Teradyne, Inc.
TERADYNE, INC (Form: 10-Q, Received: 08/09/2013 14:10:53)
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 10-Q

 

 

(Mark One)

 

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

For the quarterly period ended June 30, 2013

OR

 

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

For the transition period from        to

Commission File No. 001-06462

 

 

TERADYNE, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Massachusetts   04-2272148

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

600 Riverpark Drive, North Reading,

Massachusetts

  01864
(Address of Principal Executive Offices)   (Zip Code)

978-370-2700

(Registrant’s Telephone Number, Including Area Code)

 

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files)    Yes   x     No   ¨

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

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨    Smaller reporting company   ¨

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

The number of shares outstanding of the registrant’s only class of Common Stock as of August 2, 2013 was 191,459,202 shares.

 

 

 


Table of Contents

TERADYNE, INC.

INDEX

 

         Page No.  
PART I. FINANCIAL INFORMATION   
Item 1.   Financial Statements (Unaudited):   
 

Condensed Consolidated Balance Sheets as of June 30, 2013 and December 31, 2012

     1   
 

Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2013 and July 1, 2012

     2   
 

Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2013 and July 1, 2012

     3   
 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2013 and July 1, 2012

     4   
 

Notes to Condensed Consolidated Financial Statements

     5   
Item 2.  

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

     22   
Item 3.  

Quantitative and Qualitative Disclosures about Market Risk

     32   
Item 4.  

Controls and Procedures

     32   
PART II. OTHER INFORMATION   
Item 1.   Legal Proceedings      33   
Item 1A.   Risk Factors      33   
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds      33   
Item 4.   Mine Safety Disclosures      34   
Item 6.   Exhibits      35   


Table of Contents

PART I

 

Item 1: Financial Statements

TERADYNE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

     June 30,
2013
     December 31,
2012
 
    

(in thousands,

except per share information)

 
ASSETS      

Current assets:

     

Cash and cash equivalents

   $ 227,601       $ 338,920   

Marketable securities

     501,148         431,516   

Accounts receivable, less allowance for doubtful accounts of $3,664 and $4,118 at June 30, 2013 and December 31, 2012, respectively

     228,208         153,423   

Inventories:

     

Parts

     71,552         89,598   

Assemblies in process

     25,124         32,303   

Finished goods

     31,528         17,509   
  

 

 

    

 

 

 
     128,204         139,410   

Deferred tax assets

     83,789         77,305   

Prepayments and other current assets

     113,253         95,487   
  

 

 

    

 

 

 

Total current assets

     1,282,203         1,236,061   

Net property, plant and equipment

     264,876         265,782   

Long-term marketable securities

     302,846         235,872   

Other assets

     19,051         20,209   

Retirement plans assets

     4,194         3,282   

Intangible assets, net

     283,728         318,867   

Goodwill

     349,272         349,272   
  

 

 

    

 

 

 

Total assets

   $ 2,506,170       $ 2,429,345   
  

 

 

    

 

 

 
LIABILITIES      

Current liabilities:

     

Accounts payable

   $ 67,125       $ 58,324   

Accrued employees’ compensation and withholdings

     73,756         86,264   

Deferred revenue and customer advances

     76,254         81,357   

Other accrued liabilities

     54,684         57,249   

Accrued income taxes

     13,686         12,306   

Current debt

     179,565         2,328   
  

 

 

    

 

 

 

Total current liabilities

     465,070         297,828   

Long-term deferred revenue and customer advances

     18,240         16,227   

Retirement plans liabilities

     94,004         94,373   

Deferred tax liabilities

     41,429         50,201   

Long-term other accrued liabilities

     20,934         21,302   

Long-term debt

     —          171,059   
  

 

 

    

 

 

 

Total liabilities

     639,677         650,990   
  

 

 

    

 

 

 

Commitments and contingencies (Note N)

     
SHAREHOLDERS’ EQUITY      

Common stock, $0.125 par value, 1,000,000 shares authorized, 190,721 shares and 187,908 shares issued and outstanding at June 30, 2013 and December 31, 2012, respectively

     23,840         23,488   

Additional paid-in capital

     1,364,944         1,347,762   

Accumulated other comprehensive income

     3,279         5,820   

Retained earnings

     474,430         401,285   
  

 

 

    

 

 

 

Total shareholders’ equity

     1,866,493         1,778,355   
  

 

 

    

 

 

 

Total liabilities and shareholders’ equity

   $ 2,506,170       $ 2,429,345   
  

 

 

    

 

 

 

The accompanying notes, together with the Notes to Consolidated Financial Statements included in Teradyne’s Annual Report on Form 10-K for the year ended December 31, 2012, are an integral part of the condensed consolidated financial statements.

 

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TERADYNE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

     For the Three Months
Ended
    For the Six Months
Ended
 
     June 30,
2013
    July 1,
2012
    June 30,
2013
    July 1,
2012
 
     (in thousands, except per share amount)  

Net revenues:

        

Products

   $ 363,087      $ 480,578      $ 577,387      $ 811,469   

Services

     65,802        67,706        131,869        133,483   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net revenues

     428,889        548,284        709,256        944,952   

Cost of revenues:

        

Cost of products

     158,411        206,498        255,204        380,499   

Cost of services

     29,245        32,280        59,402        64,021   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenues

     187,656        238,778        314,606        444,520   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     241,233        309,506        394,650        500,432   

Operating expenses:

        

Engineering and development

     67,773        67,834        130,524        129,113   

Selling and administrative

     69,230        72,064        137,120        138,697   

Acquired intangible assets amortization

     18,063        18,429        36,099        36,858   

Restructuring and other

     259        (6,262     591        (8,087
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     155,325        152,065        304,334        296,581   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     85,908        157,441        90,316        203,851   

Interest income

     903        874        1,975        1,767   

Interest expense and other

     (6,454     (6,323     (13,360     (12,382
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     80,357        151,992        78,931        193,236   

Income tax provision

     13,801        40,605        5,786        48,285   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 66,556      $ 111,387      $ 73,145      $ 144,951   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per common share:

        

Basic

   $ 0.35      $ 0.60      $ 0.38      $ 0.78   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.28      $ 0.49      $ 0.31      $ 0.63   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common share—basic

     190,569        186,573        190,128        186,205   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common share—diluted

     234,909        229,646        234,833        230,399   
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes, together with the Notes to Consolidated Financial Statements included in Teradyne’s Annual Report on Form 10-K for the year ended December 31, 2012, are an integral part of the condensed consolidated financial statements.

 

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TERADYNE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

     For the Three Months
Ended
    For the Six Months
Ended
 
     June 30,
2013
    July 1,
2012
    June 30,
2013
    July 1,
2012
 
     (in thousands)  

Net income

   $ 66,556      $ 111,387      $ 73,145      $ 144,951   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income:

        

Available-for-sale marketable securities:

        

Net unrealized (losses) gains on marketable securities arising during period

     (2,268     452        (1,905     1,196   

Less: Reclassification adjustment for net gains included in net income

     (143     (24     (419     (490
  

 

 

   

 

 

   

 

 

   

 

 

 

Net change

     (2,411     428        (2,324     706   

Defined benefit pension and post-retirement plans:

        

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

     (109     (92     (217     (183
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income

     (2,520     336        (2,541     523   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 64,036      $ 111,723      $ 70,604      $ 145,474   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

The accompanying notes, together with the Notes to Consolidated Financial Statements included in Teradyne’s Annual Report on Form 10-K for the year ended December 31, 2012, are an integral part of the condensed consolidated financial statements.

 

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TERADYNE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     For the Six Months
Ended
 
         June 30,     
2013
        July 1,     
2012
 
     (in thousands)  

Cash flows from operating activities:

    

Net income

   $ 73,145      $ 144,951   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation

     27,552        25,578   

Amortization

     43,925        43,744   

Stock-based compensation

     18,077        21,396   

Provision for excess and obsolete inventory

     5,775        10,927   

Deferred taxes

     (15,230     15,937   

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

           6,089   

Contingent consideration adjustment

           (8,373

Tax benefit related to stock options and restricted stock units

     (1,584     (7,600

Retirement plans actuarial (gains) losses

     (1,359     3,054   

Impairment loss on property, plant and equipment

     1,074         

Other

     1,077        (471

Changes in operating assets and liabilities:

    

Accounts receivable

     (74,785     (216,794

Inventories

     26,373        21,446   

Prepayments and other assets

     (17,277     5,027   

Accounts payable and other accrued expenses

     (15,149     27,140   

Deferred revenue and customer advances

     (3,090     (6,198

Retirement plans contributions

     (2,511     (2,550

Accrued income taxes

     2,964        29,958   
  

 

 

   

 

 

 

Net cash provided by operating activities

     68,977        113,261   

Cash flows from investing activities:

    

Purchases of property, plant and equipment

     (50,798     (57,804

Purchases of marketable securities

     (458,070     (153,871

Proceeds from maturities of marketable securities

     268,546        86,192   

Proceeds from sales of marketable securities

     50,255        10,028   
  

 

 

   

 

 

 

Net cash used for investing activities

     (190,067     (115,455

Cash flows from financing activities:

    

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

     9,638        16,984   

Tax benefit related to stock options and restricted stock units

     1,584        7,600   

Payments of long-term debt

     (1,063     (1,246

Payments of contingent consideration

     (388     (5,824
  

 

 

   

 

 

 

Net cash provided by financing activities

     9,771        17,514   
  

 

 

   

 

 

 

(Decrease) increase in cash and cash equivalents

     (111,319     15,320   

Cash and cash equivalents at beginning of period

     338,920        573,736   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 227,601      $ 589,056   
  

 

 

   

 

 

 

The accompanying notes, together with the Notes to Consolidated Financial Statements included in Teradyne’s Annual Report on Form 10-K for the year ended December 31, 2012, are an integral part of the condensed consolidated financial statements.

