteria for classification as an equity transaction and is considered indexed to Teradynes 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 Teradynes nonconvertible debt borrowing rate at the date of issuance when interest cost is recognized in subsequent periods. 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, Teradynes 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 December 31, 2018, debt issuance costs were approximately $5.3 million.
The below tables represents the key components of Teradynes convertible senior notes:
December 31, 2018 |
December 31, 2017 |
|||||||
(in thousands) |
||||||||
Debt principal |
$ | 460,000 | $ | 460,000 | ||||
Unamortized discount |
80,019 | 94,013 | ||||||
|
|
|
|
|||||
Net carrying amount of convertible debt |
$ | 379,981 | $ | 365,987 | ||||
|
|
|
|
For the year ended | ||||||||
December 31, 2018 |
December 31, 2017 |
|||||||
(in thousands) |
||||||||
Contractual interest expense on the coupon |
$ | 5,750 | $ | 5,734 | ||||
Amortization of the discount component and debt issue fees recognized as interest expense |
13,995 | 13,318 | ||||||
|
|
|
|
|||||
Total interest expense on the convertible debt |
$ | 19,745 | $ | 19,052 | ||||
|
|
|
|
As of December 31, 2018, the unamortized discount was $80.0 million, which will be amortized over five years using the effective interest rate method. The carrying amount of the equity component was $100.8 million. As of December 31, 2018, the conversion price was approximately $31.70 per share and if converted the value of the notes was $455.4 million.
74
Revolving Credit Facility
On April 27, 2015, Teradyne entered into a Credit Agreement (the Credit Agreement) with Barclays Bank PLC, as administrative agent and collateral agent, and the lenders party thereto. The Credit Agreement provides for a five-year, senior secured revolving credit facility of up to $350 million (the Credit Facility). The Credit Agreement further provides that, subject to customary conditions, Teradyne may seek to obtain from existing or new lenders incremental commitments under the Credit Facility in an aggregate principal amount not to exceed $150 million.
Proceeds from the Credit Facility may be used for general corporate purposes and working capital. Teradyne incurred $2.3 million in costs related to the revolving credit facility. These costs are being amortized over the five-year term of the revolving credit facility and are included in interest expense in the statements of operations. As of March 1, 2019, Teradyne has not borrowed any funds under the Credit Facility.
The interest rates applicable to loans under the Credit Facility are, at Teradynes option, equal to either a base rate plus a margin ranging from 0.00% to 1.00% per annum or LIBOR plus a margin ranging from 1.00% to 2.00% per annum, based on the Consolidated Leverage Ratio of Teradyne and its Restricted Subsidiaries. In addition, Teradyne will pay a commitment fee on the unused portion of the commitments under the Credit Facility ranging from 0.125% to 0.350% per annum, based on the then applicable Consolidated Leverage Ratio.
Teradyne is not required to repay any loans under the Credit Facility prior to maturity, subject to certain customary exceptions. Teradyne is permitted to prepay all or any portion of the loans under the Credit Facility prior to maturity without premium or penalty, other than customary LIBOR breakage costs.
The Credit Agreement contains customary events of default, representations, warranties and affirmative and negative covenants that, among other things, limit Teradynes and its Restricted Subsidiaries ability to sell assets, grant liens on assets, incur other secured indebtedness and make certain investments and restricted payments, all subject to exceptions set forth in the Credit Agreement. The Credit Agreement also requires Teradyne to satisfy two financial ratios measured as of the end of each fiscal quarter: a consolidated leverage ratio and an interest coverage ratio. As of December 31, 2018, Teradyne was in compliance with all covenants.
The Credit Facility is guaranteed by certain of Teradynes domestic subsidiaries and collateralized by assets of Teradyne and such subsidiaries, including a pledge of 65% of the capital stock of certain foreign subsidiaries.
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I. ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
Changes in accumulated other comprehensive (loss) income, which is 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) | ||||||||||||||||
Balance at December 31, 2016, net of tax of $0, $209, $(778) |
$ | (21,921 | ) | $ | (60 | ) | $ | 1,767 | $ | (20,214 | ) | |||||
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|
|
|
|
|
|
|
|||||||||
Other comprehensive income before reclassifications, net of tax of $0, $1,903, $0 |
37,840 | 1,863 | | 39,703 | ||||||||||||
Amounts reclassified from accumulated other comprehensive income, net of tax of $0, $(297), $(154) |
| (441 | ) | (272 | ) | (713 | ) | |||||||||
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|
|
|
|
|
|
|
|||||||||
Net current period other comprehensive income, net of tax of $0, $1,606, $(154) |
37,840 | 1,422 | (272 | ) | 38,990 | |||||||||||
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|
|
|
|
|
|
|
|||||||||
Balance at December 31, 2017, net of tax of $0, $1,815, $(932) |
15,919 | 1,362 | 1,495 | 18,776 | ||||||||||||
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|
|
|
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|
|||||||||
Other comprehensive loss before reclassifications, net of tax of $0, $(722), $0 |
(28,442 | ) | (2,110 | ) | | (30,552 | ) | |||||||||
Amounts reclassified from accumulated other comprehensive income, net of tax of $0, $(21), $(71) |
| 1,337 | (245 | ) | 1,092 | |||||||||||
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|
|
|
|
|
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|
|||||||||
Net current period other comprehensive loss, net of tax of $0, $(743), $(71) |
(28,442 | ) | (773 | ) | (245 | ) | (29,460 | ) | ||||||||
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|
|
|
|
|
|
|
|||||||||
Reclassification of tax effects resulting from the Tax Reform Act, net of tax of $0, $(691), $(78), respectively (a) |
| 691 | 78 | 769 | ||||||||||||
Reclassification of unrealized gains on equity securities, net of tax of $0, $(902), $0, respectively, (b) |
| (3,125 | ) | | (3,125 | ) | ||||||||||
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|
|
|
|
|
|
|
|||||||||
Balance at December 31, 2018, net of tax of $0, $(521), $(1,081) |
$ | (12,523 | ) | $ | (1,845 | ) | $ | 1,328 | $ | (13,040 | ) | |||||
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|
|
|
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|
|
(a) | In the year ended December 31, 2018, Teradyne early adopted ASU 2018-02, Income StatementReporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. As a result, the stranded tax effects resulting from the Tax Reform Act enacted in December 2017 were reclassified from accumulated other comprehensive income to retained earnings. |
(b) | In the year ended December 31, 2018, Teradyne adopted ASU 2016-01, Financial InstrumentsOverall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. See Note B: Accounting Policies. |
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Reclassifications out of accumulated other comprehensive income to the statements of operations for the years ended December 31, 2018, 2017, and 2016 were as follows:
Details about Accumulated Other Comprehensive Income Components |
For the year ended | Affected Line Item in the Statements of Operations |
||||||||||||||
December 31, 2018 |
December 31, 2017 |
December 31, 2016 |
||||||||||||||
(in thousands) | ||||||||||||||||
Available-for-sale marketable securities |
||||||||||||||||
Unrealized (losses) gains, net of tax of $21, $297, $255 |
$ | (1,337 | ) | $ | 441 | $ | 683 | |
Interest income (expense) |
| ||||||
Defined benefit pension and postretirement plans: |
||||||||||||||||
Amortization of prior service benefit, net of tax of $71, $154, $190 |
245 | 272 | 321 | (a) | ||||||||||||
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|
|
|
|
|
|||||||||||
Total reclassifications, net of tax of $92, $451, $445 |
$ | (1,092 | ) | $ | 713 | $ | 1,004 | Net income | ||||||||
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|
|
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(a) | The amortization of prior service credit is included in the computation of net periodic pension cost and postretirement benefit; see Note N: Retirement Plans. |
J. GOODWILL AND INTANGIBLE ASSETS
Goodwill
Teradyne performs its annual goodwill impairment test as required under the provisions of ASC 350-10, IntangiblesGoodwill and Other, on December 31 of each fiscal year unless interim indicators of impairment exist. Goodwill is considered to be impaired when the net book value of a reporting unit exceeds its estimated fair value.
Teradyne has the option to perform a qualitative assessment (Step zero) to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If Teradyne determines this is the case, Teradyne is required to perform the two-step goodwill impairment test to identify potential goodwill impairment and measure the amount of goodwill impairment loss to be recognized. If Teradyne determines that it is more likely than not that the fair value of the reporting unit is greater than its carrying amounts, the two-step goodwill impairment test is not required. When performing the two-step process, the first step involves a comparison of the estimated fair value of a reporting unit to its carrying amount, including goodwill. In performing the first step, Teradyne determines the fair value of a reporting unit using the results derived from an income approach and a market approach. The income approach is estimated through the discounted cash flow (DCF) analysis. Determining fair value requires the exercise of significant judgment, including judgments about appropriate discount rates, perpetual growth rates, and the amount and timing of expected future cash flows. Discount rates are based on a weighted average cost of capital (WACC), which represents the average rate a business must pay its providers of debt and equity, plus a risk premium. The WACC used to test goodwill is derived from a group of comparable companies. The cash flows employed in the DCF analysis are derived from internal forecasts and external market forecasts. The market approach estimates the fair value of the reporting unit by utilizing the market comparable method which is based on revenue and earnings multiples from comparable companies. If the estimated fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impaired and the second step of the impairment test is not necessary. If the carrying amount of a reporting unit exceeds its estimated fair value, then the second step of the goodwill impairment test must be performed. The second step of the goodwill impairment test compares the implied fair value of the reporting units goodwill with its carrying amount of goodwill to measure the amount of impairment loss, if any. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination, whereby the estimated fair value of the reporting unit is allocated to all of the assets and
77
liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid. If the carrying amount of the reporting units goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess.
In the second quarter of 2016, the Wireless Test reporting unit (which is Teradynes Wireless Test operating and reportable segment) reduced headcount by 11% as a result of a sharp decline in projected demand attributable to an estimated smaller future wireless test market. The decrease in projected demand was due to lower forecasted buying from Teradynes largest Wireless Test segment customer (who has contributed between 51% and 73% of annual Wireless Test sales since the LitePoint acquisition in 2011 through 2015) as a result of the customers numerous operational efficiencies; slower smartphone growth rates; and a slowdown of new wireless technology adoption. Teradyne considered the headcount reduction and sharp decline in projected demand to be a triggering event for an interim goodwill impairment test.
Teradyne allocated the fair value of the Wireless Test reporting unit to all of its assets and liabilities (including unrecognized intangible assets). The net book value of raw materials inventory was estimated as an approximation of current replacement costs. The fair value of finished goods inventory was estimated at the present value of selling price less direct selling costs and profit on the selling effort. The selling price used in the inventory fair values was based upon the product gross margins included in Teradynes forecast. The fair value of the deferred revenue liability was estimated by assessing the costs required to service the obligation plus a reasonable profit margin. The fair value for personal property assets, which consisted of furniture and fixtures, machinery and equipment, computer equipment, software and leasehold improvements, was estimated using the replacement cost approach, which approximated carrying value. The fair value of intangible assets was estimated using the income approach and, in particular, developed technology and trademarks/trade names were valued using the relief-from-royalty method and customer relationships and customer backlog were valued using the discounted cash flow method. Royalty rates were estimated using rates applicable to wireless testing equipment and other similar technologies. Based upon this allocation, Teradyne determined that the Wireless Test reporting unit goodwill is valued at $8.0 million and recorded an impairment loss of $254.9 million in the second quarter of 2016.
In the fourth quarter of 2018, Teradyne performed the annual goodwill impairment test. Teradyne completed step one of the two-step impairment test for the Universal Robots reporting unit. Teradyne completed step zero for the Wireless Test, Defense/Aerospace, MiR, and Energid reporting units. There was no impairment as a result of the annual test performed in the fourth quarter of 2018.
In the fourth quarter of 2017, Teradyne performed the annual goodwill impairment test. Teradyne completed step one of the two-step impairment test for the Universal Robots reporting unit. Teradyne completed step zero for the Wireless Test and Defense/Aerospace reporting units. There was no impairment as a result of the annual test performed in the fourth quarter of 2017.
In the fourth quarter of 2016, Teradyne performed the annual goodwill impairment test. Teradyne completed step one of the two-step impairment test for the Universal Robots, Wireless Test and Defense/Aerospace reporting units. There was no impairment as a result of the annual test performed in the fourth quarter of 2016.
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The changes in the carrying amount of goodwill by reportable segments for the years ended December 31, 2018 and 2017 are as follows:
Industrial Automation |
System Test |
Wireless Test |
Semiconductor Test |
Total | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Balance at December 31, 2016: |
||||||||||||||||||||
Goodwill |
$ | 204,851 | $ | 158,699 | $ | 361,819 | $ | 260,540 | $ | 985,909 | ||||||||||
Accumulated impairment losses |
| (148,183 | ) | (353,843 | ) | (260,540 | ) | (762,566 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
204,851 | 10,516 | 7,976 | | 223,343 | ||||||||||||||||
Foreign currency translation adjustment |
28,668 | | | | 28,668 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance at December 31, 2017: |
||||||||||||||||||||
Goodwill |
233,519 | 158,699 | 361,819 | 260,540 | 1,014,577 | |||||||||||||||
Accumulated impairment losses |
| (148,183 | ) | (353,843 | ) | (260,540 | ) | (762,566 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
233,519 | 10,516 | 7,976 | | 252,011 | ||||||||||||||||
MiR acquisition |
135,976 | | | | 135,976 | |||||||||||||||
Energid acquisition |
14,394 | | | | 14,394 | |||||||||||||||
Foreign currency translation adjustment |
(20,531 | ) | | | | (20,531 | ) | |||||||||||||
Balance at December 31, 2018: |
||||||||||||||||||||
Goodwill |
363,358 | 158,699 | 361,819 | 260,540 | 1,144,416 | |||||||||||||||
Accumulated impairment losses |
| (148,183 | ) | (353,843 | ) | (260,540 | ) | (762,566 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
$ | 363,358 | $ | 10,516 | $ | 7,976 | $ | | $ | 381,850 | |||||||||||
|
|
|
|
|
|
|
|
|
|
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. As a result of the Wireless Test segment goodwill impairment review in the second quarter of 2016, Teradyne performed an impairment test of the Wireless Test segments intangible and long-lived assets. The impairment test is based on a comparison of the estimated undiscounted cash flows to the carrying value of the asset group. If undiscounted cash flows for the asset group are less than the carrying amount, the asset group is written down to its estimated fair value based on a discounted cash flow analysis. The cash flow estimates used to determine the impairment contain managements best estimates using appropriate assumptions and projections at that time. The fair value of intangible assets was estimated using the income approach and, in particular, developed technology and trademarks/trade names were valued using the relief-from-royalty method and customer relationships were valued using the discounted cash flow method. Royalty rates were estimated using rates applicable to wireless testing equipment and other similar technologies. As a result of the analysis, Teradyne recorded an $83.3 million impairment charge in the second quarter of 2016 in acquired intangible assets impairment on the statements of operations, resulting in a remaining intangible assets balance of $2.2 million at December 31, 2018 for the Wireless Test segment.
There were no events or circumstances indicating that the carrying value of intangible and long-lived assets may not be recoverable in 2018 and 2017.
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Amortizable intangible assets consist of the following and are included in intangible assets, net on the balance sheets:
December 31, 2018 | ||||||||||||||||
Gross Carrying Amount (1)(2) |
Accumulated Amortization (2) |
Foreign Currency Translation Adjustment |
Net Carrying Amount |
|||||||||||||
(in thousands) | ||||||||||||||||
Developed technology |
$ | 336,308 | $ | (252,080 | ) | $ | (4,079 | ) | $ | 80,149 | ||||||
Customer relationships |
97,153 | (83,448 | ) | (340 | ) | 13,365 | ||||||||||
Tradenames and trademarks |
64,420 | (31,653 | ) | (799 | ) | 31,968 | ||||||||||
Non-compete agreement |
320 | (320 | ) | | | |||||||||||
Backlog |
30 | (30 | ) | | | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total intangible assets |
$ | 498,231 | $ | (367,531 | ) | $ | (5,218 | ) | $ | 125,482 | ||||||
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|
|
|
|
|
|
|
December 31, 2017 | ||||||||||||||||
Gross Carrying Amount |
Accumulated Amortization |
Foreign Currency Translation Adjustment |
Net Carrying Amount |
|||||||||||||
(in thousands) | ||||||||||||||||
Developed technology |
$ | 270,877 | $ | (226,190 | ) | $ | 1,618 | $ | 46,305 | |||||||
Customer relationships |
92,741 | (83,585 | ) | 171 | 9,327 | |||||||||||
Tradenames and trademarks |
50,100 | (27,120 | ) | 416 | 23,396 | |||||||||||
Non-compete agreement |
320 | (260 | ) | | 60 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total intangible assets |
$ | 414,038 | $ | (337,155 | ) | $ | 2,205 | $ | 79,088 | |||||||
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|
|
|
|
|
|
|
(1) | Includes intangible assets acquired in 2018, $80.7 million from the MiR acquisition and $12.3 million from the Energid acquisition. |
(2) | In 2018, $8.8 million of amortizable intangible assets became fully amortized and have been eliminated from the gross carrying amount and accumulated amortization. |
Aggregate intangible assets amortization expense for the years ended December 31, 2018, 2017, and 2016 was $39.2 million, $30.5 million, and $52.6 million, respectively. Estimated intangible assets amortization expense for each of the five succeeding fiscal years is as follows:
Year |
Amortization Expense | |||
(in thousands) | ||||
2019 |
$ | 38,496 | ||
2020 |
24,186 | |||
2021 |
13,945 | |||
2022 |
13,052 | |||
2023 |
12,785 | |||
Thereafter |
23,018 |
K. COMMITMENTS AND CONTINGENCIES
Purchase Commitments
As of December 31, 2018, Teradyne had entered into non-cancelable purchase commitments for certain components and materials. The purchase commitments covered by the agreements aggregate to approximately $242.1 million, of which $232.5 million is for less than one year.
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Commitments
Teradyne leases certain of its office buildings and other facilities under various operating lease arrangements that include renewal options and escalation clauses for adjusting rent payments to reflect changes in price indices. Rental expense for leases with fixed escalation clauses is recognized on a straight line basis over the lease term.
Rental expense for the years ended December 31, 2018, 2017, and 2016 was $19.3 million, $20.2 million, and $19.1 million, respectively.
The following table reflects Teradynes non-cancelable operating lease commitments:
Non-cancelable Lease Commitments |
||||
(in thousands) | ||||
2019 |
$ | 19,570 | ||
2020 |
18,293 | |||
2021 |
13,578 | |||
2022 |
9,693 | |||
2023 |
5,449 | |||
Beyond 2024 |
9,472 | |||
|
|
|||
Total |
$ | 76,055 | ||
|
|
Legal Claims
Teradyne is subject to legal proceedings, claims and investigations that arise 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.
Guarantees and Indemnification Obligations
Teradyne provides indemnification, to the extent permitted by law, to its officers, directors, employees and agents for liabilities arising from certain events or occurrences while the officer, director, employee, or agent, is or was serving, at Teradynes request in such capacity. Teradyne has entered into indemnification agreements with certain of its officers and directors. With respect to acquisitions, Teradyne provides indemnifications to or assumes indemnification obligations for the current and former directors, officers and employees of the acquired companies in accordance with the acquired companies by-laws and charter. As a matter of practice, Teradyne has maintained directors and officers liability insurance coverage including coverage for directors and officers of acquired companies.
Teradyne enters into agreements in the ordinary course of business with customers, resellers, distributors, integrators and suppliers. Most of these agreements require Teradyne to defend and/or indemnify the other party against intellectual property infringement claims brought by a third party with respect to Teradynes products. From time to time, Teradyne also indemnifies customers and business partners for damages, losses and liabilities they may suffer or incur relating to personal injury, personal property damage, product liability, breach of confidentiality obligations and environmental claims relating to the use of Teradynes products and services or resulting from the acts or omissions of Teradyne, its employees, authorized agents or subcontractors. On occasion, Teradyne has also provided guarantees to customers regarding the delivery and performance of its products in addition to the warranty described below.
As a matter of ordinary business course, Teradyne warrants that its products will substantially perform in accordance with its standard published specifications in effect at the time of delivery. Most warranties have a one-year duration commencing from installation. A provision is recorded upon revenue recognition to cost of revenue for estimated warranty expense based upon historical experience. When Teradyne receives revenue for
81
extended warranties beyond the standard duration, it is deferred and recognized on a straight line basis over the contract period. Related costs are expensed as incurred. As of December 31, 2018 and 2017, Teradyne had a product warranty accrual of $7.9 million and $8.2 million, respectively, included in other accrued liabilities, and revenue deferrals related to extended warranties of $27.4 million and $24.4 million, respectively, included in short and long-term deferred revenue and customer advances.
In addition, in the ordinary course of business, Teradyne provides minimum purchase guarantees to certain vendors to ensure continuity of supply against the market demand. Although some of these guarantees provide penalties for cancellations and/or modifications to the purchase commitments as the market demand decreases, most of the guarantees do not. Therefore, as the market demand decreases, Teradyne re-evaluates these guarantees and determines what charges, if any, should be recorded.
With respect to its agreements covering product, business or entity divestitures and acquisitions, Teradyne provides certain representations, warranties and covenants to purchasers and agrees to indemnify and hold such purchasers harmless against breaches of such representations, warranties and covenants. Many of the indemnification claims have a definite expiration date while some remain in force indefinitely. With respect to its acquisitions, Teradyne may, from time to time, assume the liability for certain events or occurrences that took place prior to the date of acquisition.
As a matter of ordinary course of business, Teradyne occasionally guarantees certain indebtedness obligations of its subsidiary companies, limited to the borrowings from financial institutions, purchase commitments to certain vendors, and lease commitments to landlords.
Based on historical experience and information known as of December 31, 2018 and 2017, except for product warranty, Teradyne has not recorded any liabilities for these guarantees and obligations because the amount would be immaterial.
L. NET INCOME (LOSS) PER COMMON SHARE
The following table sets forth the computation of basic and diluted net income (loss) per common share:
2018 | 2017 | 2016 | ||||||||||
(in thousands, except per share amounts) | ||||||||||||
Net income (loss) for basic and diluted net income per share |
$ | 451,779 | $ | 257,692 | $ | (43,421 | ) | |||||
|
|
|
|
|
|
|||||||
Weighted average common shares-basic |
187,672 | 198,069 | 202,578 | |||||||||
Effect of dilutive potential common shares: |
||||||||||||
Incremental shares from assumed conversion of convertible notes (1) |
2,749 | 1,298 | | |||||||||
Convertible note hedge warrant shares (2) |
485 | 112 | | |||||||||
Restricted stock units |
1,385 | 1,800 | | |||||||||
Stock options |
278 | 335 | 0 | |||||||||
Employee stock purchase rights |
36 | 27 | 0 | |||||||||
|
|
|
|
|
|
|||||||
Dilutive potential common shares |
4,933 | 3,572 | | |||||||||
|
|
|
|
|
|
|||||||
Weighted average common shares-diluted |
192,605 | 201,641 | 202,578 | |||||||||
|
|
|
|
|
|
|||||||
Net income (loss) per common share-basic |
$ | 2.41 | $ | 1.30 | $ | (0.21 | ) | |||||
|
|
|
|
|
|
|||||||
Net income (loss) per common share-diluted |
$ | 2.35 | $ | 1.28 | $ | (0.21 | ) | |||||
|
|
|
|
|
|
(1) | Incremental shares from the 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 $31.70, multiplied by 14.5 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 $39.78, multiplied by 14.5 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. |
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The computation of diluted net income per common share for 2018 excludes the effect of the potential exercise of stock options to purchase approximately 0.1 million shares and restricted stock units to purchase approximately 0.5 million shares because the effect would have been anti-dilutive.
The computation of diluted net income per common share for 2017 excludes the effect of the potential exercise of stock options to purchase approximately 0.1 million shares because the effect would have been anti-dilutive.
The computation of diluted net loss per common share for 2016 excludes the effect of the potential exercise of all outstanding stock options and restricted stock units because Teradyne had a net loss and inclusion would be anti-dilutive.
M. RESTRUCTURING AND OTHER
During the year ended December 31, 2018, Teradyne recorded an expense of $17.7 million for the increase in the fair value of the MiR contingent consideration liability, $8.7 million of severance charges related to headcount reductions primarily in Semiconductor Test, and $4.5 million for acquisition related expenses and compensation, partially offset by a gain of $16.7 million for the decrease in the fair value of the Universal Robots contingent consideration liability.
During the year ended December 31, 2017, Teradyne recorded an expense of $7.8 million for the increase in the fair value of the Universal Robots contingent consideration liability, $3.8 million of severance charges related to headcount reductions primarily in Semiconductor Test, $1.1 million for an impairment of fixed assets in Semiconductor Test, $1.0 million for a lease impairment of a Wireless Test facility in Sunnyvale, CA, which was terminated in September 2017, and $0.8 million of expenses related to an earthquake in Kumamoto, Japan, partially offset by $5.1 million of property insurance recovery related to the Japan earthquake.
During the year ended December 31, 2016, Teradyne recorded an expense of $15.9 million for the increase in the fair value of the contingent consideration liability, of which $15.3 million was related to Universal Robots and $0.6 million was related to AIT, $6.0 million of severance charges related to headcount reductions primarily in Wireless Test, $4.2 million for an impairment of fixed assets, and $0.9 million for expenses related to an earthquake in Kumamoto, Japan, partially offset by $5.1 million of property insurance recovery related to the Japan earthquake.
N. RETIREMENT PLANS
ASC 715, CompensationRetirement Benefits, requires an employer with defined benefit plans or other postretirement benefit plans to recognize an asset or a liability on its balance sheet for the overfunded or underfunded status of the plans as defined by ASC 715. The pension asset or liability represents a difference between the fair value of the pension plans 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. Teradynes funding policy is to make contributions to the plans in accordance with local laws and to the extent that such contributions are tax deductible. The assets of these plans consist primarily of fixed income and equity securities. In addition, Teradyne has an unfunded supplemental executive defined benefit plan in the United States to provide retirement benefits in excess of levels allowed by the Employment Retirement Income Security Act (ERISA) and the Internal Revenue Code (the IRC), as well as unfunded qualified foreign plans.
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During 2018, Teradyne purchased a group annuity contract for its retiree participants in the U.S. qualified pension plan. Under the group annuity, the accrued pension obligations for approximately 1,700 retiree participants were transferred to an insurance company. The reduction in the pension benefit obligation and pension assets was $151.3 million. During 2018, Teradyne recorded a settlement loss of $0.3 million related to the retiree group annuity transaction.
The December 31 balances of these defined benefit pension plans assets and obligations are shown below:
2018 | 2017 | |||||||||||||||
United States | Foreign | United States | Foreign | |||||||||||||
(in thousands) | ||||||||||||||||
Assets and Obligations |
||||||||||||||||
Change in benefit obligation: |
||||||||||||||||
Projected benefit obligation: |
||||||||||||||||
Beginning of year |
$ | 363,026 | $ | 39,353 | $ | 353,616 | $ | 60,738 | ||||||||
Service cost |
2,196 | 786 | 2,239 | 818 | ||||||||||||
Interest cost |
8,940 | 687 | 13,151 | 852 | ||||||||||||
Actuarial (gain) loss |
(30,136 | ) | 773 | 12,702 | 262 | |||||||||||
Benefits paid |
(14,793 | ) | (741 | ) | (18,682 | ) | (994 | ) | ||||||||
Retiree annuity purchase |
(151,341 | ) | | | | |||||||||||
Liability loss due to settlement |
345 | | | | ||||||||||||
Settlements |
| | | (28,560 | ) | |||||||||||
Admin expenses paid |
| | | (40 | ) | |||||||||||
Non-U.S. currency movement |
| (1,712 | ) | | 6,277 | |||||||||||
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End of year |
178,237 | 39,146 | 363,026 | 39,353 | ||||||||||||
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Change in plan assets: |
||||||||||||||||
Fair value of plan assets: |
||||||||||||||||
Beginning of year |
324,506 | 1,307 | 307,304 | 27,571 | ||||||||||||
Company contributions |
2,587 | 822 | 4,462 | 883 | ||||||||||||
Actual return on plan assets |
(16,658 | ) | 50 | 31,422 | 737 | |||||||||||
Benefits paid |
(14,793 | ) | (741 | ) | (18,682 | ) | (994 | ) | ||||||||
Retiree annuity purchase |
(151,341 | ) | | | | |||||||||||
Settlements |
| | | (28,560 | ) | |||||||||||
Admin expenses paid |
| | | (40 | ) | |||||||||||
Non-U.S. currency movement |
| (38 | ) | | 1,710 | |||||||||||
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End of year |
144,301 | 1,400 | 324,506 | 1,307 | ||||||||||||
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Funded status |
$ | (33,936 | ) | $ | (37,746 | ) | $ | (38,520 | ) | $ | (38,046 | ) | ||||
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The following table provides amounts recorded within the account line items of the statements of financial position as of December 31:
2018 | 2017 | |||||||||||||||
United States | Foreign | United States | Foreign | |||||||||||||
(in thousands) | ||||||||||||||||
Retirement plans assets |
$ | 16,883 | $ | | $ | 17,491 | $ | | ||||||||
Accrued employees compensation and withholdings |
(2,676 | ) | (852 | ) | (2,524 | ) | (863 | ) | ||||||||
Retirement plans liabilities |
(48,143 | ) | (36,894 | ) | (53,487 | ) | (37,183 | ) | ||||||||
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Funded status |
$ | (33,936 | ) | $ | (37,746 | ) | $ | (38,520 | ) | $ | (38,046 | ) | ||||
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The following table provides amounts recognized in accumulated other comprehensive income as of December 31:
2018 | 2017 | |||||||||||||||
United States | Foreign | United States | Foreign | |||||||||||||
(in thousands) | ||||||||||||||||
Prior service cost, before tax |
$ | | $ | | $ | 58 | $ | | ||||||||
Deferred taxes |
560 | | 539 | | ||||||||||||
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Total recognized in other comprehensive income, net of tax |
$ | 560 | $ | | $ | 597 | $ | | ||||||||
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The accumulated benefit obligation for the United States defined benefit pension plans was $172.8 million and $354.3 million at December 31, 2018 and 2017, respectively. The accumulated benefit obligation for foreign defined benefit pension plans was $35.6 million and $34.7 million at December 31, 2018 and 2017, respectively.
Information for pension plans with an accumulated benefit obligation in excess of plan assets as of December 31:
2018 | 2017 | |||||||||||||||
United States | Foreign | United States | Foreign | |||||||||||||
(in millions) | ||||||||||||||||
Projected benefit obligation |
$ | 50.8 | $ | 39.1 | $ | 56.0 | $ | 39.4 | ||||||||
Accumulated benefit obligation |
48.6 | 35.6 | 51.6 | 34.7 | ||||||||||||
Fair value of plan assets |
| 1.4 | | 1.3 |
Expense
For the years ended December 31, 2018, 2017, and 2016, Teradynes net periodic pension (income) cost was comprised of the following:
2018 | 2017 | 2016 | ||||||||||||||||||||||
United States |
Foreign | United States |
Foreign | United States |
Foreign | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Components of Net Periodic Pension (Income) Cost: |
||||||||||||||||||||||||
Service cost |
$ | 2,196 | $ | 786 | $ | 2,239 | $ | 818 | $ | 2,302 | $ | 761 | ||||||||||||
Interest cost |
8,940 | 687 | 13,151 | 852 | 13,630 | 1,185 | ||||||||||||||||||
Expected return on plan assets |
(9,049 | ) | (19 | ) | (12,008 | ) | (165 | ) | (13,830 | ) | (443 | ) | ||||||||||||
Amortization of prior service cost |
58 | | 70 | | 96 | | ||||||||||||||||||
Net actuarial (gain) loss |
(4,429 | ) | 743 | (6,712 | ) | (310 | ) | (4,013 | ) | 815 | ||||||||||||||
Settlement loss |
345 | | | | | | ||||||||||||||||||
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Total net periodic pension (income) cost |
$ | (1,939 | ) | $ | 2,197 | $ | (3,260 | ) | $ | 1,195 | $ | (1,815 | ) | $ | 2,318 | |||||||||
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Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income: |
||||||||||||||||||||||||
Reversal of amortization items: |
||||||||||||||||||||||||
Prior service cost |
(58 | ) | | (70 | ) | | (96 | ) | | |||||||||||||||
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Total recognized in other comprehensive income |
(58 | ) | | (70 | ) | | (96 | ) | | |||||||||||||||
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Total recognized in net periodic pension (income) cost and other comprehensive income |
$ | (1,997 | ) | $ | 2,197 | $ | (3,330 | ) | $ | 1,195 | $ | (1,911 | ) | $ | 2,318 | |||||||||
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Weighted Average Assumptions to Determine Net Periodic Pension Cost at January 1:
2018 | 2017 | 2016 | ||||||||||||||||||||||
United States | Foreign | United States | Foreign | United States | Foreign | |||||||||||||||||||
Discount rate |
3.4 | % | 1.8 | % | 3.9 | % | 1.8 | % | 4.0 | % | 2.3 | % | ||||||||||||
Expected return on plan assets |
4.3 | 1.5 | 4.0 | 2.0 | 4.8 | 2.0 | ||||||||||||||||||
Salary progression rate |
2.3 | 2.7 | 2.6 | 2.7 | 2.7 | 3.2 |
Weighted Average Assumptions to Determine Pension Obligations at December 31:
2018 | 2017 | |||||||||||||||
United States | Foreign | United States | Foreign | |||||||||||||
Discount rate |
4.1 | % | 1.8 | % | 3.4 | % | 1.8 | % | ||||||||
Salary progression rate |
2.3 | 2.6 | 2.3 | 2.7 |
In developing the expected return on plan assets assumption, Teradyne evaluates input from its investment manager and pension consultants, including their forecast of asset class return expectations. Teradyne believes that 4.25% was an appropriate rate to use for fiscal 2018 for the U.S. Qualified Pension Plan (U.S. Plan).
Teradyne recognizes net actuarial gains and losses and the change in the fair value of the plan assets in its operating results in the year in which they occur or upon any interim remeasurement of the plans. Teradyne calculates the expected return on plan assets using the fair value of the plan assets. Actuarial gains and losses are generally measured annually as of December 31 and, accordingly, recorded during the fourth quarter of each year or upon any interim remeasurement of the plans.
The discount rate utilized to determine future pension obligations for the U.S. Plan is based on FTSE Pension Index adjusted for the plans expected cash flows and was 4.15% at December 31, 2018, up from 3.4% at December 31, 2017.
Plan Assets
As of December 31, 2018, the fair value of Teradynes pension plans assets totaled $145.7 million of which $144.3 million was related to the U.S. Plan and $1.4 million was related to the Taiwan defined benefit pension plan. Substantially all of Teradynes pension plans assets are held in individual trusts, which were established for the investment of assets of Teradynes sponsored retirement plans.
The following table provides weighted average pension asset allocation by asset category at December 31, 2018 and 2017:
2018 | 2017 | |||||||||||||||
United States | Foreign | United States | Foreign | |||||||||||||
Fixed income securities |
94.0 | % | | % | 88.1 | % | | % | ||||||||
Equity securities |
5.0 | | 9.9 | | ||||||||||||
Other |
1.0 | 100.0 | 2.0 | 100.0 | ||||||||||||
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|||||||||
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||||||||
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The assets of the U.S. Plan are overseen by the Teradyne Fiduciary Committee which is comprised of members of senior management drawn from appropriate diversified levels of the management team. The Fiduciary Committee is responsible for setting the policy that provides the framework for management of the U.S. Plan assets. In accordance with its responsibilities, the Fiduciary Committee meets on a regular basis to review the performance of the U.S. Plan assets and compliance with the investment policy. The policy sets forth
86
an investment structure for managing U.S. Plan assets, including setting the asset allocation ranges, which are expected to provide an appropriate level of overall diversification required to maximize the long-term return on plan assets for a prudent and reasonable level of risk given prevailing market conditions, total investment return over the long term, and preservation of capital, while maintaining sufficient liquidity to pay the benefits of the U.S. Plan. The investment portfolio will not, at any time, have a direct investment in Teradyne stock. It may have indirect investment in Teradyne stock, if one of the funds selected by the investment manager invests in Teradyne stock. In developing the asset allocation ranges, third party asset allocation studies are periodically performed that consider the current and expected positions of the plan assets and funded status. Based on this study and other appropriate information, the Fiduciary Committee establishes asset allocation ranges taking into account acceptable risk targets and associated returns. The investment return objectives are to avoid excessive volatility and produce a rate of return that at least matches the Policy Index identified below. The managers investment performance is reviewed at least annually. Results for the total portfolio and for each major category of assets are evaluated in comparison with appropriate market indices and the Policy Index.
The target asset allocation and the index for each asset category for the U.S. Plan, per the investment policy, are as follows:
Asset Category: |
Policy Index: |
Target Allocation |
||||
U.S. corporate fixed income | Barclays U.S. Corporate A or Better Index | 75 | % | |||
Global equity | MSCI World Minimum Volatility Index | 5 | ||||
U.S. government fixed income | Barclays U.S. 20+ Year Treasury Strips Index | 14 | ||||
High yield fixed income | Barclays U.S. Corporate High Yield 2% Issuer Cap Index | 5 | ||||
Cash | Citigroup Three Month U.S. Treasury Bill Index | 1 |
Teradynes U.S. Plan invests primarily in common trust funds. Units held in the common trust funds are valued at the unit price as reported by the investment manager based on the asset value of the underlying investments; underlying investments in equity securities are valued at the last reported sales price, and underlying investments in fixed-income securities are generally valued using methods based upon market transactions for comparable securities.
In 2017, the U.K. defined benefit pension was terminated and the obligations and assets of the plan were transferred to an insurance company.
During the year ended December 31, 2018, $2.7 million of pension assets were transferred out of Level 3 to Level 2. During the year ended December 31, 2017, there were no transfers of pension assets in or out of Level 1, Level 2 or Level 3.
The fair value of pension plan assets by asset category and by level at December 31, 2018 and December 31, 2017 were as follows:
December 31, 2018 | ||||||||||||||||||||||||||||||||
United States | Foreign | |||||||||||||||||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||
Fixed income securities: |
||||||||||||||||||||||||||||||||
Corporate debt securities |
$ | | $ | 115,424 | $ | | $ | 115,424 | $ | | $ | | $ | | $ | | ||||||||||||||||
U.S. government securities |
| 20,176 | | 20,176 | | | | | ||||||||||||||||||||||||
Global equity |
| 7,252 | | 7,252 | | | | | ||||||||||||||||||||||||
Other |
| | | | | 1,400 | | 1,400 | ||||||||||||||||||||||||
Cash and cash equivalents |
1,449 | | | 1,449 | | | | | ||||||||||||||||||||||||
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Total |
$ | 1,449 | $ | 142,852 | $ | | $ | 144,301 | $ | | $ | 1,400 | $ | | $ | 1,400 | ||||||||||||||||
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December 31, 2017 | ||||||||||||||||||||||||||||||||
United States | Foreign | |||||||||||||||||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||
Fixed income securities: |
||||||||||||||||||||||||||||||||
Corporate debt securities |
$ | | $ | 260,294 | $ | | $ | 260,294 | $ | | $ | | $ | | $ | | ||||||||||||||||
U.S. government securities |
| 25,709 | | 25,709 | | | | | ||||||||||||||||||||||||
Global equity |
| 32,120 | | 32,120 | | | | | ||||||||||||||||||||||||
Group annuity insurance contracts |
| | 3,166 | 3,166 | | | | | ||||||||||||||||||||||||
Other |
| | | | | 1,307 | | 1,307 | ||||||||||||||||||||||||
Cash and cash equivalents |
3,217 | | | 3,217 | | | | | ||||||||||||||||||||||||
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Total |
$ | 3,217 | $ | 318,123 | $ | 3,166 | $ | 324,506 | $ | | $ | 1,307 | $ | | $ | 1,307 | ||||||||||||||||
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The pension plan assets identified as Level 3 above are related to group annuity insurance contracts held by the U.S. Plan.
Changes in the fair value of Level 3 group annuity insurance contracts for the years ended December 31, 2018 and 2017 were as follows:
Group Annuity Insurance Contracts | ||||
(in thousands) | ||||
Balance at December 31, 2016 |
$ | 29,456 | ||
Settlements |
(28,560 | ) | ||
Interest and market value adjustments |
959 | |||
Benefits paid |
(244 | ) | ||
Other |
(61 | ) | ||
Non-U.S. currency movement |
1,616 | |||
|
|
|||
Balance at December 31, 2017 |
3,166 | |||
Transfer out of Level 3 |
(2,658 | ) | ||
Purchases of retiree annuity insurance contracts |
(512 | ) | ||
Interest and market value adjustments |
59 | |||
Benefits paid |
(40 | ) | ||
Other |
(15 | ) | ||
|
|
|||
Balance at December 31, 2018 |
$ | | ||
|
|
Contributions
Teradynes funding policy is to make contributions to the plans in accordance with local laws and to the extent that such contributions are tax deductible. During 2018, Teradyne contributed $2.6 million to the U.S. supplemental executive defined benefit pension plan and $0.8 million to certain qualified plans for non-U.S. subsidiaries. During 2017, Teradyne contributed $1.9 million to the U.S. Plan, $2.6 million to the U.S. supplemental executive defined benefit pension plan and $0.9 million to certain qualified plans for non-U.S. subsidiaries. In 2019, contributions to the U.S. supplemental executive defined benefit pension plan and certain qualified plans from non-U.S. subsidiaries will be approximately $2.7 million and $0.9 million, respectively.
88
Expected Future Pension Benefit Payments
Future benefit payments are expected to be paid as follows:
United States | Foreign | |||||||
(in thousands) | ||||||||
2019 |
$ | 6,903 | $ | 874 | ||||
2020 |
7,133 | 1,522 | ||||||
2021 |
8,026 | 905 | ||||||
2022 |
8,863 | 888 | ||||||
2023 |
9,584 | 1,199 | ||||||
2024-2028 |
57,120 | 5,921 |
Postretirement Benefit Plans
In addition to receiving pension benefits, U.S. Teradyne employees who meet early retirement eligibility requirements as of their termination dates may participate in Teradynes 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 Teradynes current U.S. employees could become eligible for these benefits, and the existing benefit obligation relates primarily to those employees.
The December 31 balances of the postretirement assets and obligations are shown below:
2018 | 2017 | |||||||
(in thousands) | ||||||||
Assets and Obligations |
||||||||
Change in benefit obligation: |
||||||||
Projected benefit obligation: |
||||||||
Beginning of year |
$ | 6,177 | $ | 5,510 | ||||
Service cost |
39 | 34 | ||||||
Interest cost |
196 | 201 | ||||||
Actuarial loss |
25 | 398 | ||||||
Special termination benefits |
3,708 | 591 | ||||||
Benefits paid |
(889 | ) | (557 | ) | ||||
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|
|||||
End of year |
9,256 | 6,177 | ||||||
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|
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Change in plan assets: |
||||||||
Fair value of plan assets: |
||||||||
Beginning of year |
| | ||||||
Company contributions |
889 | 557 | ||||||
Benefits paid |
(889 | ) | (557 | ) | ||||
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End of year |
| | ||||||
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|
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Funded status |
$ | (9,256 | ) | $ | (6,177 | ) | ||
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The following table provides amounts recorded within the account line items of financial position as of December 31:
2018 | 2017 | |||||||
(in thousands) | ||||||||
Accrued employees compensation and withholdings |
$ | (1,310 | ) | $ | (591 | ) | ||
Retirement plans liability |
(7,946 | ) | (5,586 | ) | ||||
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|
|||||
Funded status |
$ | (9,256 | ) | $ | (6,177 | ) | ||
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|
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|
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The following table provides amounts recognized in accumulated other comprehensive income as of December 31:
2018 | 2017 | |||||||
(in thousands) | ||||||||
Prior service credit, before tax |
$ | (249 | ) | $ | (622 | ) | ||
Deferred taxes |
(1,641 | ) | (1,472 | ) | ||||
|
|
|
|
|||||
Total recognized in other comprehensive income, net of tax |
$ | (1,890 | ) | $ | (2,094 | ) | ||
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|
|
|
The estimated portion of prior service credit remaining in accumulated other comprehensive income that is expected to be recognized as a component of net periodic postretirement benefit income in 2019 is $(0.2) million.
Expense
For the years ended December 31, 2018, 2017, and 2016, Teradynes net periodic postretirement benefit cost (income) was comprised of the following:
2018 | 2017 | 2016 | ||||||||||
(in thousands) | ||||||||||||
Components of Net Periodic Postretirement Benefit Cost (income): |
||||||||||||
Service cost |
$ | 39 | $ | 34 | $ | 37 | ||||||
Interest cost |
196 | 201 | 218 | |||||||||
Amortization of prior service credit |
(373 | ) | (496 | ) | (607 | ) | ||||||
Net actuarial loss |
25 | 398 | 5 | |||||||||
Special termination benefits |
3,708 | 591 | | |||||||||
|
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|
|||||||
Total net periodic postretirement benefit cost (income) |
3,595 | 728 | (347 | ) | ||||||||
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|
|||||||
Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income: |
||||||||||||
Prior service cost |
| | (93 | ) | ||||||||
Reversal of amortization items: |
||||||||||||
Prior service credit |
373 | 496 | 607 | |||||||||
|
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|
|
|||||||
Total recognized in other comprehensive income |
373 | 496 | 514 | |||||||||
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|
|||||||
Total recognized in net periodic postretirement benefit cost (income) and other comprehensive income |
$ | 3,968 | $ | 1,224 | $ | 167 | ||||||
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Weighted Average Assumptions to Determine Net Periodic Postretirement Benefit Income as of January 1:
2018 | 2017 | 2016 | ||||||||||
Discount rate |
3.4 | % | 3.9 | % | 3.9 | % | ||||||
Initial health care cost trend rate |
7.9 | 7.3 | 7.5 | |||||||||
Ultimate health care cost trend rate |
4.5 | 5.0 | 5.0 | |||||||||
Year in which ultimate health care cost trend rate is reached |
2026 | 2023 | 2023 |
Weighted Average Assumptions to Determine Postretirement Benefit Obligation as of December 31:
2018 | 2017 | 2016 | ||||||||||
Discount rate |
4.0 | % | 3.4 | % | 3.9 | % | ||||||
Initial medical trend |
7.5 | 7.9 | 7.3 | |||||||||
Ultimate health care trend |
4.5 | 4.5 | 5.0 | |||||||||
Medical cost trend rate decrease to ultimate rate in year |
2026 | 2026 | 2023 |
90
Assumed health care trend rates could have a significant effect on the amounts reported for health care plans. A one percentage point change in the assumed health care cost trend rates for the year ended December 31, 2018 would have the following effects:
1 Percentage Point Increase |
1 Percentage Point Decrease |
|||||||
(in thousands) | ||||||||
Effect on total service and interest cost components |
$ | 7 | $ | (7 | ) | |||
Effect on postretirement benefit obligations |
181 | (171 | ) |
Expected Future Benefit Payments
Future benefit payments are expected to be paid as follows:
Benefit Payments | ||||
(in thousands) | ||||
2019 |
$ | 1,310 | ||
2020 |
1,234 | |||
2021 |
1,181 | |||
2022 |
984 | |||
2023 |
811 | |||
2024-2028 |
2,364 |
O. STOCK-BASED COMPENSATION
Stock Compensation Plans
Under Teradynes stock compensation plans, Teradyne grants stock options, restricted stock units and performance-based restricted stock units, and employees are eligible to purchase Teradynes common stock through its Employee Stock Purchase Plan (ESPP).