 

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TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

A. The Company

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

 

   

semiconductor test (“Semiconductor Test”) systems;

 

   

wireless test (“Wireless Test”) systems; and

 

   

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

B. Accounting Policies

Basis of Presentation

The condensed consolidated interim financial statements include the accounts of Teradyne and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated. These interim financial statements are unaudited and reflect all normal recurring adjustments that are, in the opinion of management, necessary for the fair presentation of such interim financial statements. Certain prior year’s amounts were reclassified to conform to the current year presentation. The December 31, 2012 condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

The accompanying financial information should be read in conjunction with the consolidated financial statements and notes thereto contained in Teradyne’s Annual Report on Form 10-K, filed with the U.S. Security and Exchange Commission (“SEC”) on March 1, 2013, for the year ended December 31, 2012.

Preparation of Financial Statements and Use of Estimates

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

C. Recently Issued Accounting Pronouncements

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

In February 2013, the FASB issued ASU 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income” amending the disclosure requirements regarding the reporting of amounts reclassified out of accumulated other comprehensive income. The amendment does not change the current requirement for reporting net income or other comprehensive income, but requires

 

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additional disclosures about significant amounts reclassified out of accumulated other comprehensive income including the effect of the reclassification on the related statement of operations line items. The provisions of this ASU are effective for interim and annual periods beginning on or after January 1, 2013. Teradyne adopted this amendment effective January 1, 2013. See Note I “Accumulated Other Comprehensive Income.”

On July 18, 2013, the FASB issued ASU 2013-11,  “Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” Under this ASU, unrecognized tax benefits will be netted against all available same-jurisdiction loss or other tax carryforwards that would be utilized, rather than only against carryforwards that are created by unrecognized tax benefits. The provisions of this ASU are effective for interim and annual periods beginning on or after December 15, 2013. Teradyne does not expect this ASU to have a material impact on its financial position or results of operations.

D. Financial Instruments and Derivatives

Financial Instruments

Teradyne uses the market and income approach to value its financial instruments and there was no change in valuation techniques used by Teradyne during the three and six months ended June 30, 2013 and July 1, 2012. As defined in ASC 820-10, “Fair Value Measurements and Disclosures,” fair value is the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. ASC 820-10 requires that assets and liabilities are carried at fair value and are classified in one of the following three categories:

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

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

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

Most of Teradyne’s fixed income securities are classified as Level 2, with the exception of U.S. Treasury securities and investments in equity and debt mutual funds, which are classified as Level 1, and contingent consideration, which is classified as Level 3. The majority of Level 2 securities are 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.

There were no realized losses recorded in the three and six months ended June 30, 2013 and July 1, 2012. Realized gains recorded in the three and six months ended June 30, 2013 were $0.1 million and $0.3 million, respectively. Realized gains recorded in the three and six months ended July 1, 2012 were $0.3 million and $0.6 million, respectively. Realized gains are included in interest income.

During the six months ended June 30, 2013 and July 1, 2012, there were no transfers in or out of Level 1, Level 2 or Level 3 financial instruments.

 

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The following table sets forth by fair value hierarchy Teradyne’s financial assets and liabilities that were measured at fair value on a recurring basis as of June 30, 2013 and December 31, 2012.

 

     June 30, 2013  
     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

   $ 115,442       $ —         $ —        $ 115,442   

Cash equivalents

     107,988         4,171         —           112,159   

Available-for-sale securities:

           

U.S. Treasury securities

     382,871         —           —           382,871   

U.S. government agency securities

     —           261,598         —           261,598   

Commercial paper

     —           97,667         —           97,667   

Corporate debt securities

     —           50,161         —           50,161   

Equity and debt mutual funds

     11,360         —           —           11,360   

Certificates of deposit and time deposits

     —           257         —           257   

Non-U.S. government securities

     —           80         —           80   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     617,661         413,934         —           1,031,595   

Derivatives

     —           7         —           7   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 617,661      $ 413,941       $ —         $ 1,031,602   
  

 

 

    

 

 

    

 

 

    

 

 

 

Reported as follows:

 

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

Assets

           

Cash and cash equivalents

   $ 223,430       $ 4,171       $ —         $ 227,601   

Marketable securities

     289,230         211,918         —           501,148   

Long-term marketable securities

     105,001         197,845         —           302,846   

Prepayments and other current assets

     —           7         —           7   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 617,661      $ 413,941       $ —         $ 1,031,602   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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     December 31, 2012  
     Quoted Prices
in Active
Markets for
Identical
Instruments
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
     Total  
     (in thousands)  

Assets

           

Cash

   $ 139,354       $ —         $ —         $ 139,354   

Cash equivalents

     183,039         16,527         —           199,566   

Available-for-sale securities:

           

U.S. Treasury securities

     312,116         —           —           312,116   

U.S. government agency securities

     —           217,655         —           217,655   

Commercial paper

     —           70,434         —           70,434   

Corporate debt securities

     —           55,755         —           55,755   

Equity and debt mutual funds

     9,717         —           —           9,717   

Certificates of deposit and time deposits

     —           1,627         —           1,627   

Non-U.S. government securities

     —           84         —           84   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     644,226         362,082         —           1,006,308   

Derivatives

     —           121         —           121   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 644,226       $ 362,203       $ —         $ 1,006,429   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Contingent consideration

   $ —         $ —         $ 388       $ 388   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ —         $ 388       $ 388   
  

 

 

    

 

 

    

 

 

    

 

 

 

Reported as follows:

 

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

Assets

           

Cash and cash equivalents

   $ 322,393       $ 16,527       $ —         $ 338,920   

Marketable securities

     239,192         192,324         —           431,516   

Long-term marketable securities

     82,641         153,231         —           235,872   

Prepayments and other current assets

     —           121         —           121   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 644,226       $ 362,203       $ —         $ 1,006,429   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Other accrued liabilities

   $ —         $ —         $ 388       $ 388   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ —         $ —         $ 388       $ 388   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Changes in the fair value of Level 3 contingent consideration for the three and six months ended June 30, 2013 were as follows:

 

     Contingent consideration  
     (in thousands)  

Balance at December 31, 2012

   $ 388   

Payments

     (313
  

 

 

 

Balance at March 31, 2013

     75   

Payments

     (75
  

 

 

 

Balance at June 30, 2013

   $ —     
  

 

 

 

The carrying amounts and fair values of financial instruments at June 30, 2013 and December 31, 2012 were as follows:

 

     June 30, 2013      December 31, 2012  
     Carrying Value      Fair Value      Carrying Value      Fair Value  
     (in thousands)  

Cash and cash equivalents

   $ 227,601       $ 227,601       $ 338,920       $ 338,920   

Marketable securities

     803,994         803,994         667,388         667,388   

Convertible debt(1)

     177,532         610,726         169,896         589,000   

Japan loan

     2,033         2,033         3,491         3,491   

 

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

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

The following tables summarize the composition of available-for-sale marketable securities at June 30, 2013 and December 31, 2012:

 

     June 30, 2013  
     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

   $ 382,884       $ 144       $ (157   $ 382,871       $ 166,301   

U.S. government agency securities

     261,870         129         (401     261,598         130,310   

Commercial paper

     97,660         14         (7     97,667         18,722   

Corporate debt securities

     50,043         1,032         (914     50,161         11,926   

Equity and debt mutual funds

     9,761         1,647         (48     11,360         892   

Certificates of deposit and time deposits

     257         —           —          257         —     

Non-U.S. government securities

     80         —           —          80         —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
   $ 802,555       $ 2,966       $ (1,527   $ 803,994       $ 328,151   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

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Reported as follows:

 

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

Marketable securities

   $ 501,007       $ 170       $ (29   $ 501,148       $ 135,029   

Long-term marketable securities

     301,548         2,796         (1,498     302,846         193,122   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
   $ 802,555       $ 2,966       $ (1,527   $ 803,994       $ 328,151   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

     December 31, 2012  
     Available-for-Sale      Fair Market
Value of
Investments
with  Unrealized
Losses
 
     Cost      Unrealized
Gain
     Unrealized
(Loss)
    Fair Market
Value
    
     (in thousands)  

U.S. Treasury securities

   $ 311,915       $ 216       $ (15   $ 312,116       $ 1,018   

U.S. government agency securities

     217,396         262         (3     217,655         9,018   

Commercial paper

     70,431         9         (6     70,434         25,209   

Corporate debt securities

     53,405         2,414         (64     55,755         23,255   

Equity and debt mutual funds

     8,767         961         (11     9,717         600   

Certificates of deposit and time deposits

     1,627         —           —          1,627         —     

Non-U.S. government securities

     84         —           —          84         —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
   $ 663,625       $ 3,862       $ (99   $ 667,388       $ 59,100   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Reported as follows:

 

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

Marketable securities

   $ 431,324       $ 203       $ (11   $ 431,516       $ 41,110   

Long-term marketable securities

     232,301         3,659         (88     235,872         17,990   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
   $ 663,625       $ 3,862       $ (99   $ 667,388       $ 59,100   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

As of June 30, 2013, the fair market value of marketable securities with unrealized losses totaled $328.2 million. Of this value, $2.1 million had unrealized losses greater than one year and $326.1 million had unrealized losses less than one year. As of December 31, 2012, the fair market value of marketable securities with unrealized losses totaled $59.1 million. There were no unrealized losses greater than one year.