Stock options to purchase Teradynes 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.
Time-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 in full, on the earlier of (a) the first anniversary of the grant date or (b) the date of the following years Annual Meeting of Shareholders. Teradyne expenses the cost of the restricted stock unit awards subject to time 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.
Teradyne grants performance-based restricted stock units (PRSUs) to its executive officers with a performance metric based on relative total shareholder return (TSR). For TSR grants issued in 2018, 2017, and 2016, Teradynes 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 200% to 0% of the target shares capped at four times the grant date value. 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 employees meeting the retirement provisions prior to the grant date will be recognized in full on the date of the grant. Compensation expense is recognized regardless of the eventual number of units that are earned based upon the market condition, provided
91
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.
In January 2018, 2017, and 2016, Teradyne granted PRSUs to its executive officers with a performance metric based on three-year cumulative non-GAAP profit before interest and tax (PBIT) as a percent of Teradynes 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 200% to 0% 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 three-year service period. Compensation expense is recognized based on the number of units that are earned based upon the three-year Teradyne PBIT as a percent of Teradynes 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 recipients 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 recipients 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-year period.
During 2018, 2017, and 2016, Teradyne granted 0.1 million TSR PRSUs, with a grant date fair value of $54.85, $35.66 and $20.29, respectively. The fair value was estimated using the Monte Carlo simulation model with the following assumptions:
2018 | 2017 | 2016 | ||||||||||
Risk-free interest rate |
2.2 | % | 1.5 | % | 1.0 | % | ||||||
Teradyne volatility-historical |
26.8 | % | 26.6 | % | 27.0 | % | ||||||
NYSE Composite Index volatility-historical |
12.4 | % | 13.4 | % | 13.1 | % | ||||||
Dividend yield |
0.8 | % | 1.0 | % | 1.2 | % |
Expected volatility was based on the historical volatility of Teradynes stock and the NYSE Composite Index for the 2018, 2017 and 2016 grants, 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 for 2018, 2017 and 2016 was based upon an estimated annual dividend amount of $0.36 per share for 2018, $0.28 per share for 2017 and $0.24 per share for 2016 divided by Teradynes stock price on the grant date of $47.70 for the 2018 grant, $28.56 for the 2017 grant, and $19.43 for the 2016 grant.
During 2018, 2017, and 2016, Teradyne granted 0.1 million PBIT PRSUs with a grant date fair value of $46.62, $27.72 and $18.71, respectively.
During 2018, 2017, and 2016, Teradyne granted 0.6 million, 0.8 million, and 1.2 million of service-based restricted stock unit awards to employees, respectively, at a weighted average grant date fair value of $45.92, $28.19, and $18.88, respectively.
During 2018, 2017, and 2016, Teradyne granted 0.1 million of service-based restricted stock unit awards to non-employee directors at a weighted average grant date fair value of $35.81, $34.48, and $18.71, respectively.
During 2018, 2017, and 2016, Teradyne granted 0.1 million of service-based stock options to executive officers at a weighted average grant date fair value of $12.17, $7.13, and $5.30, respectively.
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The fair value of the stock options at grant date was estimated using the Black-Scholes option-pricing model with the following assumptions:
2018 | 2017 | 2016 | ||||||||||
Expected life (years) |
5.0 | 5.0 | 5.0 | |||||||||
Risk-free interest rate |
2.4 | % | 2.0 | % | 1.4 | % | ||||||
Volatility-historical |
26.4 | % | 27.8 | % | 32.9 | % | ||||||
Dividend yield |
0.80 | % | 1.00 | % | 1.20 | % |
Teradyne determined the stock options expected life based upon historical exercise data for executive officers, the age of executives and the terms of the stock option award. Volatility was determined using historical volatility for a period equal to the expected life. The 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 $0.36 per share for 2018, $0.28 per share for 2017, and $0.24 per share for 2016 divided by Teradynes stock price on the grant date of $47.70 for the 2018 grants, $28.56 for the 2017 grants, and $19.43 for the 2016 grants.
Stock compensation plan activity for the years 2018, 2017, and 2016 is as follows:
2018 | 2017 | 2016 | ||||||||||
(in thousands) | ||||||||||||
Restricted Stock Units: |
||||||||||||
Non-vested at January 1 |
3,174 | 3,778 | 4,070 | |||||||||
Awarded |
790 | 939 | 1,471 | |||||||||
Vested |
(1,382 | ) | (1,434 | ) | (1,530 | ) | ||||||
Forfeited |
(128 | ) | (109 | ) | (233 | ) | ||||||
|
|
|
|
|
|
|||||||
Non-vested at December 31 |
2,454 | 3,174 | 3,778 | |||||||||
|
|
|
|
|
|
|||||||
Stock Options: |
||||||||||||
Outstanding at January 1 |
531 | 926 | 1,121 | |||||||||
Granted |
69 | 111 | 130 | |||||||||
Exercised |
(94 | ) | (501 | ) | (324 | ) | ||||||
Expired |
| (5 | ) | (2 | ) | |||||||
|
|
|
|
|
|
|||||||
Outstanding at December 31 |
506 | 531 | 926 | |||||||||
|
|
|
|
|
|
|||||||
Vested and expected to vest at December 31 |
506 | 531 | 926 | |||||||||
|
|
|
|
|
|
|||||||
Exercisable at December 31 |
256 | 233 | 598 | |||||||||
|
|
|
|
|
|
Total shares available for the years 2018, 2017, and 2016:
2018 | 2017 | 2016 | ||||||||||
(in thousands) | ||||||||||||
Shares available: |
||||||||||||
Available for grant at January 1 |
8,605 | 9,546 | 10,914 | |||||||||
Options granted |
(69 | ) | (111 | ) | (130 | ) | ||||||
Restricted stock units awarded |
(790 | ) | (939 | ) | (1,471 | ) | ||||||
Restricted stock units forfeited |
128 | 109 | 233 | |||||||||
|
|
|
|
|
|
|||||||
Available for grant at December 31 |
7,874 | 8,605 | 9,546 | |||||||||
|
|
|
|
|
|
93
Weighted average restricted stock unit award date fair value information for the years 2018, 2017, and 2016 is as follows:
2018 | 2017 | 2016 | ||||||||||
Non-vested at January 1 |
$ | 21.71 | $ | 18.27 | $ | 17.66 | ||||||
Awarded |
45.99 | 28.91 | 18.95 | |||||||||
Vested |
20.20 | 17.90 | 17.36 | |||||||||
Forfeited |
24.67 | 20.35 | 17.80 | |||||||||
Non-vested at December 31 |
$ | 29.22 | $ | 21.71 | $ | 18.27 |
Restricted stock unit awards aggregate intrinsic value information at December 31 for the years 2018, 2017, and 2016 is as follows:
2018 | 2017 | 2016 | ||||||||||
(in thousands) | ||||||||||||
Vested |
$ | 63,688 | $ | 40,649 | $ | 30,008 | ||||||
Outstanding |
77,015 | 132,875 | 95,952 | |||||||||
Expected to vest |
77,187 | 130,594 | 91,871 |
Restricted stock units weighted average remaining contractual terms (in years) information at December 31, for the years 2018, 2017, and 2016 is as follows:
2018 | 2017 | 2016 | ||||||||||
Outstanding |
0.92 | 1.00 | 1.04 | |||||||||
Expected to vest |
0.91 | 0.99 | 1.03 |
Weighted average stock options exercise price information for the year ended December 31, 2018 is as follows:
2018 | ||||
Outstanding at January 1 |
$ | 13.92 | ||
Options granted |
47.70 | |||
Options exercised |
10.89 | |||
Outstanding at December 31 |
19.06 | |||
Exercisable at December 31 |
8.31 |
The total cash received from employees as a result of employee stock options exercises during the years ended December 31, 2018, 2017, and 2016, was $1.0 million, $6.8 million and $2.9 million, respectively. In connection with these exercises, the tax benefit realized by Teradyne for the years ended December 31, 2018, 2017, and 2016, was $0.4 million, $2.5 million, and $0.8 million, respectively.
Stock option aggregate intrinsic value information for the years ended December 31, 2018, 2017, and 2016 is as follows:
2018 | 2017 | 2016 | ||||||||||
(in thousands) | ||||||||||||
Exercised |
$ | 2,960 | $ | 8,035 | $ | 3,729 | ||||||
Outstanding |
7,359 | 14,831 | 12,468 | |||||||||
Vested and expected to vest |
7,359 | 14,831 | 12,468 | |||||||||
Exercisable |
5,905 | 9,076 | 10,217 |
94
Stock options weighted average remaining contractual terms (in years) information at December 31, for the years 2018, 2017, and 2016 is as follows:
2018 | 2017 | 2016 | ||||||||||
Outstanding |
3.6 | 4.1 | 3.9 | |||||||||
Vested and expected to vest |
3.6 | 4.1 | 3.9 | |||||||||
Exercisable |
2.4 | 2.8 | 3.2 |
Significant option groups outstanding at December 31, 2018 and related weighted average price and remaining contractual life information follow:
Options Outstanding | Options Exercisable | |||||||||||||||||||
Range Of Exercise Prices |
Weighted- Average Remaining Contractual Life (Years) |
Shares | Weighted- Average Exercise Price |
Shares | Weighted- Average Exercise Price |
|||||||||||||||
(shares in thousands) | ||||||||||||||||||||
$1.48 $2.58 |
1.23 | 67 | $ | 1.83 | 67 | $ | 1.83 | |||||||||||||
$2.67 $3.28 |
2.20 | 103 | 2.69 | 103 | 2.69 | |||||||||||||||
$7.71 $19.43 |
3.41 | 166 | 18.59 | 68 | 18.02 | |||||||||||||||
$28.56 $47.70 |
5.62 | 170 | 36.30 | 18 | 28.56 | |||||||||||||||
|
|
|
|
|||||||||||||||||
506 | $ | 19.06 | 256 | $ | 8.31 | |||||||||||||||
|
|
|
|
As of December 31, 2018, total unrecognized expense related to non-vested restricted stock unit awards and stock options was $44 million, and is expected to be recognized over a weighted average period of 2.4 years.
Employee Stock Purchase Plan
Under the ESPP, eligible employees may purchase shares of common stock through regular payroll deductions of up to 10% of their compensation, to a maximum of shares with a fair market value of $25,000 per calendar year, not to exceed 6,000 shares. Under the plan, the price paid for the common stock is equal to 85% of the stock price on the last business day of the six-month purchase period.
In July 2018, 0.3 million shares of common stock were issued to employees who participated in the plan during the first half of 2018 at the price of $32.36 per share. In January 2019, Teradyne issued 0.4 million shares of common stock to employees who participated in the plan during the second half of 2018 at the price of $26.67 per share.
In July 2017, 0.3 million shares of common stock were issued to employees who participated in the plan during the first half of 2017 at the price of $25.53 per share. In January 2018, Teradyne issued 0.3 million shares of common stock to employees who participated in the plan during the second half of 2017 at the price of $35.59 per share.
In July 2016, 0.5 million shares of common stock were issued to employees who participated in the plan during the first half of 2016 at the price of $16.74 per share. In January 2017, Teradyne issued 0.4 million shares of common stock to employees who participated in the plan during the second half of 2016 at the price of $21.59 per share.
As of December 31, 2018, there were 2.5 million shares available for grant under the ESPP.
95
The following table provides the effect to income from operations for recording stock-based compensation for the years ended December 31, 2018, 2017, and 2016:
2018 | 2017 | 2016 | ||||||||||
(in thousands) | ||||||||||||
Cost of revenues |
$ | 3,129 | $ | 3,212 | $ | 3,153 | ||||||
Engineering and development |
9,181 | 9,370 | 9,458 | |||||||||
Selling and administrative |
21,267 | 21,515 | 18,139 | |||||||||
|
|
|
|
|
|
|||||||
Stock-based compensation |
33,577 | 34,097 | 30,750 | |||||||||
Income tax benefit |
(12,036 | ) | (10,462 | ) | (8,752 | ) | ||||||
|
|
|
|
|
|
|||||||
Total stock-based compensation expense after income taxes |
$ | 21,541 | $ | 23,635 | $ | 21,998 | ||||||
|
|
|
|
|
|
P. SAVINGS PLAN
Teradyne sponsors a defined contribution employee retirement savings plan (Savings Plan) covering substantially all U.S. employees. Under the Savings Plan, employees may contribute up to 20% of their compensation (subject to Internal Revenue Service limitations). The Savings Plan provides for a discretionary employer match that is determined each year. In 2018, 2017 and 2016, Teradyne matched 100% of eligible employee contributions up to 4% of their compensation for employees not accruing benefits in the U.S. Qualified Pension Plan. There was no match for employees still actively accruing benefits in the U.S. Qualified Pension Plan. Teradynes contributions vest 25% per year for the first four years of employment, and contributions for those employees with four years of service vest immediately.
In addition, Teradyne established an unfunded U.S. Supplemental Savings Plan to provide savings benefits in excess of those allowed by the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code. The provisions of this plan are the same as the Savings Plan. The liability for the U.S. Supplemental Savings Plan at December 31, 2018 and 2017, was $24.4 million and $23.4 million, respectively, and is included in retirement plan liabilities. Teradyne also established defined contribution savings plans for its foreign employees. Under Teradynes savings plans, amounts charged to the statements of operations for the years ended December 31, 2018, 2017, and 2016 were $17.2 million, $15.3 million, and $14.5 million, respectively.
Q. INCOME TAXES
The components of income (loss) before income taxes and the provision (benefit) for income taxes as shown in the consolidated statements of operations were as follows:
2018 | 2017 | 2016 | ||||||||||
(in thousands) | ||||||||||||
Income (loss) before income taxes: |
||||||||||||
U.S. |
$ | 189,691 | $ | 76,699 | $ | (341,018 | ) | |||||
Non-U.S. |
278,110 | 447,713 | 285,958 | |||||||||
|
|
|
|
|
|
|||||||
$ | 467,801 | $ | 524,412 | $ | (55,060 | ) | ||||||
|
|
|
|
|
|
|||||||
Provision (benefit) for income taxes: |
||||||||||||
Current: |
||||||||||||
U.S. Federal |
$ | (59,122 | ) | $ | 162,679 | $ | 7,750 | |||||
Non-U.S. |
45,083 | 64,313 | 41,579 | |||||||||
State |
1,721 | 2,623 | 1,968 | |||||||||
|
|
|
|
|
|
|||||||
(12,318 | ) | 229,615 | 51,297 | |||||||||
|
|
|
|
|
|
|||||||
Deferred: |
||||||||||||
U.S. Federal |
29,252 | 43,687 | (51,482 | ) | ||||||||
Non-U.S. |
(1,243 | ) | (6,476 | ) | (9,240 | ) | ||||||
State |
331 | (106 | ) | (2,214 | ) | |||||||
|
|
|
|
|
|
|||||||
28,340 | 37,105 | (62,936 | ) | |||||||||
|
|
|
|
|
|
|||||||
Total provision (benefit) for income taxes: |
$ | 16,022 | $ | 266,720 | $ | (11,639 | ) | |||||
|
|
|
|
|
|
96
Income tax expense for 2018 and 2017 totaled $16.0 and $266.7 million, respectively. Income tax benefit for 2016 totaled $11.6 million. The effective tax rate for 2018, 2017 and 2016 was 3.4%, 50.9%, and 21.1%, respectively.
On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act of 2017 (the Tax Reform Act), making significant changes to the Internal Revenue Code. The Tax Reform Act has significant direct and indirect implications for accounting for income taxes under ASC 740, Accounting for Income Taxes some of which could not be calculated with precision until further clarification and guidance was made available from tax authorities, regulatory bodies or the FASB. In light of this uncertainty, on December 22, 2017 the SEC issued Staff Accounting Bulletin (SAB) No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act, to address uncertainty in the application of U.S. GAAP when the registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Reform Act. In accordance with SAB 118, Teradyne recorded a provisional amount of $186.0 million of additional income tax expense in the fourth quarter of 2017 which represented Teradynes best estimate of the impact of the Tax Reform Act in accordance with Teradynes understanding of the Tax Reform Act and available guidance as of that date. The $186.0 million was primarily composed of expense of $161.0 million related to the one-time transition tax on the mandatory deemed repatriation of foreign earnings, $33.6 million of expense related to the remeasurement of certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, and a benefit of $10.3 million associated with the impact of correlative adjustments on uncertain tax positions. In accordance with the requirements of SAB 118, in the fourth quarter of 2018 Teradyne completed its analysis of the effect of the Tax Reform Act based on the application of the most recently available guidance as of December 31, 2018 and recorded $49.5 million of net income tax benefit. The net benefit consisted of $51.7 million of benefit resulting from a reduction in the estimate of the one-time transition tax on the mandatory deemed repatriation of foreign earnings and an expense of $2.2 million associated with the impact of correlative adjustments on uncertain tax positions.
The Tax Reform Act also includes a new U.S. tax base erosion provision, the global intangible low-taxed income (GILTI) provision, which imposes a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. Teradyne has made an accounting policy election to account for GILTI as a component of tax expense in the period in which Teradyne is subject to the rules and therefore did not provide any deferred tax impacts of GILTI in its consolidated financial statements.
The decrease in the effective tax rate from 2017 to 2018 was primarily attributable to the $186.0 million of income tax expense recorded in the fourth quarter of 2017 as a provisional estimate of the impact of the Tax Reform Act and the $51.7 million of income tax benefit recorded in the fourth quarter of 2018 resulting from a reduction in the estimate of the one-time transition tax on the mandatory deemed repatriation of foreign earnings and an expense of $2.2 million associated with the impact of correlative adjustments on uncertain tax positions. The change in the effective tax rate from 2017 to 2018 was also impacted by a shift in the geographic distribution of income which increased income subject to taxation in the U.S. relative to lower tax rate jurisdictions, the benefit of the U.S. foreign derived intangible income deduction and increases in discrete benefit from non-taxable foreign exchange gains and losses.
The increase in the effective tax rate from 2016 to 2017 was primarily attributable to the $186.0 million of income tax expense recorded in the fourth quarter of 2017 as a provisional estimate of the impact of the Tax Reform Act. The change in the effective rate from 2016 to 2017 was also impacted by the U.S. non-deductible goodwill impairment charge recorded in 2016, a shift in the geographic distribution of income which increased income subject to taxation in the U.S. relative to lower tax rate jurisdictions, decreases in the discrete benefits from tax reserve releases, increases in discrete expense from non-taxable foreign exchange gains and losses and an increase in the discrete benefit from stock-based compensation.
97
A reconciliation of the effective tax rate for the years 2018, 2017, and 2016 is as follows:
2018 | 2017 | 2016 | ||||||||||
U.S. statutory federal tax rate |
21.0 | % | 35.0 | % | 35.0 | % | ||||||
U.S. transition tax |
(10.5 | ) | 28.7 | | ||||||||
U.S. foreign derived intangible income |
(1.8 | ) | | | ||||||||
Impact of rate change on deferred tax |
0.3 | 6.9 | | |||||||||
Uncertain tax positions |
1.0 | 1.7 | (2.6 | ) | ||||||||
Foreign taxes |
(2.0 | ) | (16.3 | ) | 78.0 | |||||||
Foreign tax credits |
(2.2 | ) | (2.2 | ) | 49.1 | |||||||
U.S. research and development credit |
(2.2 | ) | (1.6 | ) | 15.8 | |||||||
Equity compensation |
(1.2 | ) | (0.8 | ) | (2.7 | ) | ||||||
State income taxes, net of federal tax benefit |
0.1 | (0.4 | ) | 2.3 | ||||||||
Domestic production activities deduction |
| (0.3 | ) | 2.3 | ||||||||
Goodwill impairment |
| | (162.1 | ) | ||||||||
U.S. alternative minimum tax credit |
| | 3.7 | |||||||||
Inventory cost capitalization |
| | 1.8 | |||||||||
Other, net |
0.9 | 0.2 | 0.5 | |||||||||
|
|
|
|
|
|
|||||||
3.4 | % | 50.9 | % | 21.1 | % | |||||||
|
|
|
|
|
|
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 attributable to the Singapore tax holiday for the years ended December 31, 2018, 2017 and 2016 were $11.9 million or $0.06 per diluted share, $24.8 million or $0.12 per diluted share and $17.0 million or $0.08 per diluted share, respectively. The tax holiday is scheduled to expire on December 31, 2020.
Significant components of Teradynes deferred tax assets (liabilities) as of December 31, 2018 and 2017 were as follows:
2018 | 2017 | |||||||
(in thousands) | ||||||||
Deferred tax assets: |
||||||||
Tax credits |
$ | 69,091 | $ | 76,083 | ||||
Accruals |
23,449 | 27,508 | ||||||
Pension liabilities |
20,826 | 22,602 | ||||||
Inventory valuations |
18,514 | 17,793 | ||||||
Deferred revenue |
9,130 | 9,016 | ||||||
Equity compensation |
7,190 | 6,861 | ||||||
Vacation accrual |
4,772 | 4,747 | ||||||
Net operating loss carryforwards |
3,658 | 5,440 | ||||||
Marketable securities |
962 | | ||||||
Other |
685 | 713 | ||||||
|
|
|
|
|||||
Gross deferred tax assets |
158,277 | 170,763 | ||||||
Less: valuation allowance |
(69,852 | ) | (63,919 | ) | ||||
|
|
|
|
|||||
Total deferred tax assets |
$ | 88,425 | $ | 106,844 | ||||
|
|
|
|
|||||
Deferred tax liabilities: |
||||||||
Intangible assets |
$ | (24,211 | ) | $ | (16,120 | ) | ||
Depreciation |
(14,028 | ) | (12,293 | ) | ||||
Marketable securities |
| (1,125 | ) | |||||
|
|
|
|
|||||
Total deferred tax liabilities |
$ | (38,239 | ) | $ | (29,538 | ) | ||
|
|
|
|
|||||
Net deferred assets |
$ | 50,186 | $ | 77,306 | ||||
|
|
|
|
98
As of December 31, 2018 and 2017, Teradyne evaluated the likelihood that it would realize the deferred income taxes to offset future taxable income and concluded that it is more likely than not that a substantial majority of its deferred tax assets will be realized through consideration of both the positive and negative evidence. At December 31, 2018 and 2017, Teradyne maintained a valuation allowance for certain deferred tax assets of $69.9 million and $63.9 million, respectively, primarily related to state net operating losses and state tax credit carryforwards, due to the uncertainty regarding their realization. Adjustments could be required in the future if Teradyne estimates that the amount of deferred tax assets to be realized is more or less than the net amount recorded.
At December 31, 2018, Teradyne had operating loss carryforwards that expire in the following years:
State Operating Loss Carryforwards |
Foreign Operating Loss Carryforwards |
|||||||
(in thousands) | ||||||||
2019 |
$ | 258 | $ | | ||||
2020 |
269 | | ||||||
2021 |
2,977 | | ||||||
2022 |
5,749 | | ||||||
2023 |
6,241 | | ||||||
2024-2028 |
4,672 | | ||||||
2029-2033 |
22,724 | 44 | ||||||
Beyond 2033 |
5,305 | 72 | ||||||
Non-expiring |
| 4,389 | ||||||
|
|
|
|
|||||
Total |
$ | 48,195 | $ | 4,505 | ||||
|
|
|
|
Teradyne has approximately $98.4 million of tax credit carryforwards including federal business tax credits of approximately $0.9 million which expire in 2028, and state tax credits of $97.5 million, of which $55.6 million do not expire and the remainder expires in the years 2019 through 2038.
Teradynes gross unrecognized tax benefits for the years ended December 31, 2018, 2017, and 2016 were as follows:
2018 | 2017 | 2016 | ||||||||||
(in thousands) | ||||||||||||
Beginning balance, as of January 1 |
$ | 36,263 | $ | 38,958 | $ | 36,792 | ||||||
Additions: |
||||||||||||
Tax positions for current year |
4,716 | 8,208 | 9,766 | |||||||||
Tax positions for prior years |
2,626 | 199 | 187 | |||||||||
Reductions: |
||||||||||||
Tax positions for prior years |
(153 | ) | (10,573 | ) | (1,960 | ) | ||||||
Expiration of statutes |
(57 | ) | (325 | ) | (3,532 | ) | ||||||
Settlements with tax authorities |
| (204 | ) | (2,295 | ) | |||||||
|
|
|
|
|
|
|||||||
Ending balance as of December 31 |
$ | 43,395 | $ | 36,263 | $ | 38,958 | ||||||
|
|
|
|
|
|
Current year and prior year additions include assessment of potential transfer pricing issues worldwide, federal and state tax credits and incentives, capitalization rules, domestic production activities deductions and correlative effects of the transition tax charge. Of the $43.4 million of unrecognized tax benefits as of December 31, 2018, $30.7 million would impact the consolidated income tax rate if ultimately recognized. The remaining $12.6 million would impact deferred taxes if recognized.
99
On February 4, 2019, the IRS issued a closing audit letter related to the U.S. Federal income tax return for the year ended December 31, 2015 indicating that there was no change to the reported tax. As a result of the completion of the 2015 audit, Teradyne anticipates recording a $33.8 million reduction in the balance of unrecognized tax benefits in the first quarter of 2019 primarily composed of federal and state reserves related to transfer pricing and research credits. Of the $33.8 million reduction in the balance of unrecognized tax benefits, $5.9 million will be offset by valuation allowance. The remaining $27.9 million, net of a $2.0 million reduction for the federal benefit of state reserves, will be recognized as an income tax benefit. Teradyne estimates that it is reasonably possible that the balance of unrecognized tax benefits as of December 31, 2018 may decrease an additional $0.2 million in the next twelve months, as a result of the lapse of statutes of limitation.
Teradyne records all interest and penalties related to income taxes as a component of income tax expense. Accrued interest and penalties related to income tax items at December 31, 2018 and 2017 amounted to $0.3 million and $0.3 million, respectively. For the years ended December 31, 2018, 2017, and 2016, expense of $0.1 million, benefit of $0.1 million and benefit of $0.1 million, respectively, was recorded for interest and penalties related to income tax items.
Teradyne is subject to U.S. federal income tax, as well as income tax in multiple state, local and foreign jurisdictions. As of December 31, 2018, all material state and local income tax matters have been concluded through 2013, all material federal income tax matters have been concluded through 2014 and all material foreign income tax matters have been concluded through 2012. However, in some jurisdictions, including the United States, operating losses and tax credits may be subject to adjustment until such time as they are utilized and the year of utilization is closed to adjustment.
As of December 31, 2018, Teradyne is not permanently reinvested with respect to the unremitted earnings of non-U.S. subsidiaries to the extent that those earnings exceed local statutory and operational requirements. Remittance of those earnings is not expected to result in material income tax.
R. OPERATING SEGMENT, GEOGRAPHIC AND SIGNIFICANT CUSTOMER INFORMATION
Teradyne has four 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, distribution channels, and currency risks. 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 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 are the same as those described in Note B: Accounting Policies.
100
Segment information for the years ended December 31, 2018, 2017, and 2016 is as follows:
Semiconductor Test |
System Test |
Industrial Automation |
Wireless Test |
Corporate And Other |
Consolidated | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
2018 |
||||||||||||||||||||||||
Revenues |
$ | 1,492,417 | $ | 216,132 | $ | 261,452 | $ | 132,006 | $ | (1,205 | ) | $ | 2,100,802 | |||||||||||
Income (loss) before taxes (1)(2) |
397,645 | 48,857 | 7,670 | 29,052 | (15,423 | ) | 467,801 | |||||||||||||||||
Total assets (3) |
669,452 | 88,098 | 607,502 | 77,570 | 1,263,984 | 2,706,606 | ||||||||||||||||||
Property additions |
94,496 | 3,469 | 11,188 | 5,226 | | 114,379 | ||||||||||||||||||
Depreciation and amortization expense |
58,095 | 6,430 | 36,755 | 5,328 | 6,616 | 113,224 | ||||||||||||||||||
2017 |
||||||||||||||||||||||||
Revenues |
$ | 1,662,549 | $ | 192,135 | $ | 170,056 | $ | 111,866 | $ | | $ | 2,136,606 | ||||||||||||
Income (loss) before taxes (1)(2) |
491,361 | 10,305 | 8,763 | 17,350 | (3,368 | ) | 524,411 | |||||||||||||||||
Total assets (3) |
597,480 | 97,018 | 368,037 | 59,912 | 1,987,098 | 3,109,545 | ||||||||||||||||||
Property additions |
87,920 | 5,976 | 7,044 | 4,435 | | 105,375 | ||||||||||||||||||
Depreciation and amortization expense |
58,901 | 6,646 | 25,711 | 5,392 | 11,425 | 108,075 | ||||||||||||||||||
2016 |
||||||||||||||||||||||||
Revenues |
$ | 1,368,169 | $ | 189,846 | $ | 99,031 | $ | 96,204 | $ | | $ | 1,753,250 | ||||||||||||
Income (loss) before taxes (1)(2) |
311,939 | 28,916 | (16,783 | ) | (371,409 | ) | (7,723 | ) | (55,060 | ) | ||||||||||||||
Total assets (3) |
557,546 | 110,361 | 317,635 | 62,366 | 1,714,585 | 2,762,493 | ||||||||||||||||||
Property additions |
70,543 | 3,788 | 6,755 | 4,186 | | 85,272 | ||||||||||||||||||
Depreciation and amortization expense |
58,087 | 6,551 | 26,869 | 25,921 | 2,581 | 120,009 |
(1) | Included in Corporate and Other are: contingent consideration adjustments, pension and postretirement plans actuarial gains (losses), severance charges, impairment of fixed assets and expenses related to the Japan earthquake, property insurance recovery, interest income, interest expense, net foreign exchange 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. In 2016, loss before income taxes in Wireless Test also included charges related to goodwill and acquired intangible assets impairment. |
(3) | Total assets are attributable to each segment. Corporate assets consist of cash and cash equivalents, marketable securities and certain other assets. |
Included in the Semiconductor Test segment are charges in the following accounts:
For the Year Ended December 31, | ||||||||||||
2018 | 2017 | 2016 | ||||||||||
(in thousands) | ||||||||||||
Restructuring and otheremployee severance |
$ | 8,429 | $ | 1,779 | $ | 2,860 | ||||||
Cost of revenuesinventory charge |
6,822 | 4,606 | 9,656 | |||||||||
Restructuring and otherimpairment of fixed assets |
| 1,124 | |
Included in the System Test segment are charges in the following accounts:
For the Year Ended December 31, | ||||||||||||
2018 | 2017 | 2016 | ||||||||||
(in thousands) | ||||||||||||
Cost of revenuesinventory charge |
$ | 1,175 | $ | 1,918 | $ | 630 |
101
Included in the Industrial Automation segment are charges in the following accounts:
For the Year Ended December 31, | ||||||||||||
2018 | 2017 | 2016 | ||||||||||
(in thousands) | ||||||||||||
Restructuring and otheracquisition related expenses and compensation |
$ | 1,163 | $ | | $ | | ||||||
Cost of revenuesinventory charge |
680 | | | |||||||||
Restructuring and otheremployee severance |
| 1,414 | 585 |
Included in the Wireless Test segment are charges in the following accounts:
For the Year Ended December 31, | ||||||||||||
2018 | 2017 | 2016 | ||||||||||
(in thousands) | ||||||||||||
Cost of revenuesinventory charge |
$ | 2,565 | $ | 2,190 | $ | 7,207 | ||||||
Restructuring and otherlease impairment |
| 972 | | |||||||||
Restructuring and otheremployee severance |
| | 2,650 | |||||||||
Goodwill impairment charge |
| | 254,946 | |||||||||
Intangible assets impairment charge |
| | 83,339 |
Included in Corporate and Other are charges and credits in the following accounts:
For the Year Ended December 31, | ||||||||||||
2018 | 2017 | 2016 | ||||||||||
(in thousands) | ||||||||||||
Restructuring and otherMiR contingent consideration adjustment |
$ | 17,666 | $ | | $ | | ||||||
Restructuring and otherUniversal Robots contingent consideration adjustment |
(16,679 | ) | 7,820 | 15,346 | ||||||||
Restructuring and otheracquisition related expenses |
3,422 | | | |||||||||
Restructuring and other |
872 | | | |||||||||
Restructuring and otherexpense related to Japan earthquake and impairment of fixed assets |
| 755 | 5,051 | |||||||||
Restructuring and otherproperty insurance recovery |
| (5,064 | ) | (5,051 | ) |
Information as to Teradynes revenues by country is as follows:
2018 | 2017 | 2016 | ||||||||||
(in thousands) | ||||||||||||
Revenues from customers (1): |
||||||||||||
Taiwan |
$ | 516,322 | $ | 687,031 | $ | 653,076 | ||||||
China |
348,942 | 260,451 | 174,876 | |||||||||
United States |
282,869 | 252,516 | 221,948 | |||||||||
Europe |
223,207 | 163,715 | 117,671 | |||||||||
Korea |
163,224 | 206,819 | 147,882 | |||||||||
Japan |
158,281 | 169,093 | 135,978 | |||||||||
Malaysia |
122,797 | 124,048 | 103,472 | |||||||||
Singapore |
108,618 | 101,085 | 73,172 | |||||||||
Philippines |
77,996 | 105,850 | 54,705 | |||||||||
Thailand |
59,184 | 29,566 | 43,097 | |||||||||
Rest of the World |
39,362 | 36,432 | 27,373 | |||||||||
|
|
|
|
|
|
|||||||
$ | 2,100,802 | $ | 2,136,606 | $ | 1,753,250 | |||||||
|
|
|
|
|
|
(1) | Revenues attributable to a country are based on location of customer site. |
102
In 2018, no single customer accounted for more than 10% of total consolidated revenue. In 2017 and 2016, one customer of Teradynes Semiconductor Test segment accounted for 13% and 12%, respectively, of total consolidated revenues. In 2016, a different customer of Teradynes Semiconductor Test segment accounted for 12% of total consolidated revenues. Teradyne estimates consolidated revenues driven by a single OEM customer, combining direct sales to that customer with sales to the customers outsourced semiconductor assembly and test providers (OSATs), accounted for approximately 13%, 22%, and 26% of Teradynes consolidated revenues in 2018, 2017, and 2016, respectively.
Long-lived assets by geographic area:
United States | Foreign(1) | Total | ||||||||||
(in thousands) | ||||||||||||
December 31, 2018 |
$ | 209,368 | $ | 70,453 | $ | 279,821 | ||||||
December 31, 2017 |
$ | 198,855 | $ | 69,592 | $ | 268,447 |
(1) | As of December 31, 2018 and 2017, long-lived assets attributable to Singapore were $19.4 million and $23.6 million, respectively. |
S. STOCK REPURCHASE PROGRAM
In January 2015, Teradynes Board of Directors authorized a stock repurchase program for up to $500 million of common stock. In 2016, Teradyne repurchased 6.8 million shares of common stock at an average price of $21.39, for a total cost of $146 million. The cumulative repurchases as of December 31, 2016 totaled 22.5 million shares of common stock for $446 million at an average price per share of $19.87.
In December 2016, Teradynes Board of Directors cancelled the January 2015 stock repurchase program and approved a new $500 million share repurchase authorization which commenced on January 1, 2017. The cumulative repurchases as of December 31, 2017 totaled 5.8 million shares of common stock for $200 million at an average price per share of $34.30.
In January 2018, Teradynes Board of Directors cancelled the December 2016 stock repurchase program and authorized a new stock repurchase program for up to $1.5 billion of common stock. The cumulative repurchases as of December 31, 2018 totaled 21.6 million shares of common stock for $823.5 million at an average price per share of $38.06. Teradyne intends to repurchase $500 million in 2019.
T. SUBSEQUENT EVENTS
In January 2019, Teradynes Board of Directors declared a quarterly cash dividend of $0.09 per share to be paid on March 22, 2019 to shareholders of record as of February 22, 2019.
While Teradyne declared a quarterly cash dividend and authorized a share repurchase program, it may reduce or eliminate the cash dividend or share repurchase program in the future. Future cash dividends and stock repurchases are subject to the discretion of Teradynes Board of Directors which will consider, among other things, Teradynes earnings, capital requirements and financial condition.
103
SUPPLEMENTARY INFORMATION
(Unaudited)
The following sets forth certain unaudited consolidated quarterly statements of operations data for each of Teradynes last eight quarters. In managements opinion, this quarterly information reflects all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement for the periods presented. Such quarterly results are not necessarily indicative of future results of operations and should be read in conjunction with the audited consolidated financial statements of Teradyne and the notes thereto included elsewhere herein.
2018 | ||||||||||||||||
1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | |||||||||||||
(1) | (2)(5) | (3)(5) | (4)(5) | |||||||||||||
(in thousands, except per share amounts) | ||||||||||||||||
Revenues: |
||||||||||||||||
Products |
$ | 403,925 | $ | 434,051 | $ | 470,994 | $ | 420,652 | ||||||||
Services |
83,542 | 92,878 | 95,854 | 98,906 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total revenues |
487,467 | 526,929 | 566,848 | 519,558 | ||||||||||||
Cost of revenues: |
||||||||||||||||
Cost of products |
180,958 | 180,777 | 195,339 | 170,064 | ||||||||||||
Cost of services |
36,677 | 38,818 | 37,816 | 39,959 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total cost of revenues (exclusive of acquired intangible assets amortization shown separately below) |
217,635 | 219,595 | 233,155 | 210,023 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Gross profit |
269,832 | 307,334 | 333,693 | 309,535 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Operating expenses: |
||||||||||||||||
Selling and administrative |
90,505 | 99,410 | 100,202 | 100,552 | ||||||||||||
Engineering and development |
74,408 | 75,342 | 77,049 | 74,706 | ||||||||||||
Acquired intangible assets amortization |
7,698 | 9,793 | 11,142 | 10,558 | ||||||||||||
Restructuring and other |
(313 | ) | 2,389 | 1,710 | 11,446 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total operating expenses |
172,298 | 186,934 | 190,103 | 197,262 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income (loss) from operations |
97,534 | 120,400 | 143,590 | 112,273 | ||||||||||||
Non-operating (income) expense: |
||||||||||||||||
Interest income |
(5,981 | ) | (5,427 | ) | (6,213 | ) | (9,083 | ) | ||||||||
Interest expense |
6,890 | 5,639 | 5,557 | 13,182 | ||||||||||||
Other (income) expense, net |
805 | 176 | 3,405 | (2,954 | ) | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income (loss) before income taxes |
95,820 | 120,012 | 140,841 | 111,128 | ||||||||||||
Income tax provision (benefit) |
8,846 | 18,975 | 20,863 | (32,662 | ) | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) |
$ | 86,974 | $ | 101,037 | $ | 119,978 | $ | 143,790 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) per common sharebasic |
$ | 0.45 | $ | 0.53 | $ | 0.65 | $ | 0.80 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) per common sharediluted |
$ | 0.43 | $ | 0.52 | $ | 0.63 | $ | 0.79 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Cash dividend declared per common share |
$ | 0.09 | $ | 0.09 | $ | 0.09 | $ | 0.09 | ||||||||
|
|
|
|
|
|
|
|
(1) | Restructuring and other includes a $3.5 million gain for the decrease in the fair value of the Universal Robots contingent consideration liability, partially offset by $2.5 million of acquisition related expenses and compensation and $2.4 million of employee severance charges. |
(2) | Restructuring and other includes a $5.0 million gain for the decrease in the fair value of the Universal Robots contingent consideration liability, partially offset by $3.9 million of employee severance charges and $0.8 million of acquisition related expenses and compensation. |
104
(3) | Restructuring and other includes $1.7 million of employee severance charges, $0.8 million of acquisition related expenses and compensation, partially offset by a $0.8 million gain for the decrease in the fair value of the Universal Robots contingent consideration liability. |
(4) | Restructuring and other includes a $17.7 million fair value adjustment to increase the MiR acquisition contingent consideration, $0.8 million of employee severance charges, and $0.5 million acquisition related expenses and compensation, partially offset by a $7.4 million gain for the decrease in the fair value of the Universal Robots contingent consideration liability. |
(5) | Teradyne recorded pension and post retirement net actuarial (gains) losses of $(0.1) million, $0.3 million and $(3.5) million for the second, third and fourth quarter in 2018, respectively. See Note B: Accounting Policies for a discussion of Teradynes accounting policy. |
2017 | ||||||||||||||||
1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | |||||||||||||
(1) | (2)(5) | (3) | (4)(5) | |||||||||||||
(in thousands, except per share amounts) | ||||||||||||||||
Revenues: |
||||||||||||||||
Products |
$ | 373,204 | $ | 610,356 | $ | 412,854 | $ | 388,282 | ||||||||
Services |
83,709 | 86,545 | 90,524 | 91,133 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total revenues |
456,913 | 696,901 | 503,378 | 479,415 | ||||||||||||
Cost of revenues: |
||||||||||||||||
Cost of products |
154,883 | 267,752 | 169,661 | 168,672 | ||||||||||||
Cost of services |
37,014 | 38,511 | 38,848 | 39,813 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total cost of revenues (exclusive of acquired intangible assets amortization shown separately below) |
191,897 | 306,263 | 208,509 | 208,485 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Gross profit |
265,016 | 390,638 | 294,869 | 270,930 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Operating expenses: |
||||||||||||||||
Selling and administrative |
84,792 | 90,111 | 86,130 | 87,880 | ||||||||||||
Engineering and development |
75,978 | 82,270 | 76,986 | 72,070 | ||||||||||||
Acquired intangible assets amortization |
7,952 | 8,166 | 7,028 | 7,384 | ||||||||||||
Restructuring and other |
2,511 | 2,288 | (4,407 | ) | 8,970 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total operating expenses |
171,233 | 182,835 | 165,737 | 176,304 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income from operations |
93,783 | 207,803 | 129,132 | 94,626 | ||||||||||||
Non-operating (income) expense: |
||||||||||||||||
Interest income |
(3,520 | ) | (3,292 | ) | (4,517 | ) | (6,476 | ) | ||||||||
Interest expense |
5,402 | 5,509 | 5,372 | 5,380 | ||||||||||||
Other (income) expense, net |
(115 | ) | (1,291 | ) | 840 | (2,362 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Income before income taxes |
92,016 | 206,877 | 127,437 | 98,084 | ||||||||||||
Income tax provision |
6,795 | 31,901 | 24,017 | 204,007 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) |
$ | 85,221 | $ | 174,976 | $ | 103,420 | $ | (105,923 | ) | |||||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) per common sharebasic |
$ | 0.43 | $ | 0.88 | $ | 0.52 | $ | (0.54 | ) | |||||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) per common sharediluted |
$ | 0.42 | $ | 0.87 | $ | 0.52 | $ | (0.54 | ) | |||||||
|
|
|
|
|
|
|
|
|||||||||
Cash dividend declared per common share |
$ | 0.07 | $ | 0.07 | $ | 0.07 | $ | 0.07 | ||||||||
|
|
|
|
|
|
|
|
(1) | Restructuring and other includes a $1.3 million charge for a lease impairment of a Wireless Test facility in Sunnyvale, CA, a $0.6 million fair value adjustment to increase the Universal Robots acquisition contingent consideration, and $0.6 million of employee severance charges. |
105
(2) | Restructuring and other includes a $1.5 million charge for a fair value adjustment to increase the Universal Robots acquisition contingent consideration, and $0.8 million of employee severance charges. |
(3) | Restructuring and other includes $5.1 million of property insurance recovery related to the Japan earthquake, a $0.4 million credit related to previously impaired lease termination of a Wireless Test facility in Sunnyvale, CA, and a $0.3 million credit for the decrease in the fair value of the Universal Robots contingent consideration liability, partially offset by $0.8 million of Japan earthquake related expenses and $0.6 million of employee severance charges. |
(4) | Restructuring and other includes a $6.0 million fair value adjustment to increase the Universal Robots acquisition contingent consideration, $1.8 million of employee severance charges, and $1.1 million of charges for impairment of fixed assets. |
(5) | Teradyne recorded pension and post retirement net actuarial gains of $2.8 million and $3.8 million for the second and fourth quarter in 2017, respectively. See Note B: Accounting Policies for a discussion of Teradynes accounting policy. |
Item 9: | Changes in and disagreements with accountants on accounting and financial disclosure |
None.
Item 9A: | Controls and procedures |
Disclosure Controls and Procedures
As of the end of the period covered by this report, our management, with the participation of our CEO and CFO, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15(b) promulgated under the Exchange Act. Based upon that evaluation, our CEO and CFO 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 by us 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 SECs rules and forms, including ensuring that such material information is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting during the fourth fiscal quarter ended December 31, 2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Managements Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our CEO and CFO, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal ControlIntegrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal ControlIntegrated Framework (2013), our management concluded that our internal control over financial reporting was effective as of December 31, 2018.
The effectiveness of our internal control over financial reporting as of December 31, 2018 has been audited by PricewaterhouseCoopers LLP, our independent registered public accounting firm, as stated in their report which is included under Item 8 of this Annual Report.
106
Inherent Limitations on Effectiveness of Controls
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Item 9B: | Other Information |
None.
107
Item 10: | Directors, Executive Officers and Corporate Governance |
Certain information relating to our directors and executive officers, committee information, reports and charters, executive compensation, security ownership of certain beneficial owners and management and related stockholder matters, and certain relationships and related transactions is incorporated by reference herein from our definitive proxy statement in connection with our Annual Meeting of Shareholders to be held on May 7, 2019. The proxy statement will be filed with the SEC not later than 120 days after the close of the fiscal year. For this purpose, the Compensation Committee Report included in such proxy statement is specifically not incorporated herein. Also see Item 1: BusinessOur Executive Officers.
Item 11: | Executive Compensation |
Certain information relating to our directors and executive officers, executive compensation, security ownership of certain beneficial owners and management and related stockholder matters, and certain relationships and related transactions is incorporated by reference herein from our definitive proxy statement in connection with our Annual Meeting of Shareholders to be held on May 7, 2019. The proxy statement will be filed with the SEC not later than 120 days after the close of the fiscal year. For this purpose, the Compensation Committee Report included in such proxy statement is specifically not incorporated herein.
Item 12: | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
Certain information relating to our directors and executive officers, executive compensation, security ownership of certain beneficial owners and management and related stockholder matters, and certain relationships and related transactions is incorporated by reference herein from our definitive proxy statement in connection with our Annual Meeting of Shareholders to be held May 7, 2019. The proxy statement will be filed with the SEC not later than 120 days after the close of the fiscal year. For this purpose, the Compensation Committee Report included in such proxy statement is specifically not incorporated herein. Also see Item 7: Managements Discussion and Analysis of Financial Condition and Results of OperationsEquity Compensation Plans.
Item 13: | Certain Relationships and Related Transactions, and Director Independence |
Certain information relating to our directors and executive officers, executive compensation, security ownership of certain beneficial owners and management and related stockholder matters, and certain relationships and related transactions is incorporated by reference herein from our definitive proxy statement in connection with our Annual Meeting of Shareholders to be held on May 7, 2019. The proxy statement will be filed with the SEC not later than 120 days after the close of the fiscal year. For this purpose, the Compensation Committee Report included in such proxy statement is specifically not incorporated herein.
Item 14: | Principal Accountant Fees and Services |
Certain information relating to audit fees and other of Teradynes independent registered public accounting firm is incorporated by reference herein from our definitive proxy statement in connection with our Annual Meeting of Shareholders to be held on May 7, 2019. The proxy statement will be filed with the SEC not later than 120 days after the close of the fiscal year. For this purpose, the Audit Committee Report included in such proxy statement is specifically not incorporated herein.