The contractual maturities of available-for-sale marketable securities at June 30, 2013 were as follows:

 

     June 30, 2013  
     Cost      Fair Market
Value
 
     (in thousands)  

Due within one year

   $ 501,007       $ 501,148   

Due after 1 year through 5 years

     275,543         276,815   

Due after 5 years through 10 years

     2,968         3,024   

Due after 10 years

     23,037         23,007   
  

 

 

    

 

 

 

Total

   $ 802,555       $ 803,994   
  

 

 

    

 

 

 

 

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Table of Contents

Derivatives

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

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

The notional amount of foreign exchange contracts hedging monetary assets and liabilities denominated in foreign currencies was $54.0 million and $64.1 million at June 30, 2013 and December 31, 2012, respectively.

The following table summarizes the fair value of derivative instruments at June 30, 2013 and December 31, 2012.

 

 

     Balance Sheet Location      June 30,
2013
     December 31,
2012
 
            (in thousands)  

Derivatives not designated as hedging instruments:

        

Foreign exchange contracts

     Prepayments and other current assets       $ 7      $ 121   
     

 

 

    

 

 

 
      $ 7       $ 121   
     

 

 

    

 

 

 

Teradyne had no offsetting foreign exchange contracts at June 30, 2013 and December 31, 2012.

The following table summarizes the effect of derivative instruments recognized in the statement of operations during the three and six months ended June 30, 2013 and July 1, 2012. The table does not reflect the corresponding (losses) gains from the remeasurement of the monetary assets and liabilities denominated in foreign currencies, which were $(1.8) million, $2.5 million, $(4.6) million, and $(0.4) million, respectively for the three and six months ended June 30, 2013 and July 1, 2012.

 

    Location of Gains (Losses)
Recognized in Statement
of Operations
    For the Three Months
Ended
    For the Six Months
Ended
 
    June 30,
2013
    July 1,
2012
    June 30,
2013
    July 1,
2012
 
          (in thousands)  

Derivatives not designated as hedging instruments:

         

Foreign exchange contracts

    Interest expense and other      $ 1,818      $ (2,360   $ 4,067      $ 520   
   

 

 

   

 

 

   

 

 

   

 

 

 
    $ 1,818      $ (2,360   $ 4,067      $ 520   
   

 

 

   

 

 

   

 

 

   

 

 

 

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

E. Debt

Loan Agreement

On March 31, 2009, Teradyne K.K., Teradyne’s wholly-owned subsidiary in Japan, entered into a loan agreement with a local bank in Japan to borrow approximately $10.0 million (the loan is denominated in Japanese Yen). The loan has a term of 5 years and a fixed interest rate of 0.8%. Approximately $6.0 million of

 

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the loan is collateralized by a real estate mortgage on Teradyne K.K.’s building and land in Kumamoto, Japan and approximately $4.0 million is unsecured. Teradyne, Inc. has guaranteed payment of the loan obligation. The loan is amortized over the term of the loan with semiannual principal payments of approximately $1.0 million payable on September 30 and March 30 each year. At June 30, 2013, the outstanding loan principal of approximately $2.0 million is included in current debt.

Convertible Senior Notes

In April 2009, Teradyne issued 4.50% convertible senior notes (the “Notes”) at an aggregate principal amount of $190 million. The Notes will mature on March 15, 2014, unless earlier repurchased by Teradyne or converted. The Notes are senior unsecured obligations and rank equally with all of Teradyne’s existing and future senior debt and senior to any of Teradyne’s subordinated debt.

The Notes may be converted, at the option of the holder, under certain circumstances and during certain periods, at an initial conversion rate of approximately 182.65 shares of Teradyne’s common stock per $1,000 principal amount of Notes, which is equivalent to an initial conversion price of approximately $5.48, a 25% conversion premium based on the last reported sale price of $4.38 per share of Teradyne’s common stock on March 31, 2009. The conversion rate is subject to adjustment in certain circumstances including but not limited to Teradyne issuing a cash or stock dividend or effecting a stock split.

During the three months ended June 30, 2013, the following circumstance occurred that allows holders to convert their Notes at their option prior to December 15, 2013: the last reported sale price of Teradyne’s common stock for 20 or more trading days in a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter exceeded 130% of the conversion price in effect on the last trading day of the immediately preceding calendar quarter. As of August 9, 2013, one holder exercised the option to convert two thousand dollars worth of Notes which Teradyne settled in cash.

Concurrently with the offering of the Notes, Teradyne entered into a convertible note hedge transaction with a strike price equal to the initial conversion price of the Notes, or approximately $5.48. The convertible note hedge allows Teradyne to receive shares of its common stock and/or cash related to the excess conversion value that it would pay to the holders of the Notes upon conversion. The convertible note hedges will cover, subject to customary antidilution adjustments, approximately 34,703,196 shares of Teradyne’s common stock. Teradyne paid approximately $64.6 million for the convertible note hedges.

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

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

The Notes are classified as current debt in the balance sheet at June 30, 2013. The tables below represent the components of Teradyne’s convertible senior notes:

 

     June 30,
2013
     December 31,
2012
 
     (in thousands)  

Debt principal

   $ 189,998       $ 190,000   

Unamortized debt discount

     12,466         20,104   
  

 

 

    

 

 

 

Net carrying amount of the convertible debt

   $ 177,532       $ 169,896   
  

 

 

    

 

 

 

 

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The interest expense on Teradyne’s convertible senior notes for the three and six months ended June 30, 2013 and July 1, 2012 was as follows:

 

     For the Three Months
Ended
     For the Six Months
Ended
 
     June 30, 
2013
     July 1, 
2012
     June 30, 
2013
     July 1, 
2012
 
     (in thousands)  

Contractual interest expense

   $ 2,137       $ 2,138       $ 4,274       $ 4,299   

Amortization of the discount component and debt issue fees

     4,087         3,592         8,044         7,071   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense on the convertible debt

   $ 6,224       $ 5,730       $ 12,318       $ 11,370   
  

 

 

    

 

 

    

 

 

    

 

 

 

As of June 30, 2013, the unamortized discount was $12.5 million, which will be amortized over the next nine months, and the carrying amount of the equity component was $63.4 million. As of June 30, 2013, the conversion rate was equal to the initial conversion price of approximately $5.48 per share and the if-converted value of the Notes was $609.7 million.

F. Deferred Revenue and Customer Advances

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

 

     June 30,
2013
     December 31,
2012
 
     (in thousands)  

Maintenance, training and extended warranty

   $ 56,499       $ 51,198   

Customer advances

     29,025         39,613   

Undelivered elements

     8,970         6,773   
  

 

 

    

 

 

 

Total deferred revenue and customer advances

   $ 94,494       $ 97,584   
  

 

 

    

 

 

 

G. Product Warranty

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

 

     For the Three Months
Ended
    For the Six Months
Ended
 
     June 30,
2013
    July 1,
2012
    June 30,
2013
    July 1,
2012
 
     (in thousands)  

Balance at beginning of period

   $ 7,075      $ 8,722      $ 9,786      $ 8,154   

Accruals for warranties issued during the period

     3,684        5,649        5,107        9,425   

Adjustments related to pre-existing warranties

     (869     403        (1,798     143   

Settlements made during the period

     (2,539     (3,727     (5,744     (6,675
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 7,351      $ 11,047      $ 7,351      $ 11,047   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

When Teradyne receives revenue for extended warranty beyond one year, it is deferred and recognized on a straight-line basis over the contract period. Related costs are expensed as incurred. The extended warranty balance below is included in short- and long-term deferred revenue and customer advances.

 

     For the Three Months
Ended
    For the Six Months
Ended
 
     June 30,
2013
    July 1,
2012
    June 30,
2013
    July 1,
2012
 
     (in thousands)  

Balance at beginning of period

   $ 28,599      $ 12,927      $ 26,987      $ 12,742   

Deferral of new extended warranty revenue

     8,734        9,935        12,205        12,282   

Recognition of extended warranty deferred revenue

     (2,479     (2,108     (4,338     (4,270
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 34,854      $ 20,754      $ 34,854      $ 20,754   
  

 

 

   

 

 

   

 

 

   

 

 

 

H. Stock-Based Compensation

Restricted stock unit awards granted to employees vest in equal installments over four years. A portion of restricted stock unit awards granted to executive officers is subject to time-based vesting and a portion is subject to performance-based vesting. The percentage level of performance satisfied for performance-based grants is assessed on or near the anniversary of the grant date and, in turn, that percentage level determines the number of performance-based restricted stock units available for vesting over the vesting period; portions of the performance-based grants not available for vesting will be forfeited. Stock options vest in equal installments over four years, and have a term of seven years from the date of grant.