108
Item 15: | Exhibits and Financial Statement Schedule. |
15(a)(1) Financial Statements
The following consolidated financial statements are included in Item 8:
15(a)(2) Financial Statement Schedule
The following consolidated financial statement schedule is included in Item 15(c):
Schedule IIValuation and Qualifying Accounts
Schedules other than those listed above have been omitted since they are either not required or information is otherwise included.
15(a)(3) Listing of Exhibits
The Exhibits which are filed with this report or which are incorporated by reference herein are set forth in the Exhibit Index.
15(c) Financial Statement Schedules
109
TERADYNE, INC.
SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS
Column A |
Column B | Column C | Column D | Column E | Column F | |||||||||||||||
Description |
Balance
at Beginning of Period |
Additions Charged to Cost and Expenses |
Other | Deductions | Balance
at End of Period |
|||||||||||||||
(in thousands) | ||||||||||||||||||||
Valuation reserve deducted in the balance sheet from the asset to which it applies: |
||||||||||||||||||||
Accounts receivable: |
||||||||||||||||||||
2018 Allowance for doubtful accounts |
$ | 2,219 | $ | | $ | 20 | $ | 566 | $ | 1,673 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
2017 Allowance for doubtful accounts |
$ | 2,356 | $ | 4 | $ | | $ | 141 | $ | 2,219 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
2016 Allowance for doubtful accounts |
$ | 2,407 | $ | | $ | | $ | 51 | $ | 2,356 | ||||||||||
|
|
|
|
|
|
|
|
|
|
Column A |
Column B | Column C | Column D | Column E | Column F | |||||||||||||||
Description |
Balance
at Beginning of Period |
Additions Charged to Cost and Expenses |
Other | Deductions | Balance
at End of Period |
|||||||||||||||
(in thousands) | ||||||||||||||||||||
Valuation reserve deducted in the balance sheet from the asset to which it applies: |
||||||||||||||||||||
Inventory: |
||||||||||||||||||||
2018 Inventory reserve |
$ | 102,896 | $ | 11,242 | $ | 368 | $ | 13,727 | $ | 100,779 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
2017 Inventory reserve |
$ | 116,016 | $ | 8,844 | $ | (126 | ) | $ | 21,838 | $ | 102,896 | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
2016 Inventory reserve |
$ | 119,376 | $ | 17,493 | $ | 4,417 | $ | 25,270 | $ | 116,016 | ||||||||||
|
|
|
|
|
|
|
|
|
|
Column A |
Column B | Column C | Column D | Column E | Column F | |||||||||||||||
Description |
Balance
at Beginning of Period |
Additions Charged to Cost and Expenses |
Other | Deductions | Balance
at End of Period |
|||||||||||||||
(in thousands) | ||||||||||||||||||||
Valuation reserve deducted in the balance sheet from the asset to which it applies: |
||||||||||||||||||||
Deferred taxes: |
||||||||||||||||||||
2018 Valuation allowance |
$ | 63,919 | $ | 6,333 | $ | | $ | 400 | $ | 69,852 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
2017 Valuation allowance |
$ | 48,369 | $ | 15,571 | $ | | $ | 21 | $ | 63,919 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
2016 Valuation allowance |
$ | 43,039 | $ | 5,413 | $ | | $ | 83 | $ | 48,369 | ||||||||||
|
|
|
|
|
|
|
|
|
|
Item 16: | Form 10-K Summary |
Not applicable.
110
EXHIBIT INDEX
The following designated exhibits are, as indicated below, either filed herewith or have heretofore been filed with the Securities and Exchange Commission and are referred to and incorporated by reference to such filings.
Exhibit No. |
Description |
SEC Document Reference | ||
2.1 |
Share Sale and Purchase Agreement by and among Teradyne Holdings Denmark ApS, Teradyne Inc. and the shareholders of Universal Robots A/S dated May 13, 2015. |
Exhibit 2.1 to Teradynes Quarterly Report on Form 10-Q for the quarter ended July 5, 2015. | ||
2.2 |
Share Sale and Purchase Agreement to and among Teradyne Robotics Holdings Denmark ApS, Teradyne, Inc. and the shareholders of Mobile Industrial Robots ApS dated April 25, 2018. |
Exhibit 2.1 to Teradynes Quarterly Report on Form 10-Q for the quarter ended April 1, 2018. | ||
3.1 |
Restated Articles of Organization. |
|||
3.2 |
Amended and Restated By-laws, as amended. |
Exhibit 3.1 to Teradynes Quarterly Report on Form 10-Q for the quarter ended September 30, 2007. | ||
4.1 |
Indenture dated as of December 12, 2016, between Teradyne Inc and Wilmington Trust, National Association, as trustee |
Exhibit 4.1 to Teradynes Current Report on Form 8-K filed on December 12, 2016. | ||
10.1 |
Standard Manufacturing Agreement entered into as of November 24, 2003 by and between Teradyne and Solectron. |
Exhibit 10.1 to Teradynes Quarterly Report on Form 10-Q for the quarter ended September 30, 2007. | ||
10.2 |
Amendment 1 to Standard Manufacturing Agreement, dated as of January 18, 2007, by and between Teradyne and Solectron. |
Exhibit 10.2 to Teradynes Quarterly Report on Form 10-Q for the quarter ended September 30, 2007. | ||
10.3 |
Second Amendment to Standard Manufacturing Agreement, dated as of August 27, 2007, by and between Teradyne and Solectron. |
Exhibit 10.3 to Teradynes Quarterly Report on Form 10-Q for the quarter ended September 30, 2007. | ||
10.4 |
Fifth Amendment to Standard Manufacturing Agreement, dated as of July 17, 2009, by and between Teradyne and Flextronics Corporation. |
Exhibit 10.4 to Teradynes Annual Report on Form 10-K for the fiscal year ended December 31, 2009. | ||
10.5 |
Sixth Amendment to Standard Manufacturing Agreement, dated as of July 27, 2009, by and between Teradyne and Flextronics Corporation. |
Exhibit 10.5 to Teradynes Annual Report on Form 10-K for the fiscal year ended December 31, 2009. | ||
10.6 |
Addendum to Standard Manufacturing Agreement (Authorized Purchase Agreement)Revised July 1, 2010. |
Exhibit 10.6 to Teradynes Annual Report on Form 10-K for the fiscal year ended December 31, 2010. | ||
10.7 |
Eighth Amendment to Standard Manufacturing Agreement, dated as of April 13, 2012, by and between Teradyne and Flextronics Sales & Marketing North Asia (L) LTD. |
Exhibit 10.7 to Teradynes Annual Report on Form 10-K for the fiscal year ended December 31, 2012. |
111
Exhibit No. |
Description |
SEC Document Reference | ||
10.8 |
Ninth Amendment to Standard Manufacturing Agreement, dated as of September 17, 2012, by and between Teradyne and Flextronics Sales & Marketing North Asia (L) LTD. |
Exhibit 10.8 to Teradynes Annual Report on Form 10-K for the fiscal year ended December 31, 2012. | ||
10.9 |
2006 Equity and Cash Compensation Incentive Plan, as amended.* |
|||
10.10 |
Danish Sub-Plan to the 2006 Equity and Cash Compensation Incentive Plan. |
|||
10.11 |
Form of Performance-Based Restricted Stock Unit Agreement for Executive Officers under 2006 Equity and Cash Compensation Incentive Plan.* |
Exhibit 10.10 to Teradynes Annual Report on Form 10-K for the fiscal year ended December 31, 2017. | ||
10.12 |
Form of Time-Based Restricted Stock Unit Agreement for Executive Officers under 2006 Equity and Cash Compensation Incentive Plan.* |
Exhibit 10.11 to Teradynes Annual Report on Form 10-K for the fiscal year ended December 31, 2017. | ||
10.13 |
Form of Executive Officer Stock Option Agreement under 2006 Equity and Cash Compensation Incentive Plan, as amended.* |
Exhibit 10.15 to Teradynes Annual Report on Form 10-K for the fiscal year ended December 31, 2017. | ||
10.14 |
Form of Restricted Stock Unit Agreement for Directors under 2006 Equity and Cash Compensation Incentive Plan.* |
Exhibit 10.12 to Teradynes Annual Report on Form 10-K for the fiscal year ended December 31, 2016. | ||
10.15 |
1996 Employee Stock Purchase Plan, as amended.* |
|||
10.16 |
Sub-Plan to the 1996 Employee Stock Purchase Plan for participants located in the European Union /European Economic Area. |
Exhibit 10.14 to Teradynes Annual Report on Form 10-K for the fiscal year ended December 31, 2017. | ||
10.17 |
Deferral Plan for Non-Employee Directors, as amended.* |
Exhibit 10.2 to Teradynes Quarterly Report on form 10-Q for the quarter ended September 28, 2008. | ||
10.18 |
Supplemental Savings Plan, as amended and restated.* |
Exhibit 10.18 to Teradynes Annual Report on Form 10-K for the fiscal year ended December 31, 2008. | ||
10.19 |
Supplemental Executive Retirement Plan, as restated.* |
Exhibit 10.19 to Teradynes Annual Report on Form 10-K for the fiscal year ended December 31, 2008. | ||
10.20 |
Agreement Regarding Termination Benefits dated January 22, 2014 between Teradyne and Mark Jagiela.* |
Exhibit 10.24 to Teradynes Annual Report on Form 10-K for the fiscal year ended December 31, 2013. | ||
10.21 |
Employment Agreement dated August 9, 2004 between Teradyne and Gregory R. Beecher.* |
Exhibit 10.40 to Teradynes Quarterly Report on Form 10-Q for the quarter ended July 4, 2004. | ||
10.22 |
Employment Agreement dated May 7, 2004 between Teradyne and Mark Jagiela.* |
Exhibit 10.37 to Teradynes Quarterly Report on Form 10-Q for the quarter ended July 4, 2004. |
112
Exhibit No. |
Description |
SEC Document Reference | ||
10.23 |
Amended and Restated Executive Officer Change in Control Agreement dated December 30, 2008 between Teradyne and Gregory R. Beecher, as amended.* |
Exhibit 10.28 to Teradynes Annual Report on Form 10-K for the fiscal year ended December 31, 2012. | ||
10.24 |
Executive Officer Change in Control Agreement dated January 22, 2014 between Teradyne and Mark Jagiela, as amended.* |
Exhibit 10.29 to Teradynes Annual Report on Form 10-K for the fiscal year ended December 31, 2013. | ||
10.25 |
Amended and Restated Executive Officer Change in Control Agreement dated May 26, 2009 between Teradyne and Charles J. Gray, as amended.* |
Exhibit 10.30 to Teradynes Annual Report on Form 10-K for the fiscal year ended December 31, 2012. | ||
10.26 |
Employment Agreement dated July 24, 2009 between Teradyne and Charles J. Gray.* |
Exhibit 10.1 to Teradynes Quarterly Report on Form 10-Q for the quarter ended April 4, 2010. | ||
10.27 |
Amended and Restated Executive Officer Change in Control Agreement dated June 30, 2012 between Teradyne and Walter G. Vahey, as amended.* |
Exhibit 10.32 to Teradynes Annual Report on Form 10-K for the fiscal year ended December 31, 2012. | ||
10.28 |
Employment Agreement dated February 6, 2013 between Teradyne and Walter G. Vahey.* |
Exhibit 10.33 to Teradynes Annual Report on Form 10-K for the fiscal year ended December 31, 2012. | ||
10.29 |
Executive Officer Change in Control Agreement dated September 1, 2014 between Teradyne, Inc. and Bradford Robbins.* |
Exhibit 10.1 to Teradynes Quarterly Report on Form 10-Q for the quarter ended September 28, 2014. | ||
10.30 |
Employment Agreement dated September 1, 2014 between Teradyne, Inc. and Bradford Robbins.* |
Exhibit 10.2 to Teradynes Quarterly Report on Form 10-Q for the quarter ended September 28, 2014. | ||
10.31 |
Executive Change in Control Agreement dated February 8, 2016 between Teradyne, Inc. and Greg Smith. |
Exhibit 10.1 to Teradynes Quarterly Report on Form 10-Q for the quarter ended April 3, 2016. | ||
10.32 |
Employment Agreement dated February 8, 2016 between Teradyne, Inc. and Greg Smith. |
Exhibit 10.2 to Teradynes Quarterly Report on Form 10-Q for the quarter ended April 3, 2016. | ||
10.33 |
Form of Indemnification Agreement.* |
Exhibit 10.24 to Teradynes Annual Report on Form 10-K for the fiscal year ended December 31, 2006. | ||
10.34 |
Nextest Systems Corporation 1998 Equity Incentive Plan, as amended. |
Exhibit 10.33 to Teradynes Annual Report on Form 10-K for the fiscal year ended December 31, 2008. | ||
10.35 |
Nextest Systems Corporation 2006 Equity Incentive Plan. |
Exhibit 10.34 to Teradynes Annual Report on Form 10-K for the fiscal year ended December 31, 2008. | ||
10.36 |
Eagle Test Systems, Inc. 2003 Stock Option and Grant Plan. |
Exhibit 10.35 to Teradynes Annual Report on Form 10-K for the fiscal year ended December 31, 2008. |
113
Exhibit No. |
Description |
SEC Document Reference | ||
10.37 |
Eagle Test Systems, Inc. 2006 Stock Option and Incentive Plan. |
Exhibit 10.36 to Teradynes Annual Report on Form 10-K for the fiscal year ended December 31, 2008. | ||
10.38 |
LitePoint Corporation 2002 Stock Plan. |
Exhibit 10.43 to Teradynes Annual Report on Form 10-K for the fiscal year ended December 31, 2011. | ||
10.39 |
Credit Agreement among Teradyne, Inc., Barclays Bank PLC, as the administrative agent and collateral agent, and the lenders party thereto dated April 27, 2015. |
Exhibit 10.1 to Teradynes Current Report on Form 8-K filed May 1, 2015. | ||
10.40 |
Amendment No. 1 to Credit Agreement dated as of May 19, 2015 among Teradyne Inc., Barclays Bank PLC, as the administrative agent, and the lenders party thereto. |
Exhibit 10.2 to Teradynes Quarterly Report on Form 10-Q for the quarter ended July 5, 2015. | ||
10.41 |
Amendment No. 2 to Credit Agreement dated as of March 21, 2018 among Teradyne, Inc., Barclays Bank PLC, as the administrative agent, and the lenders party thereto. |
Exhibit 10.1 to Teradynes Quarterly Report on Form 10-Q for the quarter ended April 1, 2018. | ||
10.42 |
Letter Agreement, dated December 6, 2016, between Barclays Bank PLC and Teradyne, Inc., regarding the Base Warrants. |
Exhibit 10.1 to Teradynes Current Report on Form 8-K filed December 12, 2016. | ||
10.43 |
Letter Agreement, dated December 6, 2016, between Bank of America, N.A., and Teradyne, Inc. regarding the Base Warrants. |
Exhibit 10.2 to Teradynes Current Report on Form 8-K filed December 12, 2016. | ||
10.44 |
Letter Agreement, dated December 6, 2016, between Wells Fargo Bank, National Association and Teradyne, Inc. regarding the Base Warrants. |
Exhibit 10.3 to Teradynes Current Report on Form 8-K filed December 12, 2016. | ||
10.45 |
Letter Agreement, dated December 6, 2016, between Barclays Bank PLC and Teradyne, Inc. regarding the Base Call Option Transaction. |
Exhibit 10.4 to Teradynes Current Report on Form 8-K filed December 12, 2016. | ||
10.46 |
Letter Agreement, dated December 6, 2016, between Bank of America, N.A. and Teradyne, Inc. regarding the Base Call Option Transaction. |
Exhibit 10.5 to Teradynes Current Report on Form 8-K filed December 12, 2016. | ||
10.47 |
Letter Agreement, dated December 6, 2016, between Wells Fargo Bank, National Association and Teradyne, Inc. regarding the Base Call Option Transaction. |
Exhibit 10.6 to Teradynes Current Report on Form 8-K filed December 12, 2016. | ||
10.48 |
Letter Agreement, dated December 9, 2016, between Barclays Bank PLC and Teradyne, Inc., regarding the Additional Warrants |
Exhibit 10.7 to Teradynes Current Report on Form 8-K filed December 12, 2016. |
114
Exhibit No. |
Description |
SEC Document Reference | ||
10.49 |
Letter Agreement, dated December 9, 2016, between Bank of America, N.A., and Teradyne, Inc. regarding the Additional Warrants. |
Exhibit 10.8 to Teradynes Current Report on Form 8-K filed December 12, 2016. | ||
10.50 |
Letter Agreement, dated December 9, 2016, between Wells Fargo Bank, National Association and Teradyne, Inc. regarding the Additional Warrants. |
Exhibit 10.9 to Teradynes Current Report on Form 8-K filed December 12, 2016. | ||
10.51 |
Letter Agreement, dated December 9, 2016, between Barclays Bank PLC and Teradyne, Inc. regarding the Additional Call Option Transaction. |
Exhibit 10.10 to Teradynes Current Report on Form 8-K filed December 12, 2016. | ||
10.52 |
Letter Agreement, dated December 9, 2016, between Bank of America, N.A. and Teradyne, Inc. regarding the Additional Call Option Transaction |
Exhibit 10.11 to Teradynes Current Report on Form 8-K filed December 12, 2016. | ||
10.53 |
Letter Agreement, dated December 9, 2016, between Wells Fargo Bank, National Association and Teradyne, Inc. regarding the Additional Call Option Transaction. |
Exhibit 10.12 to Teradynes Current Report on Form 8-K filed December 12, 2016. | ||
21.1 |
Subsidiaries of Teradyne. |
|||
23.1 |
Consent of PricewaterhouseCoopers LLP. |
|||
31.1 |
Rule 13a-14(a) Certification of Principal Executive Officer. |
|||
31.2 |
Rule 13a-14(a) Certification of Principal Financial Officer. |
|||
32.1 |
Section 1350 Certification of Principal Executive Officer. |
|||
32.2 |
Section 1350 Certification of Principal Financial Officer. |
|||
101.INS |
XBRL Instance Document |
|||
101.SCH |
XBRL Taxonomy Extension Schema Document |
|||
101.CAL |
XBRL Taxonomy Extension Calculation Linkbase Document |
|||
101.DEF |
XBRL Taxonomy Extension Definition Linkbase Document |
|||
101.LAB |
XBRL Taxonomy Extension Label Linkbase Document |
|||
101.PRE |
XBRL Taxonomy Extension Presentation Linkbase Document |
| -Confidential treatment granted. |
* | -Management contract or compensatory plan. |
115
Pursuant to the requirements of Section 13 or 15(d) 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 this 1st day of March, 2019.
TERADYNE, INC. | ||
By: | /S/ GREGORY R. BEECHER | |
Gregory R. Beecher, | ||
Vice President, Chief Financial Officer and Treasurer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature |
Title |
Date | ||
/S/ ROY A. VALLEE Roy A. Vallee |
Chair of the Board |
March 1, 2019 | ||
/S/ MARK E. JAGIELA Mark E. Jagiela |
Chief Executive Officer (Principal Executive Officer) and Director |
March 1, 2019 | ||
/S/ GREGORY R. BEECHER Gregory R. Beecher |
Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) |
March 1, 2019 | ||
/S/ MICHAEL A. BRADLEY Michael A. Bradley |
Director | March 1, 2019 | ||
/S/ EDWIN J. GILLIS Edwin J. Gillis |
Director | March 1, 2019 | ||
/S/ TIMOTHY E. GUERTIN Timothy E. Guertin |
Director | March 1, 2019 | ||
/S/ MERCEDES JOHNSON Mercedes Johnson |
Director | March 1, 2019 | ||
/S/ MARILYN MATZ Marilyn Matz |
Director | March 1, 2019 | ||
/S/ PAUL J. TUFANO Paul J. Tufano |
Director | March 1, 2019 |
116
Exhibit 3.1
|
The Commonwealth of Massachusetts | |||
William Francis Galvin Secretary of the Commonwealth One Ashburton Place, Boston, Massachusetts 02108-1512 |
FORM MUST BE TYPED |
Restated Articles of Organization | FORM MUST BE TYPED |
(General Laws Chapter I56D, Section 10.07, 950 CMR 113.35)
(1) Exact name of corporation: Teradyne, Inc.
(2) Registered office address: 155 Federal Street, Suite 700, Boston, MA 02110
(number, street, city or town, state, zip code)
(3) Date adopted: November 14, 2018
(month, day, year)
(4) Approved by:
(check appropriate box)
☑ | the directors without shareholder approval and shareholder approval was not required; |
OR
☐ | the board of directors and the shareholders in the manner required by G.L. Chapter 156D and the corporations articles of organization. |
(5) | The following information is required to be included in the articles of organization pursuant to G.L. Chapter 156D, Section 2.02 except that the supplemental information provided for in Article VIII is not required:* |
ARTICLE I
The exact name of the corporation is:
Teradyne, Inc.
ARTICLE II
Unless the articles of organization otherwise provide, all corporations formed pursuant to G.L. Chapter 156D have the purpose of engaging in any lawful business. Please specify if you want a more limited purpose:**
To design, develop, manufacture, assemble, produce, acquire, own, buy, import, sell, export, dispose of and otherwise deal in electronic or electromechanical products or components, and personal property of every kind and description.
To acquire, buy, own and sell securities (including the securities of this corporation), patents, licenses, trade marks, trade names and all rights of every kind thereunder.
To acquire, buy, construct, own, lease, mortgage and sell real estate, buildings or any interests therein necessary or desirable for the purposes of the corporation.
To acquire all or any part of the goodwill, rights and property, and to assume the whole or any part of the contracts or liabilities of any firm, association, corporation or person, and to pay for such acquisition in cash, stock or other securities of this corporation or otherwise.
To exercise any of the foregoing purposes of powers through subsidiary or affiliated corporations, and in connection therewith and otherwise to have all the powers conferred now or in future by the Commonwealth of Massachusetts upon business corporations.
* Changes to Article VIII must be made by filing a statement of change of supplemental Information form.
** Professional corporations governed by G.L Chapter 156A and must specify the professional activities of the corporation.
P.C.
ARTICLE III
State the total number of shares and par value, * if any, of each class of stock that the corporation is authorized to issue. All corporations must authorize stock. If only one class or series is authorized, it is not necessary to specify any particular designation.
WITHOUT PAR VALUE | WITH PAR VALUE | |||||||
TYPE | NUMBER OF SHARES | TYPE | NUMBER OF SHARES | PAR VALUE | ||||
Common | 1,000,000,000 | $.125 | ||||||
ARTICLE IV
Prior to the issuance of shares of any class or series, the articles of organization must set forth the preferences, limitations and relative rights of that class or series. The articles may also limit the type or specify the minimum amount of consideration for which shares of any class or series may be issued. Please set forth the preferences, limitations and relative rights of each class or series and, if desired, the required type and minimum amount of consideration to be received.
None.
ARTICLE V
The restrictions, if any, imposed by the articles or organization upon the transfer of shares of any class or series of stock are:
None.
ARTICLE VI
Other lawful provisions, and if there are no such provisions, this article may be left blank.
Article Six is hereby amended to add the following paragraph:
No director shall be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director notwithstanding any provision of law imposing such liability; provided, that, to the extent provided by applicable law, this provision shall not eliminate or limit the liability of a director (i) for any breach of the directors duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section sixty-one or sixty-two of Chapter 156B of the Massachusetts General Laws, or (iv) for any transaction from which the director derived an improper personal benefit. This provision shall not eliminate the liability of a director for any act or omission occurring prior to the date upon which this provision becomes effective. No amendment to or repeal of this provision shall apply to or have any effect upon the liability or alleged liability of any director for or with respect to any acts or omissions of such director occurring prior to such amendment or repeal.
Note: The preceding six (6) articles are considered to be permanent and may be changed only by filing appropriate articles of amendment.