During the six months ended June 30, 2013, Teradyne granted 1.9 million of restricted stock unit awards to employees at a weighted average grant date fair value of $16.60 and 0.2 million of service-based stock options to executive officers at a weighted average grant date fair value of $6.09.

During the six months ended July 1, 2012, Teradyne granted 1.6 million of restricted stock unit awards to employees at a weighted average grant date fair value of $16.83 and 0.2 million of service-based stock options to executive officers at a weighted average grant date fair value of $6.85.

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

 

     For the Six Months
Ended
 
     June 30,
2013
    July 1,
2012
 

Expected life (years)

     4.0        3.5   

Interest rate

     0.6     0.4

Volatility-historical

     46.8     56.0

Dividend yield

     0.0     0.0

Teradyne determined the stock options’ expected life based upon historical exercise data for executive officers, the age of the executive officers and the terms of the stock option grant. Volatility was determined using historical volatility for a period equal to the expected life. The risk-free rate was determined using the U.S. Treasury yield curve in effect at the time of grant.

Effective January 1, 2013, the price paid by employees for Teradyne’s common stock purchased through the employee stock purchase plan is equal to 85% of the stock price on the last business day of the purchase period.

 

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Table of Contents

During 2012, the price paid by employees for Teradyne’s common stock purchased through the employee stock purchase plan was equal to 85% of the lower of the stock price on the first or last business day of the purchase period.

The weighted-average fair value of employee stock purchase rights granted in the six months ended July 1, 2012 was $4.09. The fair value of the employees’ purchase rights granted in the six months ended July 1, 2012 was estimated using the Black-Scholes option-pricing model with the following assumptions:

 

     For the Six Months Ended
July 1,

2012
 

Expected life (years)

     0.5   

Interest rate

     0.06

Volatility-historical

     52.6

Dividend yield

     0.0

I. Accumulated Other Comprehensive Income

At June 30, 2013 and December 31, 2012, the accumulated other comprehensive income balances were as follows:

 

    June 30,
2013
    December 31,
2012
 
    (in thousands)  

Retirement plans prior service benefit, net of tax of $(125) and $(125)

  $ 2,678      $ 2,895   

Unrealized gains on marketable securities, net of tax of $835 and $835

    601        2,925   
 

 

 

   

 

 

 

Total accumulated other comprehensive income

  $ 3,279      $ 5,820   
 

 

 

   

 

 

 

Reclassifications out of accumulated other comprehensive income to the statement of operations for the three and six months ended June 30, 2013 and July 1, 2012, were as follows:

 

Details about Accumulated Other
Comprehensive Income Components

  For the Three Months Ended     For the Six Months Ended     Affected Line Item
in the Statements of Operations
 
    June 30,
2013
     July 1,
2012
    June 30,
2013
     July 1,
2012
       
    (in thousands)     (in thousands)        

Available-for-sale marketable securities

           

Unrealized gains

  $ 143       $ 24      $ 419       $ 490        Interest income   
 

 

 

    

 

 

   

 

 

    

 

 

   
  $ 143       $ 24      $ 419       $ 490        Net income   

Amortization of defined benefit pension and postretirement plans

        

Prior service benefit

  $ 109       $ 92      $ 217       $ 183        (a)   
 

 

 

    

 

 

   

 

 

    

 

 

   
  $ 109       $ 92      $ 217       $ 183        (a)   
 

 

 

    

 

 

   

 

 

    

 

 

   

Total reclassifications

  $ 252       $ 116      $ 636       $ 673        Net income   
 

 

 

    

 

 

   

 

 

    

 

 

   

 

(a) The amortization of prior service benefit is included in the computation of net periodic pension and postretirement benefit costs; see Note M “Retirement Plans.”

 

15


Table of Contents

J. Intangible Assets

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

 

     June 30, 2013  
     Gross
Carrying
Amount
     Accumulated
Amortization
     Net
Carrying
Amount
     Weighted
Average
Useful Life
 
     (in thousands)  

Developed technology

   $ 358,515       $ 168,339       $ 190,176         6.3 years   

Customer relationships and service and software maintenance contracts

     144,971         72,581         72,390         8.0 years   

Trade names and trademarks

     33,840         12,678         21,162         9.0 years   

Customer backlog

     1,000         1,000         —          0.4 years   
  

 

 

    

 

 

    

 

 

    

Total intangible assets

   $ 538,326       $ 254,598       $ 283,728         7.0 years   
  

 

 

    

 

 

    

 

 

    

 

     December 31, 2012  
     Gross
Carrying
Amount
     Accumulated
Amortization
     Net
Carrying
Amount
     Weighted
Average
Useful Life
 
     (in thousands)  

Developed technology

   $ 357,555       $ 143,126       $ 214,429         6.3 years   

Customer relationships and service and software maintenance contracts

     144,971         63,464         81,507         8.0 years   

Trade names and trademarks

     33,840         10,909         22,931         9.0 years   

Customer backlog

     1,000         1,000         —          0.4 years   
  

 

 

    

 

 

    

 

 

    

Total intangible assets

   $ 537,366       $ 218,499       $ 318,867         7.0 years   
  

 

 

    

 

 

    

 

 

    

Aggregate intangible asset amortization expense was $18.1 million and $36.1 million, respectively, for the three and six months ended June 30, 2013 and $18.4 million and $36.9 million, respectively, for the three and six months ended July 1, 2012. Estimated intangible asset amortization expense for each of the five succeeding fiscal years is as follows:

 

Year

   Amortization Expense  
     (in thousands)  

2013 (remainder)

   $ 36,113   

2014

     69,208   

2015

     52,458   

2016

     52,458   

2017

     46,299   

 

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Table of Contents

K. Net Income per Common Share

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

 

     For the Three Months
Ended
     For the Six Months
Ended
 
     June 30,
2013
     July 1,
2012
     June 30,
2013
     July 1,
2012
 
     (in thousands, except per share amounts)  

Net income for basic and diluted net income per share

   $ 66,556       $ 111,387       $ 73,145       $ 144,951   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares-basic

     190,569         186,573         190,128         186,205   

Effect of dilutive potential common shares:

           

Incremental shares from assumed conversion of convertible notes(1)

     23,266         22,301         23,326         22,651   

Convertible note hedge warrant shares(2)

     18,689         17,340         18,774         17,829   

Restricted stock units

     772         1,171         947         1,405   

Stock options

     1,554         2,160         1,615         2,247   

Employee stock purchase rights

     59         101         43         62   
  

 

 

    

 

 

    

 

 

    

 

 

 

Dilutive potential common shares

     44,340         43,073         44,705         44,194   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares-diluted

     234,909         229,646         234,833         230,399   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income per common share-basic

   $ 0.35       $ 0.60       $ 0.38       $ 0.78   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income per common share-diluted

   $ 0.28       $ 0.49       $ 0.31       $ 0.63   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Incremental shares from assumed conversion of the convertible notes for the three and six months ended June 30, 2013 and July 1, 2012 are calculated using the difference between the average Teradyne stock price for the period and the conversion price of $5.48, multiplied by the 34.7 million shares that would be issued upon conversion. The result of this calculation, representing the total intrinsic value of the convertible debt, is divided by the average Teradyne stock price for the period.
(2) Convertible note hedge warrant shares for the three and six months ended June 30, 2013 and July 1, 2012 are calculated using the difference between the average Teradyne stock price for the period and the warrant price of $7.67, multiplied by the 34.7 million shares that would be issued upon conversion. The result of this calculation, representing the total intrinsic value of the warrant, is divided by the average Teradyne stock price for the period.

The computation of diluted net income per common share for the three and six months ended June 30, 2013 excludes the effect of the potential exercise of stock options 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 the three and six months ended July 1, 2012 excludes the effect of the potential exercise of stock options to purchase approximately 0.3 million shares and restricted stock units of 0.1 million because the effect would have been anti-dilutive.

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

 

17


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L. Restructuring and Other

Other

During the three and six months ended July 1, 2012, due to a decrease in specified new product revenue through the December 31, 2012 earn-out period end date, Teradyne recorded a $6.5 million and $8.4 million, respectively, fair value adjustment to decrease the LitePoint acquisition contingent consideration.

Restructuring

In response to a downturn in the industry in 2008 and 2009, Teradyne initiated restructuring activities across its Semiconductor Test and Systems Test segments to reduce costs, principally through headcount reductions and facility consolidations. The remaining accrual for facility consolidations of $0.6 million is reflected in the other accrued liabilities on the balance sheet and is expected to be paid by October 2013.