*G.L. Chapter 156D eliminates the concept of par value, however a corporation may specify par value in Article III. See G.L. Chapter 156D, Section 6.21, and the comments relative thereto.
ARTICLE VII
The effective date of organization of the corporation is the date and time the articles were received for filing if the articles are not rejected within the time prescribed by law. If a later effective date is desired, specify such date, which may not be later than the 90th day after the articles are received for filing:
It is hereby certified that these restated articles of organization consolidate all amendments into a single document. If a new amendment authorizes an exchange, or effects a reclassification or cancellation, of issued shares, provisions for implementing that action are set forth in these restated articles unless contained in the text of the amendment.
Specify the number(s) of the article(s) being amended: None. |
Signed by: |
![]() |
(signature of authorized individual)
☐ | Chairman of the board of directors, |
☐ | President, |
☑ | Other officer, |
☐ | Court-appointed fiduciary, |
on this 26th day of November , 2018 .
THE COMMONWEALTH OF MASSACHUSETTS
I hereby certify that, upon examination of this document, duly submitted to me, it appears that the provisions of the General Laws relative to corporations have been complied with, and I hereby approve said articles; and the filing fee having been paid, said articles are deemed to have been filed with me on:
November 27, 2018 12:29 PM
WILLIAM FRANCIS GALVIN
Secretary of the Commonwealth
Exhibit 10.9
TERADYNE, INC.
2006 EQUITY AND CASH COMPENSATION INCENTIVE PLAN
(as amended through January 21, 2019)
1. | Purpose and Eligibility. |
The purpose of this 2006 Equity and Cash Compensation Incentive Plan (the Plan) of Teradyne, Inc. is to provide equity ownership and compensation opportunities in the Company (each an Award) to employees, officers, directors, consultants and advisors of the Company and its Subsidiaries, all of whom are eligible to receive Awards under the Plan. Any person to whom an Award has been granted under the Plan is called a Participant. Additional definitions are contained in Section 14(a).
2. | Administration. |
a. Administration by Committee of Independent Members of the Board of Directors. The Plan will be administered by a committee (the Committee) composed solely of members of the Board of Directors of the Company that are independent, as defined pursuant to Rule 10A-3(b)(1) of the Securities Exchange Act of 1934, as amended, and as proscribed under Rule 5605(a)(2) of The Nasdaq Stock Market LLC (Nasdaq), or any amendment, supplement or modification thereto; provided, however, that, except with respect to Awards granted to non-employee directors which shall be granted and administered by the Committee, at any time and on any one or more occasions the Board may itself exercise any of the powers and responsibilities assigned the Committee under the Plan and when so acting shall have the benefit of all of the provisions of the Plan pertaining to the Committees exercise of its authorities hereunder. The Committee, in its sole discretion, shall have the authority to grant Awards, to adopt, amend and repeal rules relating to the Plan, to interpret and correct the provisions of the Plan and any Award, and, subject to the limitations of the Plan, to modify and amend any Award. All decisions by the Committee shall be final and binding on all interested persons. Neither the Company nor any member of the Committee shall be liable for any action or determination relating to the Plan.
b. Delegation to Executive Officers. To the extent permitted by applicable law, the Committee may delegate to one or more executive officers of the Company the power to grant Awards and exercise such other powers under the Plan as the Committee may determine; provided, however, that the Committee shall fix the maximum number of Awards to be granted and the maximum number of shares issuable to any one Participant pursuant to Awards granted by such executive officer or officers. The Committee may, by a resolution adopted by the Committee, authorize one or more executive officers of the Company to do one or both of the following: (i) designate employees of the Company or of any of its subsidiaries to be recipients of Awards and (ii) determine the number, type and terms of such Awards to be received by such employees, subject to the limitations of the Plan; provided, however, that, in each case, the resolution so authorizing such officer or officers shall specify the maximum number and type of
Awards such officer or officers may so award. The Committee may not authorize an officer to designate himself or herself as a recipient of any such Awards or to grant Awards to other executive officers of the Company.
3. | Stock Available for Awards. |
a. Number of Shares. Subject to adjustment under Section 3(c), the aggregate number of shares (the Authorized Shares) of the Companys common stock, $0.125 par value per share (the Common Stock), that may be issued pursuant to the Plan shall be 32,000,000 shares of Common Stock. If any Award expires, is terminated, surrendered, forfeited, expires unexercised, is settled in cash in lieu of Common Stock or is exchanged for other Awards, in whole or in part, the unissued Common Stock covered by such Award shall again be available for the grant of Awards under the Plan. Shares of Common Stock delivered to the Company by a Participant to (i) purchase shares upon the exercise of an Award, or (ii) satisfy statutory tax withholding obligations with respect to any Award shall not be added back to the number of shares available for the future grant of Awards under the Plan. All shares of Common Stock covered by an SAR shall be counted against the number of shares available for the grant of Awards under the Plan; provided, however, that SARs that may be settled only in cash shall not be so counted. Shares of Common Stock repurchased by the Company on the open market using the proceeds from the exercise of an Award shall not increase the number of shares available for future grants of Awards. Shares issued under the Plan may consist in whole or in part of authorized but unissued shares. Notwithstanding anything to the contrary in this Plan, the foregoing limitations shall be subject to adjustment under Section 3(c), but only to the extent that such adjustment will not affect the status of any Award intended to qualify as performance-based compensation under Section 162(m) of the Code.
b. Per-Participant Limit. Subject to adjustment under Section 3(c), no Participant may be granted stock-based Awards during any one fiscal year to purchase more than 2,000,000 shares of Common Stock.
c. Adjustment to Common Stock. In the event of any stock split, stock dividend, extraordinary cash dividend, recapitalization, reorganization, merger, consolidation, combination, exchange of shares, liquidation, spin-off, split-up, or other similar change in capitalization or event, (i) the number and class of securities available for Awards under the Plan and the per-Participant share limit, (ii) the number and class of securities, vesting schedule and exercise price per share subject to each outstanding stock-based Award, (iii) the repurchase price per security subject to repurchase, and (iv) the terms of each other outstanding stock-based Award shall be adjusted by the Company (or substituted Awards may be made) to the extent the Committee shall determine, in good faith, that such an adjustment (or substitution) is appropriate. If Section 11(f)(i) applies for any event, this Section 3(c) shall not be applicable.
d. Fractional Shares. No fractional shares shall be issued under the Plan and the Participant shall, at the Committees discretion, receive either cash in lieu of such fractional shares or a full share for each fractional share.
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4. | Stock Options. |
a. General. The Committee may grant options to purchase Common Stock (each, an Option) and determine the terms and conditions of each Option, including, but not limited to (i) the number of shares subject to such Option or a formula for determining such, (ii) subject to Section 4(e) hereof, the exercise price of the Options and the means of payment for the shares, (iii) the Performance Criteria (as defined in Section 11(d)), if any, and level of achievement of such Performance Criteria that shall determine the number of shares or Options granted, issued, retainable and/or vested, (iv) the terms and conditions of the grant, issuance and/or forfeiture of the shares or Options, and (v) such further terms and conditions as may be determined from time to time by the Committee, in each case not inconsistent with this Plan.
b. Incentive Stock Options. An Option that the Committee intends to be an incentive stock option as defined in Section 422 of the Code (an Incentive Stock Option) shall be granted only to employees of the Company and shall be subject to and shall be construed consistently with the requirements of Section 422 of the Code. The Committee and the Company shall have no liability if an Option or any part thereof that is intended to be an Incentive Stock Option does not qualify as such.
c. Nonstatutory Stock Options. An Option or any part thereof that does not qualify as an Incentive Stock Option is referred to herein as a Nonstatutory Stock Option.
d. Dollar Limitation. For so long as the Code shall so provide, Options granted to any employee under the Plan (and any other plans of the Company) which are intended to constitute Incentive Stock Options shall not constitute Incentive Stock Options to the extent that such Options, in the aggregate, become exercisable for the first time in any one calendar year for shares of Common Stock with an aggregate Fair Market Value (as defined in Section 14 and determined as of the respective date or dates of grant) of more than $100,000 (or such other limit as may be provided by the Code). To the extent that any such Incentive Stock Options exceed the $100,000 limitation (or such other limit as may be provided by the Code), such Options shall be Nonstatutory Stock Options.
e. Exercise Price. The Committee shall establish the exercise price (or determine the method by which the exercise price shall be established) at the time each Option is granted and specify the exercise price in the applicable Option agreement, provided, that the exercise price per share specified in the agreement relating to each Option granted under the Plan shall not be less than the Fair Market Value per share of Common Stock on the date of such grant. In the case of an Incentive Stock Option to be granted to an employee owning stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company, the price per share specified in the agreement relating to such Incentive Stock Option shall not be less than one hundred ten percent (110%) of the Fair Market Value per share of Common Stock on the date of grant (or such other limit as may be provided by the Code). For purposes of determining stock ownership under this subsection, the rules of Section 424(d) of the
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Code shall apply. Subject to Section 3(c), an Option may not be amended subsequent to its issuance to reduce the price at which it is exercisable unless such amendment is approved by the Companys shareholders.
f. Duration of Options. Each Option shall be exercisable at such times and subject to such terms, conditions and expiration as the Committee may specify in the applicable Option agreement; provided, that no Option shall be exercisable for a period of time greater than ten (10) years from the date of grant of such Option; provided, further, that Incentive Stock Options granted to an employee owning stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company shall be exercisable for a maximum of five (5) years from the date of grant of such Option (or such other limit as may be provided by the Code). For purposes of determining stock ownership under this subsection, the rules of Section 424(d) of the Code shall apply.
g. Vesting of Options. At the time of the grant of an Option, the Committee shall establish a vesting date or vesting dates with respect to the shares of Common Stock covered by such Options; provided that all Options, subject to and except as provided in Sections 11(f), 11(j), 11(l) and 13, shall have a minimum vesting period of no less than one (1) year. The Committee may establish vesting dates based upon the passage of time and/or the satisfaction of Performance Criteria or other conditions as deemed appropriate by the Committee.
h. Exercise of Option. Options may be exercised only by delivery to the Company at its principal office address or to such transfer agent as the Company shall designate of a written notice of exercise specifying the number of shares as to which such Option is being exercised, signed by the proper person, or by notification of the Company-designated third party commercial provider (the Third Party Commercial Provider), in accordance with the procedures approved by the Company and to which the holder of the Option shall have ongoing access by means of accessing such persons account maintained with the Third Party Commercial Provider, together with payment in full as specified in Section 4(i) for the number of shares for which the Option is exercised.
i. Payment Upon Exercise. Common Stock purchased upon the exercise of an Option shall be paid for by one or any combination of the following forms of payment:
(i) in United States dollars in cash or by check payable to order of the Company or by fund transfer from the Option holders account maintained with the Third Party Commercial Provider;
(ii) at the discretion of the Committee, through delivery of shares of Common Stock having a Fair Market Value equal as of the date of the exercise to the cash exercise price of the Option, provided, that such shares were not acquired by the Participant in the prior six months;
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(iii) at the discretion of the Committee and consistent with applicable law, through the delivery of an assignment to the Company of a sufficient amount of the proceeds from the sale of the Common Stock acquired upon exercise of the Option and an authorization to the Third Party Commercial Provider to pay that amount to the Company, which sale shall be at the Participants direction at the time of exercise; or
(iv) at the discretion of the Committee, by any combination of (i), (ii), or (iii) above.
If the Committee exercises its discretion to permit payment of the exercise price of an Incentive Stock Option by means of the methods set forth in clauses (ii), (iii) or (iv) of the preceding sentence, such discretion shall be exercised in writing in the instrument evidencing the Award of the Incentive Stock Option.
j. Notice to Company of Disqualifying Disposition. By accepting an Incentive Stock Option granted under the Plan, each optionee agrees to notify the Company in writing immediately after such optionee makes a disqualifying disposition of any stock acquired pursuant to the exercise of the Incentive Stock Options. A disqualifying disposition is generally any disposition occurring on or before the later of (a) the date two years following the date the Incentive Stock Option was granted or (b) the date one year following the date the Incentive Stock Option was exercised.
k. Issuances of Securities. Except as provided in Section 3(c) or as otherwise expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares subject to Options. No adjustments shall be made for dividends paid in cash or in property other than securities of the Company. A Participant that is the holder of an Option shall not be entitled to receive dividends or dividend equivalents declared and payable prior to exercise of the Option.
5. | Stock Appreciation Rights |
a. General. A Stock Appreciation Right (a SAR) is an Award entitling the holder, upon exercise, to receive an amount in cash or Common Stock, or a combination thereof (such form to be determined by the Committee), determined solely by reference to appreciation, from and after the date of grant, in the Fair Market Value of a share of Common Stock. The date as of which such appreciation or other measure is determined shall be the exercise date of the SAR Award.
b. Grants. SARs may be granted in tandem with, or independently of, Options granted under the Plan.
(1) Tandem Awards. When SARs are expressly granted in tandem with Options: (i) the SARs will be exercisable only at such time or times, and to the extent, that the related Option is exercisable, and will be exercisable in accordance with the procedure required for exercise of the related Option; (ii) the
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SARs will terminate and no longer be exercisable upon the termination or exercise of the related Option, except that a SAR granted with respect to less than the full number of shares covered by an Option will not be terminated until and only to the extent that the number of shares as to which the related Option has been exercised or has terminated exceeds the number of shares not covered by the SAR; (iii) the Option will terminate and no longer be exercisable upon the exercise of the related SAR; and (iv) the SAR will be transferable only with the related Option.
(2) Independent Stock Appreciation Rights. A SAR not expressly granted in tandem with an Option will become exercisable at such time or times, and on such conditions, as the Committee may specify in the SAR Award.
c. Terms and Conditions. The Committee shall determine all terms and conditions of a SAR Award, including, but not limited to (i) the number of shares subject to such SAR Award or a formula for determining such, (ii) the Performance Criteria, if any, and level of achievement of such Performance Criteria that shall determine the number of shares granted, issued, retainable and/or vested or the amount of cash payable, (iii) the terms and conditions on the grant, issuance and/or forfeiture of the shares, and (iv) such further terms and conditions as may be determined from time to time by the Committee, in each case not inconsistent with this Plan. Subject to Section 3(c), a SAR may not be amended subsequent to its issuance to reduce the price used to determine the measurement price upon exercise unless such amendment is approved by the Companys shareholders.A Participant that is the holder of a SAR Award shall not be entitled to receive dividends or dividend equivalents. The Amendment of all SAR Awards shall be subject to Section 11(n).
d. Vesting of SAR Awards. At the time of the grant of a SAR Award, the Committee shall establish a vesting date or vesting dates with respect to such SAR Award, provided that all SAR Awards, subject to and except as provided in Sections 11(f), 11(j), 11(l) and 13, shall have a minimum vesting period of no less than one (1) year; and, provided, further, that SARs awarded in tandem with Options shall be subject to the same vesting date or vesting dates established by the Committee pursuant to Section 4(g) for such related Options and shall be exercisable only to the extent that such related Option shall then be exercisable. The Committee may establish vesting dates based upon the passage of time and/or the satisfaction of Performance Criteria or other conditions as deemed appropriate by the Committee.
6. | Restricted Stock. |
a. Grants. The Committee may grant Awards entitling recipients to acquire shares of Common Stock, subject to (i) delivery to the Company by the Participant of cash, a check or other sufficient legal consideration in an amount at least equal to the par value of the shares purchased, (ii) the right of the Company to repurchase or reacquire all or part of such shares at their issue price or other stated or formula price from the
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Participant in the event that conditions specified by the Committee in the applicable Award are not satisfied prior to the end of the applicable restriction period or periods established by the Committee for such Award (each, a Restricted Stock Award), and (iii) Section 6(b).
b. Terms and Conditions. A Participant that is the holder of a Restricted Stock Award, whether vested or unvested, shall be entitled to enjoy all shareholder rights with respect to the shares of Common Stock underlying such Restricted Stock Award, including the right to vote such shares. Subject to Section 6(c), the Committee shall determine all terms and conditions of any such Restricted Stock Award, including, but not limited to (i) the number of shares subject to such Restricted Stock Award or a formula for determining such, (ii) the purchase price of the shares, if any, and the means of payment for the shares, (iii) the Performance Criteria, if any, and level of achievement of such Performance Criteria that shall determine the number of shares granted, issued, retainable and/or vested, (iv) the terms and conditions on the grant, issuance and/or forfeiture of the shares, and (v) such further terms and conditions as may be determined from time to time by the Committee, in each case not inconsistent with this Plan. At the Committees election, shares of Common Stock issued in respect of a Restricted Stock Award may be (i) held in book entry form subject to the Companys instructions until any restrictions relating to the Restricted Stock Award lapses, or (ii) evidenced by a stock certificate that may bear a legend indicating that the ownership of the shares of Common Stock represented by such certificate is subject to the restrictions, terms and conditions of this Plan and the Restricted Stock Award. Any stock certificates issued in respect of a Restricted Stock Award shall be registered in the name of the Participant. All certificates registered in the name of the Participant shall, unless otherwise determined by the Committee, be deposited by the Participant, together with a stock power endorsed in blank, with the Company (or its designee). After the expiration of the applicable restriction periods, the Company (or such designee) shall deliver the certificates no longer subject to such restrictions to the Participant or, if the Participant has died, to the beneficiary designated by the Participant, in a manner determined by the Committee, to receive amounts due or exercise rights of the Participant in the event of the Participants death (the Designated Beneficiary). In the absence of an effective designation by a Participant, Designated Beneficiary shall mean the Participants estate.
c. Vesting of Restricted Stock. At the time of the grant of a Restricted Stock Award, the Committee shall establish a vesting date or vesting dates with respect to the shares of Common Stock covered by such Restricted Stock Award, which vesting dates may be based upon the passage of time and/or the satisfaction of Performance Criteria or other conditions as deemed appropriate by the Committee; provided, that all Restricted Stock Awards, subject to and except as provided in Sections 11(f), 11(j), 11(l) and 13, shall have a minimum vesting period of no less than one (1) year.
7. | Restricted Stock Unit. |
a. Grants. The Committee may grant Awards entitling recipients to acquire shares of Common Stock in the future, with the future delivery of the Common Stock subject to a risk of forfeiture or other restrictions that will lapse upon the satisfaction of one or more specified conditions (each, a Restricted Stock Unit).
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b. Terms and Conditions. Subject to Section 7(c), the Committee shall determine all terms and conditions of any such Restricted Stock Unit, including, but not limited to (i) the number of shares subject to such Restricted Stock Unit or a formula for determining such, (ii) the purchase price of the shares, if any, and the means of payment for the shares, (iii) the Performance Criteria, if any, and level of achievement of such Performance Criteria that shall determine the number of shares granted, issued, retainable and/or vested, (iv) the terms and conditions on the grant, issuance and/or forfeiture of the shares, and (v) such further terms and conditions as may be determined from time to time by the Committee, in each case not inconsistent with this Plan. A Participant that is the holder of a Restricted Stock Unit Award shall not be entitled to shareholder rights with respect to the Restricted Stock Units, including the right to vote such shares represented by the a Restricted Stock Unit or to receive dividends. Any dividend equivalents awarded with respect to a Restricted Stock Unit shall be subject to the same restrictions on transferability and forfeiture as the Restricted Stock Units with respect to which the dividend equivalent is paid. A Restricted Stock Unit may be settled in cash or Common Stock, as determined by the Committee, with the amount of the cash payment based on the Fair Market Value of the shares of Common Stock at the time of vesting. Any such settlements may be subject to such conditions, restrictions and contingencies as the Committee shall establish.
c. Vesting of Restricted Stock Unit. At the time of the grant of a Restricted Stock Unit, the Committee shall establish a vesting date or vesting dates with respect to the shares of Common Stock covered by such Restricted Stock Unit, which vesting dates may be based upon the passage of time and/or the satisfaction of Performance Criteria or other conditions as deemed appropriate by the Committee; provided, that all Awards of Restricted Stock Units, subject to and except as provided in Sections 11(f), 11(j), 11(l) and 13, shall have a minimum vesting period of no less than one (1) year.
8. | Phantom Stock. |
a. General. The Committee may grant Awards entitling recipients to receive, in cash or shares, the Fair Market Value of shares of Common Stock (Phantom Stock) upon the satisfaction of one or more specified conditions.
b. Terms and Conditions. Subject to Section 8(c), the Committee shall determine the terms and conditions of a Phantom Stock Award, including, but not limited to (i) the number of shares subject to or represented by such Phantom Stock Award or a formula for determining such, (ii) the purchase price of the shares, if any, and the means of payment for the shares, (iii) the Performance Criteria, if any, and level of achievement of such Performance Criteria that shall determine the number of shares granted, issued, retainable and/or vested or the amount of cash payable, (iv) the terms and conditions on the grant, issuance and/or forfeiture of the shares or Phantom Stock Award, and (v) such further terms and conditions as may be determined from time to time by the Committee, in each case not inconsistent with this Plan. A Participant may not vote the shares represented by a Phantom Stock Award. Any settlements of Phantom Stock Awards may be subject to such conditions, restrictions and contingencies as the Committee shall establish.
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c. Vesting of Phantom Stock. At the time of the grant of a Phantom Stock Award, the Committee shall establish a vesting date or vesting dates with respect to such Phantom Stock Award; provided that all Phantom Stock Awards, subject to and except as provided in Sections 11(f), 11(j), 11(l) and 13, shall have a minimum vesting period of no less than one (1) year. The Committee may establish vesting dates based upon the passage of time and/or the satisfaction of Performance Criteria or other conditions as deemed appropriate by the Committee.
9. | Other Stock-Based Awards. |
The Committee shall have the right to grant other Awards based upon the Common Stock and having such terms and conditions as the Committee may determine, including, without limitation, the grant of shares based upon certain conditions and/or Performance Criteria, the grant of securities convertible into Common Stock and the grant of stock units. The Committee shall determine the terms and conditions of any such Awards, including, but not limited to (i) the number of shares subject to such Award or a formula for determining such, (ii) the purchase price of the shares, if any, and the means of payment for the shares, (iii) the Performance Criteria, if any, and level of achievement of such Performance Criteria that shall determine the number of shares granted, issued, retainable and/or vested, (iv) the terms and conditions on the grant, issuance and/or forfeiture of the shares or Award, and (v) such further terms and conditions as may be determined from time to time by the Committee, in each case not inconsistent with this Plan. At the time of the grant of an Award under this Section 9, the Committee shall establish a vesting date or vesting dates with respect to such Award, which vesting date may be based upon the passage of time and/or the satisfaction of Performance Criteria or other conditions as deemed appropriate by the Committee; provided, that all Full Value Awards, subject to and except provided in Sections 11(f), 11(j), 11(l) and 13,granted under this Section 9 shall have a minimum vesting period of no less than one (1) year.
10. | Cash Awards. |
a. Grants. The Committee may grant cash awards (each, a Cash Award), either alone, in addition to, or in tandem with other Awards granted under the Plan.
b. Terms and Conditions. The Committee shall determine the terms and conditions of any such Cash Award. From time to time, the Committee shall establish administrative rules and procedures governing the administration of Cash Awards.
c. Variable Compensation Awards. A Cash Award that the Committee intends to be a Variable Compensation Award subject to Section 162(m) of the Code, provides a variable compensation payment each year to the Companys executive officers and certain eligible senior employees each year based on certain Performance Criteria that may include, among other criteria, overall corporate and/or individual business
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groups or divisions performance during the prior fiscal year, as determined by the Committee. Variable Compensation Awards are calculated based on a percentage of the Participants base annual salary (Variable Compensation Factor) and start at 5% for new Participants. Variable Compensation Factors are reviewed annually and typically do not exceed 100%. A newly hired executive officer or employee, who is approved for eligibility for Variable Compensation Awards, will be eligible to receive a Variable Compensation Award for their first year of employment, pro-rated from the date of hire. The Committee may rely upon the recommendation of the Companys senior management in granting Variable Compensation Awards to eligible Participants who do not constitute executive officers of the Company, including as to the amount and terms of any such Awards and the satisfaction of Performance Criteria. No Participant may be granted Variable Compensation Awards that would result in a payment of more than $3 million during any one fiscal year.
11. | General Provisions Applicable to Awards. |
a. Transferability of Awards. Except as the Committee may otherwise determine or provide in an Award, Awards shall not be sold, assigned, transferred, pledged or otherwise encumbered by the person to whom they are granted, either voluntarily or by operation of law, except by will or the laws of descent and distribution, and, during the life of the Participant, shall be exercisable only by the Participant, provided, however, that Nonstatutory Stock Options may be transferred to a grantor-retained annuity trust or a similar estate-planning vehicle in which the trust is bound by all provisions of the Option which are applicable to the Participant. References to a Participant, to the extent relevant in the context, shall include references to authorized transferees of such an Option.
b. Documentation. Each Award granted under the Plan, with the exception of Cash Awards, shall be evidenced by a written Award agreement in such form as the Committee shall from time to time approve. Award agreements shall comply with the terms and conditions of the Plan and may contain such other provisions not inconsistent with the terms and conditions of the Plan as the Committee shall deem advisable. In the case of an Incentive Stock Option, the Award agreement shall contain, or refer to, such provisions relating to exercise and other matters as are required of incentive stock options under the Code. Award agreements may be evidenced by an electronic transmission (including an e-mail or reference to a website or other URL) sent to the Participant through the Companys normal process for communicating electronically with its employees. As a condition to receiving an Award, the Committee may require the Participant to affirmatively accept the Award and agree to the terms and conditions set forth in the Award agreement by physically and/or electronically executing the Award agreement or by otherwise physically and/or electronically acknowledging such acceptance and agreement. With or without such affirmative acceptance, however, the Committee may prescribe conditions (including the exercise or attempted exercise of any benefit conferred by the Award) under which the proposed Participant may be deemed to have accepted the Award and agreed to the terms and conditions set forth in the Award agreement.
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c. Committee Discretion. The terms of each type of Award need not be identical, and the Committee need not treat Participants uniformly.
d. Performance Criteria. For purposes of this Plan, the term Performance Criteria shall mean any one or more of the following performance criteria, applied to either the Company as a whole or to a division, business unit or Subsidiary, and measured either annually or cumulatively over a period of years, on an absolute basis or relative to a pre-established target, to previous years results or to a designated comparison group, in each case as specified by the Committee in the Award: cash flow; earnings per share; earnings before interest, taxes and amortization; return on equity; total shareholder return; share price performance; return on capital; return on assets or net assets; revenue; orders; product gross margins, including by customer; income or net income; operating income or net operating income; operating profit or net operating profit; 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, and other non-recurring gains and charges; operating margin or profit margin; return on operating revenue; return on invested capital; market segment share; customer wins or design ins; product release schedules; new product innovation; product cost reduction; brand recognition/acceptance; product ship targets; process improvement results; verification of business strategy and/or business plan; improvement of strategic position; adaptation to changes in the marketplace or environment; or customer satisfaction. If the Award so provides, the Committee may appropriately evaluate achievement against Performance Criteria to take into account any of the following events that occurs during a performance period: asset write-downs; litigation or claim judgments or settlements; the effect of changes in tax law; accounting principles or other such laws or provisions affecting reported results; accruals for reorganization and restructuring programs and any extraordinary non-recurring charges or other events. The Committee may prescribe the foregoing criteria either individually or in combination. The Committees determination of the achievement of any Performance Criteria shall be conclusive. At the time of the grant of any Full Value Award subject to this Section 11(d), the Committee shall establish a vesting date or vesting dates with respect to the shares of Common Stock covered by such Awards; provided that all Full Value Awards subject to this Section 11(d), subject to and except as provided in Sections 11(f), 11(j), 11(l) and 13, shall have a minimum vesting period of no less than one (1) year.
e. Termination of Status. Except as otherwise specified herein, the Committee shall determine the effect on an Award of the disability, death, retirement, authorized leave of absence or other change in the employment or other status of a Participant and the extent to which, and the period during which, the Participant, or the Participants legal representative, conservator, guardian or Designated Beneficiary, may exercise rights under the Award under such circumstances, subject to applicable law and the provisions of the Code.
f. Acquisition or Liquidation of the Company.
(i) Consequences of an Acquisition. If the Company is to be consolidated with or acquired by another entity in a merger or other
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reorganization in which the holders of the outstanding voting stock of the Company immediately preceding the consummation of such event shall, immediately following such event, hold, as a group, less than a majority of the voting securities of the surviving or successor entity, or in the event of a sale of all or substantially all of the Companys assets or otherwise (each, an Acquisition), the Committee or the board of directors of any entity assuming the obligations of the Company hereunder (the Successor Committee), shall, as to outstanding Awards, either (A) make appropriate provision for the continuation of such Awards by substituting on an equitable basis for the shares then subject to such Awards either (1) the consideration payable with respect to the outstanding shares of Common Stock in connection with the Acquisition, (2) shares of stock of the surviving or successor corporation or (3) such other securities as the Committee or the Successor Committee deems appropriate, the Fair Market Value of which shall not materially exceed the Fair Market Value of the shares of Common Stock subject to such Awards immediately preceding the Acquisition; or (B) upon written notice to the Participants, provide that all Awards must be exercised, to the extent then exercisable or to be exercisable as a result of the Acquisition, within a specified number of days of the date of such notice, at the end of which period the Awards shall terminate; or (C) terminate all Awards in exchange for a cash payment equal to the excess, if any, of the Fair Market Value of the shares subject to such Awards (to the extent then exercisable or to be exercisable as a result of the Acquisition) over the exercise price thereof, if any; or (D) in the case of Awards that may be settled in whole or in part in cash, provide for equitable treatment of such Awards.
(ii) Substitution of Awards Upon Certain Events. In connection with a merger or consolidation of an entity with the Company or the acquisition by the Company of property or stock of an entity, the Committee may grant Awards under the Plan in substitution for stock and stock-based awards issued by such entity or an affiliate thereof. The substitute Awards shall be granted on such terms and conditions as the Committee considers appropriate in the circumstances.
(iii) Liquidation or Dissolution. In the event of the proposed liquidation or dissolution of the Company, each Award, except for Cash Awards already earned, to the extent not then exercised or vested, will terminate immediately prior to the consummation of such proposed action or at such other time and subject to such other conditions as shall be determined by the Committee.
g. Withholding. Each Participant shall pay to the Company, or make provisions satisfactory to the Company for payment, of any taxes required by law to be withheld in connection with Awards to such Participant no later than the date of the event creating the tax withholding obligation. Participants may elect to satisfy such tax withholding obligations by authorizing the Company to withhold shares of Common Stock from the Award creating the tax obligation, valued at their Fair Market Value. If the withholding of shares for legal or accounting reasons is problematic and a Participant
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does not otherwise satisfy such tax withholding obligations, the Company may, to the extent permitted by law, deduct any such tax obligations from any payment of any kind otherwise due to a Participant.
h. Amendment of Awards. The Committee may amend, modify or terminate any outstanding Award including, but not limited to, substituting therefor another Award of the same or a different type, changing the date of exercise or realization, the vesting provisions (subject to the minimum vesting requirements set forth herein), Performance Criteria, or level of achievement of Performance Criteria, and converting an Incentive Stock Option to a Nonstatutory Stock Option; provided that, except as otherwise provided in Section 11(f)(i), the Participants consent to such action shall be required unless the Committee determines that the action, taking into account any related action, would not materially and adversely affect the Participant; provided, further, that subject to Section 3(c), an Option may not be amended subsequent to its issuance either to reduce the price at which such previously issued Option is exercisable or to extend the period of time for which such previously-issued Option shall be exercisable beyond ten (10) years unless such amendment is approved by the Companys shareholders. Furthermore, no Option shall be canceled and replaced with Options having a lower exercise price unless such cancellation and exchange is approved by the Companys shareholders. The Amendment of all Awards shall be subject to Section 11(n).
i. Conditions on Delivery of Stock. The Company will not be obligated to deliver any shares of Common Stock pursuant to the Plan or to remove restrictions from shares previously delivered under the Plan until (i) all conditions of the Award have been met or removed to the satisfaction of the Company, (ii) in the opinion of the Companys counsel, all other legal matters in connection with the issuance and delivery of such shares have been satisfied, including any applicable securities laws and any applicable stock exchange or stock market rules and regulations, (iii) the Participant has executed and delivered to the Company such representations or agreements as the Company may consider appropriate to satisfy the requirements of any applicable laws, rules or regulations, and (iv) the Participant has paid to the Company, or made provisions satisfactory to the Company for payment of, any taxes required by law to be withheld in connection with the Award.
j. Acceleration. The Committee may at any time provide (i) that Awards that may be settled in whole or in part in cash may become immediately exercisable in full or in part, and (ii) in connection with the disability or death of a Participant or in connection with an event contemplated by Section 11(f)(i), that any Award shall become exercisable in full or in part or shall be free of some or all restrictions or the risk of forfeiture. The Committee may take the actions contemplated by the preceding sentence despite the fact that such actions may (x) cause the application of Sections 280G and 4999 of the Code if an event contemplated by Section 11(f)(i) occurs, or (y) disqualify all or part of an Option as an Incentive Stock Option. In the event of the acceleration of the exercisability of one or more outstanding Options, including pursuant to Section 11(f)(i), the Committee may provide, as a condition of accelerated exercisability of any or all such Options, that the Common Stock or other substituted consideration, including cash, as to which exercisability has been accelerated shall be restricted and subject to forfeiture back
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to the Company at the election of the Company at the cost thereof upon termination of employment or other relationship, with the timing and other terms of the vesting of such restricted Common Stock or other consideration being not less favorable to the Participant than the timing and other terms of the superseded vesting schedule of the related Option.
k. Reserved.
l. Exception to Minimum Vesting Periods and Acceleration Limitations. The Committee may grant or accelerate the vesting of Awards with respect to up to 5% of the maximum, aggregate shares of Common Stock authorized for issuance hereunder in a manner that does not comply with the minimum vesting periods set forth in Sections 4(g), 5(d), 6(c), 7(c), 8(c), 9, 11(d) and 13 or that is not otherwise permitted under the vesting acceleration limitations in Section 11(j).
m. Compliance with Section 409A. Any other provision of the Plan or any Award to the contrary notwithstanding, the Plan and every Award hereunder shall be construed, administered and enforced as necessary to comply with applicable requirements of Section 409A of the Code and the Treasury and IRS rulings and regulations issued thereunder, so that no Participant shall (without such Participants express written consent) incur any of the additional tax or interest liabilities of Section 409A(a)(B) of the Code with respect to any Award. The Plan and each Award are hereby modified and limited as necessary to comply with applicable requirements of Section 409A.
n. Compliance with Limitations on Repricing. Unless such action is approved by the Companys shareholders, the Company may not, except as provided for under Section 3(c)(i) amend any outstanding Option or SAR granted under the Plan to provide an exercise or measurement price per share that is lower than the then-current exercise or measurement price per share of such outstanding Option or SAR; (ii)cancel any outstanding option or stock appreciation right (whether or not granted under the Plan) and grant in substitution new Awards under the Plan (other than Awards granted pursuant to Section 11(f)(ii)); (iii) cancel in exchange for a cash payment any outstanding Option or SAR with an exercise or measurement price per share above the then-current Fair Market Value; or (iv) take any action under the Plan that constitutes a repricing of an Award with the meaning of the rules of the New York Stock Exchange, or other exchange on which the Companys Common Stock is traded.
12. | Foreign Jurisdictions. |
To the extent that the Committee determines that the material terms set by the Committee or imposed by the Plan preclude the achievement of the material purposes of the Plan in jurisdictions outside the United States, the Committee will have the authority and discretion to modify those terms and provide for such other terms and conditions as the Committee determines to be necessary, appropriate or desirable to accommodate differences in local law, policy or custom or to facilitate administration of the Plan. The Committee may adopt or approve sub-plans, appendices or supplements to, or
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amendments, restatements or alternative versions of, the Plan as it may consider necessary, appropriate or desirable for such purpose, without thereby affecting the terms of the Plan as in effect for any other purpose. The special terms and any appendices, supplements, amendments, restatements or alternative versions, however, shall not include any provisions that are inconsistent with the terms of the Plan as then in effect, unless the Plan could have been amended to eliminate such inconsistency without further approval by the shareholders. The Committee shall also have the authority and discretion to delegate the foregoing powers to appropriate officers of the Company.
13. | Grant of Awards to Non-Employee Directors. |
Each person who is a member of the Board of Directors and who is not an employee of the Company (each, a Non-Employee Director) shall be automatically granted Awards having a Fair Market Value or exercisable for shares having a Fair Market Value, as the case may be, on the day of such grant as follows:
a. on the date such Non-Employee Director is first elected or appointed to the Board of Directors (other than pursuant to an election at an annual meeting of shareholders, in which case, paragraph b and only paragraph b below shall apply) equal to the value of the Automatic Annual Grant, as prorated daily to reflect the period between the directors date of election or appointment and the date of the next Automatic Annual Grant; and
b. on the date in each year which is the earlier of (i) the date that the annual meeting of shareholders is held and (ii) the last Thursday in May, equal to a dollar amount approved by the Board of Directors not to exceed $200,000 (Automatic Annual Grant).
Awards granted under this Section 13 may be any of the following: Restricted Stock Units, Restricted Stock, Nonstatutory Stock Options, SARs, or cash, or a combination of the foregoing. Awards granted under the Plan shall be in addition to the annual Board and Committee cash retainers paid by the Company to the Non-Employee Directors. The type of Awards granted under this Section 13 shall be determined, in each instance, at the Committees discretion (subject to the foregoing limitations). The number of shares, if any, covered by Awards granted under this Section 13 shall be subject to adjustment in accordance with the provisions of Section 3(c) of this Plan. Subject to and except as provided in Sections 11(f), 11(j) and 11(l), an Award of Restricted Stock, Restricted Stock Units, Options or SARS granted pursuant to this Section 13 shall have a minimum vesting period that extends until the earlier of one year from the grant of the Award or the date the next annual meeting of shareholders is held following the grant of the Award, and shall expire on the date which is ten (10) years after the date of grant of such Award. Cash Awards granted pursuant to this Section 13 may, at the Committees discretion, be immediately exercisable or paid in their entirety on the date of grant.
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14. | Miscellaneous. |
a. Definitions.
(i) Company for purposes of eligibility under the Plan, shall include Teradyne, Inc. and any present or future subsidiary corporations of Teradyne, Inc., as defined in Section 424(f) of the Code (a Subsidiary), and any present or future parent corporation of Teradyne, Inc., as defined in Section 424(e) of the Code. For purposes of Awards other than Incentive Stock Options, the term Company shall include any other entity in which the Company has a direct or indirect significant interest, as determined by the Committee in its sole discretion.
(ii) Code means the Internal Revenue Code of 1986, as amended, and any regulations promulgated thereunder.
(iii) Employee for purposes of eligibility under the Plan shall include a person to whom an offer of employment has been extended by the Company and who has actually commenced employment with the Company, whether full or part-time status.
(iv) Fair Market Value of the Companys Common Stock on any date means (i) the closing price (on that date) of the Common Stock on the principal national securities exchange on which the Common Stock is traded, if the Common Stock is then traded on a national securities exchange; or (ii) the average of the closing bid and asked prices last quoted (on that date) by an established quotation service for over-the-counter securities, if the Common Stock is not then traded on a national securities exchange; or (iii) if the Common Stock is not publicly traded, the fair market value of the Common Stock as determined by the Committee after taking into consideration all factors which it deems appropriate, including, without limitation, recent sale and offer prices of the Common Stock in private transactions negotiated at arms length; provided, that, in all events the Fair Market Value shall represent the Committees good faith determination of the fair market value of the Common Stock. The Committees determination shall be conclusive as to the Fair Market Value of the Common Stock.
(v) Full Value Awards means Restricted Stock, Restricted Stock Units and Awards other than (a) Options or (b) SARs or (c) Cash Awards or (d) other stock-based Awards for which the Participant pays the intrinsic value (whether directly or by forgoing a right to receive a cash payment from the Company).
b. Legal Consideration for Issuance of Shares. Unless otherwise determined by the Committee, in the case of Awards of Restricted Stock, Restricted Stock Units, or Awards that are settled in whole or in part with shares of Common Stock, to the extent such Awards do not otherwise require the payment by the Participant of cash consideration that exceeds the par value of the shares of Common Stock received in connection therewith, the services rendered or to be rendered by the Participant shall satisfy the legal requirement of payment of par value for such shares of Common Stock.
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c. No Right To Employment or Other Status. No person shall have any claim or right to be granted an Award, and the grant of an Award shall not be construed as giving a Participant the right to continued employment or any other relationship with the Company. The Company expressly reserves the right at any time to dismiss or otherwise terminate its relationship with a Participant free from any liability or claim under the Plan.
d. No Rights As Shareholder. Subject to the provisions of the applicable Award, no Participant or Designated Beneficiary shall have any rights as a shareholder with respect to any shares of Common Stock to be distributed with respect to an Award until becoming the record holder thereof.
e. Effective Date and Term of Plan. The Plan shall become effective on the date on which it is approved by the shareholders of the Company (the Effective Date). No Awards shall be granted under the Plan after May 12, 2025, but Awards previously granted may extend beyond that date.
f. Amendment of Plan. The Committee may amend this Plan at any time, provided that any material amendment to the Plan will not be effective unless approved by the Companys shareholders. For this purpose, a material amendment is any amendment that would (i) other than pursuant to Section 3(c), materially increase either the aggregate number of shares of Common Stock available for issuance under the Plan; or the maximum number of shares of Common Stock issuable in one fiscal year to a Participant; (ii) expand or limit the class of persons eligible to receive Awards or otherwise participate in the Plan; (iii) subject to Section 3(c), reduce the price at which a previously-issued Option is exercisable or extend the period of time for which a previously-issued Option shall be exercisable beyond ten (10) years; (iv) subject to Section 11(f) and Section 11(j), amend the minimum vesting provisions of Full Value Awards; or (v) require shareholder approval pursuant to the requirements of Nasdaq and/or any other exchange on which the Company is then listed or pursuant to applicable law.
g. Governing Law. The provisions of the Plan and all Awards made hereunder shall be governed by and interpreted in accordance with the laws of The Commonwealth of Massachusetts, exclusive of reference to rules and principles of conflicts of law.
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Exhibit 10.10
SUPPLEMENT TO THE RESTRICTED STOCK UNIT SECTION OF THE
TERADYNE, INC.
2006 EQUITY AND CASH COMPENSATION INCENTIVE PLAN
(as amended as of January 21, 2019)
DANISH SECTION
Preamble
The purpose of this Supplement (the Supplement) to the Teradyne, Inc. 2006 Equity and Cash Compensation Incentive Plan (the Plan) and the terms and conditions applicable to restricted stock units (Restricted Stock Units) set forth in Section 7 of the Plan (the Terms), as amended, modified or restated (the Plan and the Terms as modified by this Supplement in accordance with the terms hereof, the Danish Subplan), is to allow Teradyne, Inc. (the Company) to grant certain employees and officers of its Danish subsidiaries, (Teradyne Denmark Subsidiaries) Restricted Stock Units in a manner that will comply with certain conditions set forth in the Danish Share Option Act (aktieoptionsoloven) as amended on 6 December 2018 and effective 1 January 2019 (Danish Share Option Act). Capitalized terms used herein but not elsewhere defined shall have the same meanings as those in the Plan or the Terms. Unless as set forth herein, all of the terms of the Plan and Terms shall apply to grants under this Danish Subplan.
This Danish Subplan was authorized and approved by the Compensation Committee of the Board of Directors on January 21, 2019. The Danish Subplan is a new equity incentive scheme designed to comply with the Danish Share Option Act.
Eligibility
Only employees and officers of Teradyne Denmark Subsidiaries are eligible to receive Awards of Restricted Stock Units under this Danish Subplan.
Effect of Termination of Employment
Restricted Stock Units granted under this Danish Subplan will not vest further after termination of employment, except in limited certain circumstances as follows: If the recipients employment with Teradyne Denmark Subsidiaries ends on account of permanent disability or death, the unvested portion of an Award which would have vested if the employee had continued employment through the relevant vesting period shall automatically become vested in full on the date of his or her termination of employment on account of permanent disability or death.
In all other circumstances, any unvested portion of Restricted Stock Units will be forfeited as of the date of termination of employment. The recipients employment will be considered terminated as of the date the recipient is no longer actively providing services to Teradyne Denmark Subsidiaries regardless of the reason for such termination or the terms of the recipients employment agreement, if any. The recipients right to vest in the RSUs under this Danish Subplan, if any, will terminate as of such date and will not be extended by any notice period (e.g., the recipients period of service would not include any contractual notice period or any period of garden leave or similar period mandated under Danish employment laws or the terms of the recipients employment agreement, if any). The Committee shall have the exclusive discretion to determine when the recipient is no longer actively providing services for purposes of an Award (including whether the recipient may still be considered to be providing services while on a leave of absence).
A recipients employment shall be considered as continuing uninterrupted during any bona fide leave of absence (such as those attributable to illness or military obligations) provided that the period of such leave does not exceed 90 days or, in the case of an employee, if longer, any period during which the employees right to reemployment is guaranteed by Danish law. A bona fide leave of absence with the written approval of the Committee shall not be considered an interruption of employment, provided that such written approval contractually obligates Teradyne Denmark Subsidiaries to continue the employment of the recipient after the approved period of absence.
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Exhibit 10.15
TERADYNE, INC.
1996 EMPLOYEE STOCK PURCHASE PLAN
(as amended, effective January 1, 2019)
Article 1Purpose.
This 1996 Employee Stock Purchase Plan (the Plan) is intended to encourage stock ownership by all eligible employees of Teradyne, Inc. (the Company), a Massachusetts corporation, and its participating subsidiaries (as defined in Article 17) so that they may share in the growth of the Company by acquiring or increasing their proprietary interest in the Company. The Plan is designed to encourage eligible employees to remain in the employ of the Company and its participating subsidiaries. The Plan is intended to constitute an employee stock purchase plan within the meaning of Section 423(b) of the Internal Revenue Code of 1986, as amended (the Code).
Article 2Administration of the Plan.
The Plan may be administered by a committee appointed by the Board of Directors of the Company (the Committee). The Committee shall consist of not less than two members of the Companys Board of Directors. The Board of Directors may from time to time remove members from, or add members to, the Committee. Vacancies on the Committee, howsoever caused, shall be filled by the Board of Directors. The Committee may select one of its members as Chairman, and shall hold meetings at such times and places as it may determine. Acts by a majority of the Committee, or acts reduced to or approved in writing by a majority of the members of the Committee, shall be the valid acts of the Committee.
The interpretation and construction by the Committee of any provisions of the Plan or of any option granted under it shall be final, unless otherwise determined by the Board of Directors. The Committee may from time to time adopt such rules and regulations for carrying out the Plan as it may deem best, provided that any such rules and regulations shall be applied on a uniform basis to all similarly situated employees under the Plan. No member of the Board of Directors or the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any option granted under it.
In the event the Board of Directors fails to appoint or refrains from appointing a Committee, the Board of Directors shall have all power and authority to administer the Plan. In such event, the word Committee wherever used herein shall be deemed to mean the Board of Directors.
Article 3Eligible Employees.