 

     Facility Exit Costs  
     (in thousands)  

Pre-2012 Activities

  

Balance at December 31, 2011

   $ 1,862   

Cash payments

     (778
  

 

 

 

Balance at December 31, 2012

     1,084   

Change in estimate

     (105

Cash payments

     (183
  

 

 

 

Balance at March 31, 2013

     796   

Cash payments

     (199
  

 

 

 

Balance at June 30, 2013

   $ 597   
  

 

 

 

M. Retirement Plans

Defined Benefit Pension Plans

Teradyne has defined benefit pension plans covering a portion of domestic employees and employees of certain non-U.S. subsidiaries. Benefits under these plans are based on employees’ years of service and compensation. Teradyne’s funding policy is to make contributions to these plans in accordance with local laws and to the extent that such contributions are tax deductible. The assets of these plans consist primarily of fixed income and equity securities. In addition, Teradyne has an unfunded supplemental executive defined benefit plan in the United States to provide retirement benefits in excess of levels allowed by the Employment Retirement Income Security Act (“ERISA”) and the Internal Revenue Code (“IRC”), as well as unfunded foreign plans.

Net periodic pension (benefit) cost was comprised of the following:

 

     For the Three Months
Ended
    For the Six Months
Ended
 
     June 30, 
2013
    July 1, 
2012
    June 30, 
2013
    July 1, 
2012
 
     (in thousands)  

Service cost

   $ 852      $ 643      $ 1,686      $ 1,357   

Interest cost

     3,281        4,125        6,575        8,185   

Expected return on plan assets

     (3,631     (4,082     (7,261     (8,164

Amortization of unrecognized prior service cost

     41        58        82        116   

Actuarial (gain) loss

     (1,123     3,146        (1,047     3,146   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net periodic pension (benefit) cost

   $ (580   $ 3,890      $ 35      $ 4,640   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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In the six months ended June 30, 2013, Teradyne contributed $0.9 million to the U.S. supplemental executive defined benefit pension plan and $1.0 million to certain qualified plans for non-U.S. subsidiaries.

Postretirement Benefit Plan

In addition to receiving pension benefits, U.S. Teradyne employees who meet early retirement eligibility requirements as of their termination dates may participate in Teradyne’s Welfare Plan, which includes death, and medical and dental benefits up to age 65. Death benefits provide a fixed sum to retirees’ survivors and are available to all retirees. Substantially all of Teradyne’s current U.S. employees could become eligible for these benefits, and the existing benefit obligation relates primarily to those employees.

Teradyne’s net periodic postretirement benefit was comprised of the following:

 

 

     For the Three Months
Ended
    For the Six Months
Ended
 
     June 30,
2013
    July 1,
2012
    June 30,
2013
    July 1,
2012
 
     (in thousands)  

Service cost

   $ 21      $ 15      $ 37      $ 34   

Interest cost

     84        108        171        219   

Amortization of unrecognized prior service benefit

     (150     (150     (299     (299

Actuarial gain

     (236     (92     (236     (92
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net periodic post-retirement benefit

   $ (281   $ (119   $ (327   $ (138
  

 

 

   

 

 

   

 

 

   

 

 

 

N. Commitments and Contingencies

Purchase Commitments

As of June 30, 2013, Teradyne had entered into purchase commitments for certain components and materials. The purchase commitments aggregate to approximately $265.0 million, of which $261.7 million is for less than one year.

Legal Claims

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

On May 17, 2013, Boston Semi Equipment (“BSE”) filed a complaint against Teradyne for antitrust violations and unfair business practices alleging that Teradyne is excluding BSE from competing in the market for the sale of reconfigured Teradyne equipment and the market for the repair of Teradyne equipment. BSE seeks unspecified damages and an injunction. Teradyne has filed a motion to dismiss the complaint. Teradyne believes it has meritorious defenses against this claim and intends to vigorously defend against it. While it is not possible to predict or determine the outcomes of the unsettled claims or to provide possible ranges of losses that may arise, Teradyne believes the potential losses associated with this action are unlikely to have a material adverse effect on its consolidated financial position, but could possibly be material to its consolidated results of operations and of cash flows of any one period.

O. Income Taxes

The effective tax rate for the three months ended June 30, 2013 and July 1, 2012 was 17% and 27%, respectively. The decrease in Teradyne’s tax rate for the three months ended June 30, 2013 compared to the three

 

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months ended July 1, 2012, was primarily the result of the 2013 U.S. federal research and development tax credit and utilization of foreign tax credits.

The effective tax rate for the six months ended June 30, 2013 and July 1, 2012 was 7% and 25%, retrospectively. The decrease in Teradyne’s tax rate for the six months ended June 30, 2013 compared to the six months ended July 1, 2012, was primarily the result of recognizing the tax benefit attributable to the 2012 U.S. federal research and development tax credit retrospectively reinstated under the American Taxpayer Relief Act of 2012, 2013 U.S. federal research and development tax credit and utilization of foreign tax credits.

The effective tax rate for the three months and six months ended June 30, 2013 is lower than the 35% U.S. statutory federal tax rate primarily due to the research and development credit and the effect of foreign income taxed at a rate lower than the U.S. statutory rate

P. Segment Information

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

Teradyne evaluates performance based on several factors, of which the primary financial measure is business segment income before income taxes. The accounting policies of the business segments are the same as those described in Note B “Accounting Policies” in Teradyne’s Annual Report on Form 10-K for the year ended December 31, 2012. Segment information is as follows:

 

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

Three months ended June 30, 2013:

         

Net revenues

  $ 292,431      $ 99,386      $ 37,072      $ —       $ 428,889   

Income (loss) before income taxes(1)(2)

    58,606        23,913        779        (2,941     80,357   

Three months ended July 1, 2012:

         

Net revenues

  $ 365,058      $ 111,928      $ 71,298      $ —       $ 548,284   

Income (loss) before income taxes(1)(2)

    91,249        51,139        11,628        (2,024     151,992   

Six months ended June 30, 2013:

         

Net revenues

  $ 503,937      $ 132,984      $ 72,335      $ —       $ 709,256   

Income (loss) before income taxes(1)(2)

    72,372        13,916        2,309        (9,666     78,931   

Six months ended July 1, 2012:

         

Net revenues

  $ 632,646      $ 143,256      $ 169,050      $ —       $ 944,952   

Income (loss) before income taxes(1)(2)

    126,247        38,827        33,606        (5,444     193,236   

 

(1) Pension and post retirement actuarial gains and losses, interest income, and interest expense and other are included in Corporate and Eliminations.

 

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(2) Included in the income (loss) before income taxes for each of the segments are charges and credits for the three and six months ended June 30, 2013 and July 1, 2012 that include restructuring and other, and provision for excess and obsolete inventory, as follows:

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

 

     For the Three Months
Ended
     For the Six Months
Ended
 
     June 30, 
2013
     July 1, 
2012
     June 30, 
2013
     July 1, 
2012
 
     (in thousands)  

Cost of revenues—provision for excess and obsolete inventory

   $ 287       $ 5,957       $ 500       $ 6,169   

Restructuring and other

     —           286         —           286   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 287       $ 6,243       $ 500       $ 6,455   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

    For the Three Months
Ended
    For the Six Months
Ended
 
    June 30, 
2013
    July 1, 
2012
    June 30, 
2013
    July 1, 
2012
 
    (in thousands)  

Cost of revenues—provision for excess and obsolete inventory

  $ 1,398      $ 1,643      $ 4,066      $ 2,116   

Cost of revenues—inventory step-up

    —          1,218        —          6,089   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 1,398      $ 2,861      $ 4,066      $ 8,205   
 

 

 

   

 

 

   

 

 

   

 

 

 

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

 

    For the Three Months
Ended
    For the Six Months
Ended
 
    June 30, 
2013
    July 1, 
2012
    June 30, 
2013
    July 1, 
2012
 
    (in thousands)  

Cost of revenues—provision for excess and obsolete inventory

  $ 290      $ 1,753      $ 1,209      $ 2,642   

Restructuring and other

    131        —          375        —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 421      $ 1,753      $ 1,584      $ 2,642   
 

 

 

   

 

 

   

 

 

   

 

 

 

Included in Corporate and Eliminations are credits for the following:

 

     For the Three Months
Ended
    For the Six Months
Ended
 
     June 30, 
2013
     July 1, 
2012
    June 30, 
2013
     July 1, 
2012
 
     (in thousands)  

Restructuring and other

   $ —         $ (6,548   $ —         $ (8,406
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ —         $ (6,548   $ —         $ (8,406
  

 

 

    

 

 

   

 

 

    

 

 

 

Q. Stock Repurchase Program

In November 2010, Teradyne’s board of directors authorized a stock repurchase program for up to $200 million. In the three and six months ended June 30, 2013 and July 1, 2012, Teradyne did not repurchase any shares. Cumulatively, as of June 30, 2013, Teradyne has repurchased 2.6 million shares of common stock for $31.2 million at an average price of $11.84.

 

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Table of Contents
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

Statements in this Quarterly Report on Form 10-Q which are not historical facts, so called “forward looking statements,” are made pursuant to the safe harbor provisions of Section 21E of the Securities Exchange Act of 1934, as amended. Investors are cautioned that all forward looking statements involve risks and uncertainties, including those detailed in our filings with the Securities and Exchange Commission. See also Part II, Item 1A of this Quarterly Report on Form 10-Q and Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2012. Readers are cautioned not to place undue reliance on these forward-looking statements which reflect management’s analysis only as of the date hereof. We assume no obligation to update these forward-looking statements to reflect actual results or changes in factors or assumptions affecting forward-looking statements, except as may be required by law.

Overview

We are a leading global supplier of automatic test equipment. We design, develop, manufacture and sell automatic test systems and solutions used to test semiconductors, wireless products, hard disk drives and circuit boards in the consumer electronics, wireless, automotive, industrial, computing, communications and aerospace and defense industries. Our automatic test equipment products and services include:

 

   

semiconductor test (“Semiconductor Test”) systems;

 

   

wireless test (“Wireless Test”) systems; and

 

   

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

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

In 2011, we acquired LitePoint Corporation (“LitePoint”) to expand our product portfolio of test equipment in the wireless test sector. LitePoint designs, develops, and supports advanced wireless test solutions for the development and manufacturing of wireless devices, including smart phones, tablets, notebooks/laptops, personal computer peripherals, and other Wi-Fi and cellular enabled devices. LitePoint is our Wireless Test segment.

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 since our customers often delay or accelerate purchases in reaction to changes in their businesses and to demand fluctuations in the semiconductor industry. Historically, these demand fluctuations have resulted in significant variations in our results of operations.

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

Critical Accounting Policies and Estimates

We have identified the policies which are critical to understanding our business and our results of operations. There have been no significant changes during the six months ended June 30, 2013 to the items disclosed as our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012.

 

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Table of Contents

SELECTED RELATIONSHIPS WITHIN THE CONDENSED CONSOLIDATED

STATEMENTS OF OPERATIONS

 

     For the Three Months
Ended
    For the Six Months
Ended
 
     June 30,
2013
    July 1,
2012
    June 30,
2013
    July 1,
2012
 

Percentage of total net revenues:

        

Net revenues:

        

Products

     85     88     81     86

Services

     15        12        19        14   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net revenues

     100        100        100        100   

Cost of revenues:

        

Cost of products

     37        38        36        40   

Cost of services

     7        6        8        7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenues

     44        44        44        47   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     56        56        56        53   

Operating expenses:

        

Engineering and development

     16        12        18        14   

Selling and administrative

     16        13        19        15   

Acquired intangible asset amortization

     4        3        5        4   

Restructuring and other

     —          (1     —          (1
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     36        28        43        31   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     20        29        13        22   

Interest income

     —          —          —          —     

Interest expense and other

     (2     (1     (2     (1
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     19        28        11        20   

Income tax provision

     3        7        1        5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     16     20     10     15
  

 

 

   

 

 

   

 

 

   

 

 

 

Results of Operations

Second Quarter 2013 Compared to Second Quarter 2012

Book to Bill Ratio

Book to bill ratio is calculated as net bookings divided by net sales. Book to bill ratio by reportable segment was as follows:

 

     For the Three Months
Ended
 
     June 30,
2013
     July 1,
2012
 

Semiconductor Test

     1.2         1.0   

Wireless Test

     0.9         1.7   

Systems Test

     0.7         0.6   

Total Company

     1.1         1.1   

 

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Table of Contents

Revenues

Net revenues by reportable segment were as follows:

 

     For the Three Months
Ended
     Dollar
Change
 
     June 30,
2013
     July 1,
2012
    
     (in millions)  

Semiconductor Test

   $ 292.4       $ 365.1       $ (72.7

Wireless Test

     99.4         111.9         (12.5

Systems Test

     37.1         71.3         (34.2
  

 

 

    

 

 

    

 

 

 
   $ 428.9       $ 548.3       $ (119.4
  

 

 

    

 

 

    

 

 

 

The decrease in Semiconductor Test revenues of $72.7 million or 20% from the three months ended July 1, 2012 to the three months ended June 30, 2013, was primarily due to a decrease in system-on-a-chip (“SOC”) test product sales. The decrease in Systems Test revenue of $34.2 million or 48% was primarily due to a decrease in sales due to lower product volume in Storage Test systems. The decrease in Storage Test systems sales was due to lower hard disk drive demand primarily from lower shipments of personal computers, a trend which is expected to continue. The decrease in Wireless Test revenue of $12.5 million or 11% was primarily due to lower volume.

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

 

     For the Three Months
Ended
 
     June 30,
2013
    July 1,
2012
 

China

     28     24

Taiwan

     19        23   

United States

     12        12   

Singapore

     11        5   

Korea

     8        12   

Europe

     6        4   

Malaysia

     6        5   

Japan

     5        4   

Philippines

     2        8   

Thailand

     1        3   

Rest of World

     2        —     
  

 

 

   

 

 

 
     100     100
  

 

 

   

 

 

 

Gross Profit

Our gross profit was as follows:

 

     For the Three Months
Ended
    Dollar/Point
Change
 
     June 30,
2013
    July 1,
2012
   
     (in millions)  

Gross Profit

   $ 241.2      $ 309.5      $ (68.3

Percent of Total Revenue

     56.2     56.4     (0.2

Gross profit as a percent of revenue decreased by 0.2 percentage points from the three months ended July 1, 2012 to the three months ended June 30, 2013. This decrease was the result of a decrease of 2.3 points due to

 

24


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lower sales volume, a decrease of 1.5 points related to product mix primarily from lower Wireless Test systems sales, partially offset by lower excess and obsolete inventory provisions.

We assess the carrying value of our inventory on a quarterly basis by estimating future demand and comparing that demand against on-hand and on-order inventory positions. Forecasted revenue information is obtained from the sales and marketing groups and incorporates factors such as backlog and future revenue demand. This quarterly process identifies obsolete and excess inventory. Obsolete inventory, which represents items for which there is no demand, is fully reserved. Excess inventory, which represents inventory items that are not expected to be consumed during the next twelve quarters, is written-down to estimated net realizable value.

During the three months ended June 30, 2013, we recorded an inventory provision of $2.0 million included in cost of revenues, due to downward revisions to previously forecasted demand levels. Of the $2.0 million of total excess and obsolete provisions, $1.4 million was related to Wireless Test, $0.3 million was related to Systems Test, and $0.3 million was related to Semiconductor Test.

During the three months ended July 1, 2012, we recorded an inventory provision of $9.4 million included in cost of revenues, due to the following factors:

 

   

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

 

   

A $2.6 million inventory write-down as a result of product transition related to the Flex Test Platform in Semiconductor Test.

 

   

The remainder of the charge of $3.6 million primarily reflects downward revisions to previously forecasted demand levels, of which $1.8 million was related to Systems Test, $1.6 million was related to Wireless Test and $0.2 million was related to Semiconductor Test.

During the three months ended June 30, 2013 and July 1, 2012, we scrapped $2.3 million and $2.8 million of inventory, respectively. During the three months ended June 30, 2013, we sold $3.1 million of previously written-down or written-off inventory. As of June 30, 2013, we had inventory related reserves for inventory which had been written-down or written-off totaling $140.0 million. We have no pre-determined timeline to scrap the remaining inventory.

Engineering and Development

Engineering and development expenses were as follows:

 

     For the Three Months
Ended
    Dollar
Change
 
     June 30,
2013
    July 1,
2012
   
     (in millions)  

Engineering and Development

   $ 67.8      $ 67.8      $ —     

Percent of Total Revenue

     15.8     12.4  

Engineering and development expenses remained flat as higher spending in Semiconductor Test was offset by lower variable compensation.

 

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Selling and Administrative

Selling and administrative expenses were as follows:

 

     For the Three Months
Ended
    Dollar
Change
 
     June 30,
2013
    July 1,
2012
   
     (in millions)  

Selling and Administrative

   $ 69.2      $ 72.1      $ (2.9

Percent of Total Revenue

     16.1     13.1  

The decrease of $2.9 million in selling and administrative expenses from the three months ended July 1, 2012 to the three months ended June 30, 2013, was due primarily to lower variable compensation, partially offset by increased sales and marketing spending in Semiconductor Test and Wireless Test.

Restructuring and Other

During the three months ended July 1, 2012, due to a decrease in specified new product revenue through the December 31, 2012 earn-out period end date, we recorded a $6.5 million fair value adjustment to decrease the LitePoint acquisition contingent consideration.

Interest and Other

Interest expense and other increased by $0.1 million from the three months ended July 1, 2012 to the three months ended June 30, 2013, due primarily to higher interest expense from increased convertible debt discount amortization.

Income Taxes

The effective tax rate for the three months ended June 30, 2013 and July 1, 2012 was 17% and 27%, respectively. The decrease in our tax rate for the three months ended June 30, 2013 compared to the three months ended July 1, 2012, was primarily the result of the 2013 U.S. federal research and development tax credit and utilization of foreign tax credits.

The effective tax rate for the three months ended June 30, 2013 is lower than the 35% U.S. statutory federal tax rate primarily due to the research and development credit and the effect of foreign income taxed at a rate lower than the U.S. statutory rate.