No option may be granted to any person serving as a member of the Committee at the time of grant. Subject to the foregoing limitation, all employees of the Company or any of its participating subsidiaries who are employees of the Company or any of its
participating subsidiaries on or before the first day of any Payment Period (as defined in Article 5), and whose customary employment is not less than twenty hours per week and more than five months in any calendar year shall be eligible to receive options under the Plan to purchase common stock of the Company, par value $.125 per share (Common Stock); provided, however, that the Committee retains the discretion to determine which eligible employees may participate in an offering pursuant to and consistent with Treasury Regulation Sections 1.423.2(e) and (f).. All eligible employees shall have the same rights and privileges hereunder, except as permitted or required under Treasury Regulation 1.423-2(f) and Article 17 hereof. Persons who elect to enter the Plan in accordance with Article 7 and who are eligible employees on the first business day of any Payment Period (as defined in Article 5) shall receive their options as of such day. Persons who elect to enter the Plan in accordance with Article 7 and who become eligible employees after any date on which options are granted under the Plan shall be granted options on the first business day of the next succeeding Payment Period on which options are granted to eligible employees under the Plan. In no event, however, may an employee be granted an option if such employee, immediately after the option was granted, would be treated as owning stock possessing five percent or more of the total combined voting power or value of all classes of stock of the Company or of any parent corporation or subsidiary corporation, as the terms parent corporation and subsidiary corporation are defined in Section 424(e) and (f) of the Code. For purposes of determining stock ownership under this paragraph, the rules of Section 424(d) of the Code shall apply, and stock which the employee may purchase under outstanding options shall be treated as stock owned by the employee.
Article 4Stock Subject to the Plan.
The stock subject to the options under the Plan shall be authorized but unissued Common Stock, or shares of Common Stock reacquired by the Company, including shares purchased in the open market. The aggregate number of shares which may be issued pursuant to the Plan is 30,400,000, subject to adjustment as provided in Article 12. If any option granted under the Plan shall expire or terminate for any reason without having been exercised in full or shall cease for any reason to be exercisable in whole or in part, the unpurchased shares subject thereto shall again be available under the Plan.
Article 5Payment Periods and Stock Options.
For the duration of the Plan, a Payment Period shall be defined as each six-month period commencing on the first day of January and ending on the last day of June and commencing on the first day of July and ending on the last day of December of each calendar year.
On the first business day of each Payment Period, the Company will grant to each eligible employee who is then a participant in the Plan an option to purchase on the last day of such Payment Period, at the Option Price hereinafter provided for, a maximum number of 3,000 shares on condition that such employee remains eligible to participate in the Plan throughout the remainder of such Payment Period. The participant shall be entitled to exercise the option so granted only to the extent of the participants
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accumulated payroll deductions on the last day of such Payment Period. If the participants accumulated payroll deductions on the last day of the Payment Period would enable the participant to purchase more than 3,000 shares except for the 3,000 share limitation, the excess of the amount of the accumulated payroll deductions over the aggregate purchase price of the 3,000 shares shall be promptly refunded to the participant by the Company, without interest. The Option Price per share for each Payment Period shall be 85% of the fair market value of the Common Stock on the last business day of the Payment Period rounded up to the nearest cent. The foregoing limitation on the number of shares subject to option and the Option Price shall be subject to adjustment as provided in Article 12.
For purposes of the Plan, the term fair market value on any date means (i) the closing price (on that date) of the Common Stock on the principal national securities exchange on which the Common Stock is traded, if the Common Stock is then traded on a national securities exchange; or (ii) the average of the closing bid and asked prices last quoted (on that date) by an established quotation service for over-the-counter securities, if the Common Stock is not reported on a national securities exchange; or (iii) if the Common Stock is not publicly traded, the fair market value of the Common Stock as determined by the Committee after taking into consideration all factors which it deems appropriate, including, without limitation, recent sale and offer prices of the Common Stock in private transactions negotiated at arms length.
For purposes of the Plan, the term business day means a day on which there is trading on The Nasdaq Stock Market or the aforementioned national securities exchange, whichever is applicable pursuant to the preceding paragraph; and if neither is applicable, a day that is not a Saturday, Sunday or legal holiday in Massachusetts.
Notwithstanding any other provision herein, no employee shall be granted an option which permits the employees right to purchase stock under the Plan, and under all other Section 423(b) employee stock purchase plans of the Company and any parent or subsidiary corporations, to accrue at a rate which exceeds $25,000 of fair market value of such stock (determined on the date or dates that options on such stock were granted) for each calendar year in which such option is outstanding at any time. The purpose of the limitation in the preceding sentence is to comply with Section 423(b)(8) of the Code. If the participants accumulated payroll deductions on the last day of the Payment Period would otherwise enable the participant to purchase Common Stock in excess of the Section 423(b)(8) $25,000 limitation described in this paragraph, the excess of the amount of the accumulated payroll deductions over the aggregate purchase price of the shares actually purchased shall be promptly refunded to the participant by the Company, without interest.
Article 6Exercise of Option.
Each eligible employee who continues to be a participant in the Plan on the last day of a Payment Period shall be deemed to have exercised his or her option on such date and shall be deemed to have purchased from the Company such number of full shares of Common Stock reserved for the purpose of the Plan as the participants accumulated
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payroll deductions on such date will pay for at the Option Price, subject to the 3,000 share limit of the option and the Section 423(b)(8) $25,000 limitation described in Article 5. If the individual is not a participant on the last day of a Payment Period, then he or she shall not be entitled to exercise his or her option. Only full shares of Common Stock may be purchased under the Plan. Unused payroll deductions remaining in a participants account at the end of a Payment Period solely by reason of the inability to purchase a fractional share (and for no other reason) shall be refunded.
Article 7Authorization for Entering the Plan.
An employee may elect to enter the Plan by filling out, signing and delivering to the Company an authorization:
A. Stating the percentage to be deducted from the employees pay;
B. Authorizing the purchase of stock for the employee in each Payment Period in accordance with the terms of the Plan; and
C. Specifying the exact name or names in which stock purchased for the employee is to be issued as provided under Article 11 hereof.
Such authorization must be received by the Company on or before the first day of the next succeeding Payment Period.
Unless a participant files a new authorization or withdraws from the Plan, the deductions and purchases under the authorization the participant has on file under the Plan will continue from one Payment Period to succeeding Payment Periods as long as the Plan remains in effect.
The Company will accumulate and hold for each participants account the amounts deducted from his or her pay. No interest will be paid on these amounts.
Article 8Maximum Amount of Payroll Deductions.
An employee may authorize payroll deductions in an amount (expressed as a whole percentage) not less than two percent (2%) but not more than ten percent (10%) of the employees cash compensation.
Article 9Change in Payroll Deductions.
Deductions may not be increased during a Payment Period. Deductions may be decreased during a Payment Period, provided that an employee may not decrease his deduction more than once during any Payment Period.
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Article 10Withdrawal from the Plan.
A participant may withdraw from the Plan (in whole but not in part) at any time prior to the last day of a Payment Period by delivering a withdrawal notice to the Company.
To re-enter the Plan, an employee who has previously withdrawn must file a new authorization on or before the first day of the next Payment Period in which he or she wishes to participate. The employees re-entry into the Plan becomes effective at the beginning of such Payment Period, provided that he or she is an eligible employee on the first business day of the Payment Period.
Article 11Issuance of Stock.
Stock issued to participants shall be delivered as soon as practicable after each Payment Period by the Companys transfer agent.
Stock purchased under the Plan shall be issued only in the name of the participant, or if the participants authorization so specifies, in the name of the participant and another person of legal age as joint tenants with rights of survivorship.
Article 12Adjustments.
Upon the happening of any of the following described events, a participants rights under options granted under the Plan shall be adjusted as hereinafter provided:
A. In the event that the shares of Common Stock shall be subdivided or combined into a greater or smaller number of shares or if, upon a reorganization, split-up, liquidation, recapitalization or the like of the Company, the shares of Common Stock shall be exchanged for other securities of the Company, each participant shall be entitled, subject to the conditions herein stated, to purchase such number of shares of Common Stock or amount of other securities of the Company as were exchangeable for the number of shares of Common Stock that such participant would have been entitled to purchase except for such action, and appropriate adjustments shall be made in the purchase price per share to reflect such subdivision, combination or exchange; and
B. In the event the Company shall issue any of its shares as a stock dividend upon or with respect to the shares of stock of the class which shall at the time be subject to options hereunder, each participant upon exercising such an option shall be entitled to receive (for the purchase price paid upon such exercise) the shares as to which the participant is exercising his or her option and, in addition thereto (at no additional cost), such number of shares of the class or classes in which such stock dividend or dividends were declared or paid, and such amount of cash in lieu of fractional shares, as is equal to the number of shares thereof and the amount of cash in lieu of fractional shares, respectively, which the participant would have received if the participant had been the holder of the shares as to which the participant is exercising his or her option at all times between the date of the granting of such option and the date of its exercise.
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Upon the happening of any of the foregoing events, the class and aggregate number of shares set forth in Article 4 hereof which are subject to options which have been or may be granted under the Plan and the limitations set forth in the second paragraph of Article 5 shall also be appropriately adjusted to reflect the events specified in paragraphs A and B above. Notwithstanding the foregoing, any adjustments made pursuant to paragraphs A or B shall be made only after the Committee, based on advice of counsel for the Company, determines whether such adjustments would constitute a modification (as that term is defined in Section 424 of the Code). If the Committee determines that such adjustments would constitute a modification, it may refrain from making such adjustments.
If the Company is to be consolidated with or acquired by another entity in a merger, a sale of all or substantially all of the Companys assets or otherwise (an Acquisition), the Committee or the board of directors of any entity assuming the obligations of the Company hereunder (the Successor Board) shall, with respect to options then outstanding under the Plan, either (i) make appropriate provision for the continuation of such options by arranging for the substitution on an equitable basis for the shares then subject to such options either (a) the consideration payable with respect to the outstanding shares of the Common Stock in connection with the Acquisition, (b) shares of stock of the successor corporation, or a parent or subsidiary of such corporation, or (c) such other securities as the Successor Board deems appropriate, the fair market value of which shall not exceed the fair market value of the shares of Common Stock subject to such options immediately preceding the Acquisition; or (ii) terminate each participants options in exchange for a cash payment equal to the excess of the fair market value on the date of the Acquisition of the number of shares of Common Stock that the participants accumulated payroll deductions as of the date of the Acquisition could purchase, at an option price determined with reference only to the first business day of the applicable Payment Period and subject to the 3,000 share limit, Code Section 423(b)(8) and fractional-share limitations on the amount of stock a participant would be entitled to purchase over the aggregate option price to such participant thereof.
The Committee or Successor Board shall determine the adjustments to be made under this Article 12, and its determination shall be conclusive.
Article 13No Transfer or Assignment of Employees Rights.
An option granted under the Plan may not be transferred or assigned, otherwise than by will or by the laws of descent and distribution. Any option granted under the Plan may be exercised, during the participants lifetime, only by the participant.
Article 14Termination of Employees Rights.
Whenever a participant ceases to be an eligible employee because of retirement, voluntary or involuntary termination, resignation, layoff, discharge, death or for any other
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reason, his or her rights under the Plan shall immediately terminate, and the Company shall promptly refund, without interest, the entire balance of his or her payroll deduction account under the Plan; provided, however, that if an employee is laid off during the last three months of any Payment Period, he shall nevertheless be deemed to be a participant in the Plan on the last day of the Payment Period. Notwithstanding the foregoing, eligible employment shall be treated as continuing intact while a participant is on military leave, sick leave or other bona fide leave of absence, for up to 90 days, or, if such leave is longer than 90 days, for so long as the participants right to re-employment is guaranteed either by statute or by written contract. Notwithstanding any other provision herein, if a participants employment is terminated by reason of retirement, and the date of such termination occurs after the date that is 3 months prior to the last day of the Payment Period, such participants rights under the Plan are not immediately terminated, and if the participant has not withdrawn from the Plan, such participants options shall be deemed to have been exercised on the last day of the Payment Period in accordance with the terms of the Plan.
Article 15Termination and Amendments to Plan.
The Plan may be terminated at any time by the Companys Board of Directors but such termination shall not affect options then outstanding under the Plan. If at any time shares of stock reserved for the purpose of the Plan remain available for purchase but not in sufficient number to satisfy all then unfilled purchase requirements, the available shares shall be apportioned among participants in proportion to the amount of payroll deductions accumulated on behalf of each participant that would otherwise be used to purchase stock, and the Plan shall terminate. Upon such termination or any other termination of the Plan, all payroll deductions not used to purchase stock will be refunded, without interest.
The Committee or the Board of Directors may from time to time adopt amendments to the Plan provided that, without the approval of the shareholders of the Company, no amendment may (i) increase the number of shares that may be issued under the Plan; (ii) change the class of employees eligible to receive options under the Plan, if such action would be treated as the adoption of a new plan for purposes of Code Section 423(b) and the regulations thereunder; (iii) cause Rule 16b-3 under the Securities Exchange Act of 1934 to become inapplicable to the Plan or (iv) materially revise the Plan pursuant to the rules and regulations of The Nasdaq Stock Market LLC.
Article 16Limits on Sale of Stock Purchased under the Plan.
The Plan is intended to provide shares of Common Stock for investment and not for resale. The Company does not, however, intend to restrict or influence any employee in the conduct of his or her own affairs. An employee may, therefore, sell stock purchased under the Plan at any time the employee chooses, subject to compliance with any applicable federal or state securities laws and subject to any restrictions imposed under Article 21 to ensure that tax withholding obligations are satisfied. THE EMPLOYEE ASSUMES THE RISK OF ANY MARKET FLUCTUATIONS IN THE PRICE OF THE STOCK.
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Article 17Participating Subsidiaries.
The term participating subsidiary shall mean any present or future subsidiary of the Company, as that term is defined in Section 424(f) of the Code, that is designated from time to time by the Board of Directors to participate in the Plan. The Board of Directors shall have the power to make such designation before or after the Plan is approved by the shareholders. The Board may from time to time establish one or more sub-plans under the Plan with respect to one or more participating subsidiaries, provided that such sub-plan complies with Section 423 of the Code and related Treasury Regulations.
The Company may, in order to comply with the laws of a foreign jurisdiction, grant options to employees of the Company or a participating subsidiary who are citizens or residents of such foreign jurisdiction (without regard to whether they are also citizens of the United States or resident aliens within the meaning of Section 7701(b)(1)(A) of the Code) with terms that are less favorable (but not more favorable) than the terms of options granted under the Plan to employees of the Company or a participating subsidiary who are resident in the United States. Notwithstanding the preceding provisions of the Plan, employees of the Company or a participating subsidiary who are citizens or residents of a foreign jurisdiction (without regard to whether they are also citizens of the United States or resident aliens within the meaning of Section 77091(b)(1)(A) of the Code) may be excluded from eligibility under the Plan if (a) the grant of an option under the Plan to a citizen or resident of the foreign jurisdiction is prohibited under the laws of such jurisdiction or (b) compliance with the laws of the foreign jurisdiction would cause the Plan to violate the requirements of Section 423 of the Code. The Company may add one or more appendices to this Plan describing the operation of the Plan in those foreign jurisdictions in which employees are excluded from participation or granted less favorable options.
Article 18Optionees Not Shareholders.
Neither the granting of an option to an employee nor the deductions from his or her pay shall constitute such employee a stockholder of the shares covered by an option until such shares have been actually purchased by the employee.
Article 19Application of Funds.
The proceeds received by the Company from the sale of Common Stock pursuant to options granted under the Plan will be used for general corporate purposes.
Article 20Notice to Company of Disqualifying Disposition.
By electing to participate in the Plan, each participant agrees to notify the Company in writing immediately after the participant transfers Common Stock acquired under the Plan, if such transfer occurs within two years after the first business day of the Payment Period in which such Common Stock was acquired. Each participant further agrees to provide any information about such a transfer as may be requested by the Company or any subsidiary corporation in order to assist it in complying with the tax
8
laws. Such dispositions generally are treated as disqualifying dispositions under Sections 421 and 424 of the Code, which have certain tax consequences to participants and to the Company and its participating subsidiaries.
Article 21Withholding of Additional Income Taxes.
By electing to participate in the Plan, each participant acknowledges that the Company and its participating subsidiaries are required to withhold taxes with respect to the amounts deducted from the participants compensation and accumulated for the benefit of the participant under the Plan, and each participant agrees that the Company and its participating subsidiaries may deduct additional amounts from the participants compensation, when amounts are added to the participants account, used to purchase Common Stock or refunded, in order to satisfy such withholding obligations. Each participant further acknowledges that when Common Stock is purchased under the Plan the Company and its participating subsidiaries may be required to withhold taxes with respect to all or a portion of the difference between the fair market value of the Common Stock purchased and its purchase price, and each participant agrees that such taxes may be withheld from compensation otherwise payable to such participant. It is intended that tax withholding will be accomplished in such a manner that the full amount of payroll deductions elected by the participant under Article 7 will be used to purchase Common Stock. However, if amounts sufficient to satisfy applicable tax withholding obligations have not been withheld from compensation otherwise payable to any participant, then, notwithstanding any other provision of the Plan, the Company may withhold such taxes from the participants accumulated payroll deductions and apply the net amount to the purchase of Common Stock, unless the participant pays to the Company, prior to the exercise date, an amount sufficient to satisfy such withholding obligations. Each participant further acknowledges that the Company and its participating subsidiaries may be required to withhold taxes in connection with the disposition of stock acquired under the Plan and agrees that the Company or any participating subsidiary may take whatever action it considers appropriate to satisfy such withholding requirements, including deducting from compensation otherwise payable to such participant an amount sufficient to satisfy such withholding requirements or conditioning any disposition of Common Stock by the participant upon the payment to the Company or such subsidiary of an amount sufficient to satisfy such withholding requirements.
Article 22Governmental Regulations.
The Companys obligation to sell and deliver shares of Common Stock under the Plan is subject to the approval of any governmental authority required in connection with the authorization, issuance or sale of such shares.
Government regulations may impose reporting or other obligations on the Company with respect to the Plan. For example, the Company may be required to identify shares of Common Stock issued under the Plan on its stock ownership records and send tax information statements to employees and former employees who transfer title to such shares.
9
Article 23Governing Law.
The validity and construction of the Plan shall be governed by the laws of Massachusetts, without giving effect to the principles of conflicts of law thereof.
Article 24Approval of Board of Directors and Stockholders of the Company.
The Plan was originally adopted by the Board of Directors on March 19, 1996 and subsequently approved by the shareholders. The Plan was most recently approved by shareholders on May 21, 2013 and amended by the Committee effective January 1, 2019.
10
Exhibit 21.1
Present Subsidiaries
Entity Name: | State or Jurisdiction Of Incorporation |
Percentage of Voting Securities Owned |
||||
Teradyne (Asia) Pte., Ltd. |
Singapore | 100 | %* | |||
Teradyne Canada Limited |
Canada | 100 | % | |||
Teradyne de Costa Rica S.A. |
Costa Rica | 100 | % | |||
Teradyne GmbH |
Germany | 100 | %* | |||
Teradyne Holdings Denmark ApS |
Denmark | 100 | %* | |||
Teradyne (India) Engineering Private Ltd. |
India | 100 | %* | |||
Teradyne International Holdings B.V. |
The Netherlands | 100 | % | |||
Teradyne International UK Holdings Ltd. |
United Kingdom | 100 | %* | |||
Teradyne Italia SrL |
Italy | 100 | %* | |||
Teradyne K.K. |
Japan | 100 | % | |||
Teradyne Korea Ltd. |
Korea | 100 | % | |||
Teradyne Limited |
United Kingdom | 100 | %* | |||
Teradyne Malaysia Sdn. Bhd. |
Malaysia | 99 | %* | |||
Teradyne Philippines Limited |
Delaware | 100 | % | |||
Teradyne Robotics Holdings Denmark ApS |
Denmark | 100 | %* | |||
Teradyne SAS |
France | 100 | % | |||
Teradyne (Shanghai) Co., Ltd. |
Peoples Republic of China | 100 | %* | |||
Teradyne Taiwan LLC |
Delaware | 100 | % | |||
Teradyne Thailand Ltd. |
Delaware | 100 | % | |||
Energid Technologies Corporation |
Florida | 100 | % | |||
GenRad, LLC |
Delaware | 100 | % | |||
Herco Technology Corp. |
California | 100 | % | |||
P.L.S.T., Inc. (f/k/a Perception Laminates, Inc.) |
California | 100 | % | |||
Eagle Test Systems, Inc. |
Delaware | 100 | % | |||
Eagle Test Systems (Philippines) LLC |
Delaware | 100 | %* | |||
Nextest Systems Corporation |
Delaware | 100 | % | |||
Nextest Systems (Philippines) Corp. |
Philippines | 99.9 | %* | |||
Lemsys SA |
Switzerland | 100 | %* | |||
LitePoint Corporation |
Delaware | 100 | % | |||
LitePoint Europe A/S |
Denmark | 100 | %* | |||
LitePoint Technology Limited |
Hong Kong | 100 | %* | |||
LitePoint Technology (Shanghai) Company Ltd. |
Peoples Republic of China | 100 | %* | |||
LitePoint Japan K.K. |
Japan | 100 | %* | |||
LitePoint Design Test, LLC |
New Mexico | 100 | %* | |||
LitePoint Vietnam Limited |
Socialist Republic of Vietnam | 100 | %* | |||
Mobile Industrial Robots ApS |
Denmark | 100 | %* | |||
Mobile Industrial Robots, Inc. |
Delaware | 100 | %* | |||
Mobile Industrial Robots GmbH |
Germany | 100 | %* | |||
Mobile Industrial Robots Pte. Ltd. |
Singapore | 100 | %* | |||
MiR Robots S.L. |
Spain | 100 | %* | |||
MiR Robots (Shanghai) Co. Ltd. |
Peoples Republic of China | 100 | %* | |||
Universal Robots A/S |
Denmark | 100 | %* | |||
Universal Robots (Spain) S.L. |
Spain | 100 | %* | |||
Universal Robots (Singapore) Pte. Ltd. |
Singapore | 100 | %* | |||
Universal Robots (India) Pte. Ltd. |
India | 100 | %* | |||
Universal Robots (Shanghai) Co. Ltd. |
Peoples Republic of China | 100 | %* | |||
Universal Robots (USA), Inc. |
Delaware | 100 | %* | |||
Universal Robots GmbH |
Germany | 100 | %* | |||
Universal Robots Mexico S.A. de C.V. |
Mexico | 100 | %* | |||
Universal Science and Technology (Shanghai) Co. Ltd. |
Peoples Republic of China | 100 | %* |
* | Indirect subsidiaries whose voting securities are 100% controlled by Teradyne, Inc. |
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-188824; 333-177246; 333-159723; 333-155564; 333-149017; 333-143231; 333-134519; 333-116632; 333-101983; 333-68074; 333-56373; 333-32547; and 333-07177) of Teradyne, Inc. of our report dated March 1, 2019 relating to the consolidated financial statements and financial statement schedule and the effectiveness of internal control over financial reporting, which appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP |
Boston, Massachusetts |
March 1, 2019 |
EXHIBIT 31.1
CERTIFICATIONS
I, Mark E. Jagiela, certify that:
1. I have reviewed this annual report on Form 10-K of Teradyne, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: March 1, 2019
By: | /S/ MARK E. JAGIELA | |
Mark E. Jagiela | ||
Chief Executive Officer |
EXHIBIT 31.2
I, Gregory R. Beecher, certify that:
1. I have reviewed this annual report on Form 10-K of Teradyne, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: March 1, 2019
By: | /S/ GREGORY R. BEECHER | |
Gregory R. Beecher | ||
Chief Financial Officer |
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Teradyne, Inc. (the Company) on Form 10-K for the period ending December 31, 2018 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Mark E. Jagiela, Chief Executive Officer of the Company, certify pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/S/ MARK E. JAGIELA |
Mark E. Jagiela |
Chief Executive Officer |
March 1, 2019
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Teradyne, Inc. (the Company) on Form 10-K for the period ending December 31, 2018 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Gregory R. Beecher, Chief Financial Officer of the Company, certify pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/S/ GREGORY R. BEECHER |
Gregory R. Beecher |
Chief Financial Officer |
March 1, 2019
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