On a quarterly basis, we evaluate the realizability of our deferred tax assets by jurisdiction and assess the need for a valuation allowance. At June 30, 2013, we believe that we will ultimately realize the deferred tax assets recorded on our condensed consolidated balance sheet. However, should we believe that it is more likely than not that our deferred tax assets would not be realized, our tax provision would increase in the period in which we determined that the realizability was not likely. We consider the probability of future taxable income and our historical profitability, among other factors, in assessing the realizability of our deferred tax assets.

 

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Six Months of 2013 Compared to Six Months of 2012

Revenues

Net revenues by reportable segment were as follows:

 

     For the Six Months
Ended
     Dollar
Change
 
     June 30,
2013
     July 1,
2012
    
     (in millions)  

Semiconductor Test

   $ 504.0       $ 632.6       $ (128.6

Wireless Test

     133.0         143.3         (10.3

Systems Test

     72.3         169.1         (96.8
  

 

 

    

 

 

    

 

 

 
   $ 709.3       $ 945.0       $ (235.7
  

 

 

    

 

 

    

 

 

 

The decrease of $128.6 million or 20% in Semiconductor Test revenues from the six months ended July 1, 2012 to the six months ended June 30, 2013, was primarily due to a decrease in system-on-a-chip (“SOC”) test product sales. The decrease in Systems Test revenue of $96.8 million or 57% was primarily due to a decrease in sales due to lower product volume in Storage Test systems. The decrease in Storage Test systems sales was due to lower hard disk drive demand primarily from lower shipments of personal computers, a trend which is expected to continue. The decrease in Wireless Test revenue of $10.3 million or 7% was primarily due to lower volume.

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

 

     For the Six Months
Ended
 
     June 30,
2013
    July 1,
2012
 

China

     24     20

Taiwan

     18        19   

United States

     15        12   

Singapore

     10        5   

Korea

     8        13   

Europe

     7        5   

Malaysia

     6        5   

Japan

     5        6   

Philippines

     3        7   

Thailand

     2        7   

Rest of World

     2        1   
  

 

 

   

 

 

 
     100     100
  

 

 

   

 

 

 

Gross Profit

Our gross profit was as follows:

 

     For the Six Months
Ended
    Dollar/Point
Change
 
     June 30,
2013
    July 1,
2012
   
     (in millions)  

Gross Profit

   $ 394.7      $ 500.4      $ (105.7

Percent of Total Revenue

     55.6     53.0     2.6   

 

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Gross profit as a percent of revenue increased by 2.6 percentage points from the six months ended July 1, 2012 to the six months ended June 30, 2013, primarily due to a favorable product mix in SOC Semiconductor Test and lower Storage Test systems sales.

We assess the carrying value of our inventory on a quarterly basis by estimating future demand and comparing that demand against on-hand and on-order inventory positions. Forecasted revenue information is obtained from the sales and marketing groups and incorporates factors such as backlog and future revenue demand. This quarterly process identifies obsolete and excess inventory. Obsolete inventory, which represents items for which there is no demand, is fully reserved. Excess inventory, which represents inventory items that are not expected to be consumed during the next twelve quarters, is written-down to estimated net realizable value.

During the six months ended June 30, 2013, we recorded an inventory provision of $5.8 million included in cost of revenues, due to the downward revisions to previously forecasted demand levels. Of the $5.8 million of total excess and obsolete provisions, $4.1 million was related to Wireless Test, $1.2 million was related to Systems Test, and $0.5 million was related to Semiconductor Test.

During the six months ended July 1, 2012, we recorded an inventory provision of $10.9 million included in cost of revenues, due to the following factors:

 

   

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

 

   

A $2.6 million inventory write-down as a result of product transition related to the Flex Test Platform in Semiconductor Test.

 

   

The remainder of the charge of $5.1 million primarily reflects downward revisions to previously forecasted demand levels, of which $2.6 million was related to Systems Test, $2.1 million was related to Wireless Test and $0.4 million was related to Semiconductor Test.

During the six months ended June 30, 2013 and July 1, 2012, we scrapped $2.9 million and $6.9 million of inventory, respectively. During the six months ended June 30, 2013 and July 1, 2012, we sold $4.8 million and $1.3 million, respectively, of previously written-down or written-off inventory. As of June 30, 2013, we had inventory related reserves for inventory which had been written-down or written-off totaling $140.0 million. We have no pre-determined timeline to scrap the remaining inventory.

Engineering and Development

Engineering and development expenses were as follows:

 

     For the Six Months
Ended
    Dollar
Change
 
     June 30,
2013
    July 1,
2012
   
     (in millions)  

Engineering and Development

   $ 130.5      $ 129.1      $ 1.4   

Percent of Total Revenue

     18.4     13.7  

The increase of $1.4 million in engineering and development expenses from the six months ended July 1, 2012 to the six months ended June 30, 2013, was due primarily to increased spending in Semiconductor Test, partially offset by lower variable compensation.

 

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Table of Contents

Selling and Administrative

Selling and administrative expenses were as follows:

 

     For the Six Months
Ended
    Dollar
Change
 
     June 30,
2013
    July 1,
2012
   
     (in millions)  

Selling and Administrative

   $ 137.1      $ 138.7      $ (1.6

Percent of Total Revenue

     19.3     14.7  

The decrease of $1.6 million in selling and administrative expenses from the six months ended July 1, 2012 to the six months ended June 30, 2013, was due primarily to lower variable compensation, partially offset by increased sales and marketing spending in Semiconductor Test and Wireless Test.

Restructuring and Other

During the six months ended July 1, 2012, due to a decrease in specified new product revenue through the December 31, 2012 earn-out period end date, we recorded an $8.4 million fair value adjustment to decrease the LitePoint acquisition contingent consideration.

Interest and Other

Interest income increased by $0.2 million from the six months ended July 1, 2012 to the six months ended June 30, 2013, due primarily to higher cash and marketable securities balances in the first six months of 2013. Interest expense and other increased by $1.0 million from the six months ended July 1, 2012 to the six months ended June 30, 2013, due primarily to higher interest expense from increased convertible debt discount amortization.

Income Taxes

The effective tax rate for the six months ended June 30, 2013 and July 1, 2012 was 7% and 25%, retrospectively. The decrease in our tax rate for the six months ended June 30, 2013 compared to the six months ended July 1, 2012, was primarily the result of recognizing the tax benefit attributable to the 2012 U.S. federal research and development tax credit retrospectively reinstated under the American Taxpayer Relief Act of 2012, 2013 U.S. federal research and development tax credit and utilization of foreign tax credits.

The effective tax rate for the six months ended June 30, 2013 is lower than the 35% U.S. statutory federal tax rate primarily due to the research and development credit and the effect of foreign income taxed at a rate lower than the U.S. statutory rate.

On a quarterly basis, we evaluate the realizability of our deferred tax assets by jurisdiction and assess the need for a valuation allowance. At June 30, 2013, we believe that we will ultimately realize the deferred tax assets recorded on our condensed consolidated balance sheet. However, should we believe that it is more likely than not that our deferred tax assets would not be realized, our tax provision would increase in the period in which we determined that the realizability was not likely. We consider the probability of future taxable income and our historical profitability, among other factors, in assessing the realizability of our deferred tax assets.

 

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Table of Contents

Contractual Obligations

The following table reflects our contractual obligations at June 30, 2013:

 

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

Purchase Obligations

   $ 265,022       $ 261,701       $ 3,321       $ —        $ —        $ —    

Debt Obligations

     192,031         192,031         —          —          —          —    

Retirement Plan Contributions

     52,041         5,092         10,648         10,848         25,453         —    

Operating Lease Obligations

     49,461         13,748         20,079         9,098         6,536         —    

Interest on Debt

     8,571         8,571         —          —          —          —    

Other Long-Term Liabilities Reflected on the Balance Sheet under GAAP(1)

     80,602         —          18,240         —          —          62,362   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 647,728       $ 481,143       $ 52,288       $ 19,946       $ 31,989       $ 62,362   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

Liquidity and Capital Resources

Our cash, cash equivalents and marketable securities balances increased by $25.3 million in the six months ended June 30, 2013, to $1,032 million. Cash activity for the six months ended June 30, 2013 and July 1, 2012 was as follows:

 

     For the Six Months
Ended
 
     June 30,
2013
    July 1,
2012
 
     (in millions)  

Cash provided by operating activities:

    

Net income, adjusted for non-cash items

   $ 152.5      $ 255.2   

Change in operating assets and liabilities

     (83.5     (141.9
  

 

 

   

 

 

 

Total cash provided by operating activities

     69.0        113.3   
  

 

 

   

 

 

 

Total cash used for investing activities

     (190.1     (115.5
  

 

 

   

 

 

 

Total cash provided by financing activities

     9.8        17.5   
  

 

 

   

 

 

 

(Decrease) increase in cash and cash equivalents

   $ (111.3   $ 15.3   
  

 

 

   

 

 

 

In the six months ended June 30, 2013, changes in operating assets and liabilities used cash of $83.5 million. This was due to a $65.7 million increase in operating assets and an $17.8 million decrease in operating liabilities.

The increase in operating assets was due to a $74.8 million increase in accounts receivable due to higher sales volume, a $17.3 million increase in other assets primarily due to an increase in prepayments, partially offset by a $26.4 million decrease in inventories. The decrease in operating liabilities was due to a $24.0 million decrease in accrued employee compensation due primarily to variable compensation and employee stock awards payroll taxes payments, a $3.1 million decrease in customer advance payments and deferred revenue, and $2.5 million of retirement plan contributions, partially offset by a $8.8 million increase in accounts payable due to increased sales volume and a $3.0 million increase in accrued income taxes.

 

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Investing activities during the six months ended June 30, 2013 used cash of $190.1 million, due to $458.1 million used for purchases of marketable securities and $50.8 million used for purchases of property, plant and equipment, partially offset by proceeds from maturities and sales of marketable securities that provided cash of $268.5 million and $50.3 million, respectively.

Financing activities during the six months ended June 30, 2013 provided cash of $9.8 million, $9.6 million was from the issuance of common stock under stock option and stock purchase plans and $1.6 million from the tax benefit related to stock options and restricted stock units, partially offset by $0.4 million of cash used for payments related to LitePoint acquisition contingent consideration and $1.1 million of cash used for payments on long-term debt related to the Japan loan.

In the six months ended July 1, 2012, changes in operating assets and liabilities used cash of $141.9 million. This was due to a $190.3 million increase in operating assets, partially offset by a $48.4 million increase in operating liabilities.

The increase in operating assets was due to a $216.8 million increase in accounts receivable resulting from higher sales volume, partially offset by a $21.4 million decrease in inventories and a $5.0 million decrease in other assets primarily due to a decrease in prepayments. The increase in operating liabilities was due to a $47.5 million increase in accounts payable due to increased sales volume, a $30.0 million increase in accrues income taxes, and a $1.1 million increase in other accrued liabilities, partially offset by a $21.4 million decrease in accrued employee compensation due primarily to variable compensation and employee stock awards payroll taxes payments, a $6.2 million decrease in customer advance payments and deferred revenue and $2.6 million of retirement plan contributions.

Investing activities during the six months ended July 1, 2012 used cash of $115.5 million, due to $153.9 million used for purchases of marketable securities and $57.8 million used for purchases of property, plant and equipment, partially offset by proceeds from maturities and sales of marketable securities that provided cash of $86.2 million and $10.0 million, respectively.

Financing activities during the six months ended July 1, 2012 provided cash of $17.5 million, $17.0 million was from the issuance of common stock under stock option and stock purchase plans, and $7.6 million from the tax benefit related to stock options and restricted stock units, partially offset by $5.8 million of cash used for payments related to LitePoint acquisition contingent consideration and $1.2 million of cash used for payments on long-term debt related to the Japan loan.

We believe our cash, cash equivalents and marketable securities balance will be sufficient to meet working capital and expenditure needs for at least the next twelve months. The amount of cash, cash equivalents and marketable securities in the U.S. and our operations in the U.S. provide sufficient liquidity to fund our business activities in the U.S. We have approximately $330 million of cash outside the U.S. that if repatriated would incur additional taxes. Inflation has not had a significant long-term impact on earnings.

Equity Compensation Plans

As discussed in Note P “Stock Based Compensation” in our 2012 Form 10-K, we have a 1996 Employee Stock Purchase Plan and a 2006 Equity and Cash Compensation Incentive Plan (the “2006 Equity Plan”).

The purpose of the 1996 Employee Stock Purchase Plan is to encourage stock ownership by all eligible employees of Teradyne. The purpose of the 2006 Equity Plan is to provide equity ownership and compensation opportunities in Teradyne to our employees, officers, directors, consultants and/or advisors. Both plans were approved by our shareholders.

 

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Table of Contents

Recently Issued Accounting Pronouncements

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

In February 2013, the Financial Accounting Standards Board (FASB) issued ASU 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income” amending the disclosure requirements regarding the reporting of amounts reclassified out of accumulated other comprehensive income. The amendment does not change the current requirement for reporting net income or other comprehensive income, but requires additional disclosures about significant amounts reclassified out of accumulated other comprehensive income including the effect of the reclassification on the related statement of operations line items. The provisions of this ASU are effective for interim and annual periods beginning on or after January 1, 2013. We adopted this amendment effective January 1, 2013. See Note I “Accumulated Other Comprehensive Income.”

On July 18, 2013, the FASB issued ASU 2013-11, “ Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” This ASU, unrecognized tax benefits will be netted against all available same-jurisdiction loss or other tax carryforwards that would be utilized, rather than only against carryforwards that are created by unrecognized tax benefits. The provisions of this ASU are effective for interim and annual periods beginning on or after December 15, 2013. We do not expect this ASU to have a material impact on our financial position or results of operations.

 

Item 3: Quantitative and Qualitative Disclosures about Market Risk

For “Quantitative and Qualitative Disclosures about Market Risk” affecting Teradyne, see Item 7a, “Quantitative and Qualitative Disclosures about Market Risks,” in our Annual Report on Form 10-K filed with the SEC on March 1, 2013. There were no material changes in our exposure to market risk from those set forth in our Annual Report for the fiscal year ended December 31, 2012.

 

Item 4: Controls and Procedures

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

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

 

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Table of Contents

PART II. OTHER INFORMATION

 

Item 1: Legal Proceedings

We are subject to various legal proceedings and claims which have arisen in the ordinary course of business. In the opinion of management, other than as set forth herein, the ultimate disposition of these matters will not have a material adverse effect on our results of operations, financial condition or cash flows.

On May 17, 2013, Boston Semi Equipment (“BSE”) filed a complaint against us for antitrust violations and unfair business practices alleging that we are excluding BSE from competing in the market for the sale of reconfigured Teradyne equipment and the market for the repair of Teradyne equipment. BSE seeks unspecified damages and an injunction. We filed a motion to dismiss the complaint. We believe we have meritorious defenses against this claim and intend to vigorously defend against it. While it is not possible to predict or determine the outcomes of the unsettled claims or to provide possible ranges of losses that may arise, we believe the potential losses associated with this action is unlikely to have a material adverse effect on our consolidated financial position, but could possibly be material to our consolidated results of operations and of cash flows of any one period.

 

Item 1A: Risk Factors

In addition to the other information set forth in this Form 10-Q, you should carefully consider the factors discussed in Part I, “Item 1A: Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2012, which could materially affect our business, financial condition or future results. The risk factors described in our Annual Report on Form 10-K remain applicable to our business.

The risks described in our Annual Report on Form 10-K are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

A breach of our operational or security systems could negatively affect our business and results of operations.

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.

 

Item 2: Unregistered Sales of Equity Securities and Use of Proceeds

In November 2010, Teradyne’s board of directors authorized a stock repurchase program for up to $200 million. Cumulatively, as of June 30, 2013, we have repurchased 2.6 million shares of common stock for $31.2 million at an average price of $11.84.

 

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Table of Contents

The following table includes information with respect to repurchases we made of our common stock during the three months ended June 30, 2013 (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
 

April 1, 2013 – April 28, 2013

     —         $ —           —         $ 168,825   

April 29, 2013 – May 26, 2013

     —         $ —           —         $ 168,825   

May 27, 2013 – June 30, 2013

     —         $ —           —         $ 168,825   
  

 

 

    

 

 

    

 

 

    

 

 

 
     —         $ —           —         $ 168,825   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

Item 4: Mine Safety Disclosures

Not Applicable

 

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Table of Contents
Item 6: Exhibits

 

Exhibit
Number

  

Description

  10.1    2006 Equity and Cash Compensation Incentive Plan, as amended (filed as Appendix A to Teradyne’s Notice and Proxy Statement on Schedule 14A filed with the Commission on April 11, 2013 (File No.001-06462) and incorporated herein by reference). *
  10.2    1996 Employee Stock Purchase Plan, as amended (filed as Appendix B to Teradyne’s Notice and Proxy Statement on Schedule 14A filed with the Commission on April 11, 2013 (File No.001-06462) and incorporated herein by reference). *
  31.1    Certification of Principal Executive Officer, pursuant to Rule 13a-14(a) of Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
  31.2    Certification of Principal Financial Officer, pursuant to Rule 13a-14(a) of Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
  32.1    Certification pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)
  32.2    Certification pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)
101.INS    XBRL Instance Document
101.SCH    XBRL Taxonomy Extension Schema Document
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document
101.LAB    XBRL Taxonomy Extension Label Linkbase Document
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document

 

* Management contract or compensatory plan.

 

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Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

TERADYNE, INC.
Registrant

/ S /    G REGORY R. B EECHER

Gregory R. Beecher

Vice President,

Chief Financial Officer and Treasurer

(Duly Authorized Officer

and Principal Financial Officer)

August 9, 2013

 

36

Exhibit 31.1

CERTIFICATIONS

I, Michael A. Bradley, certify that:

1. I have reviewed this quarterly report on Form 10-Q 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 registrant’s other certifying officer 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 registrant’s 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 registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s 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 registrant’s internal control over financial reporting.

Date: August 9, 2013

 

By:  

/ S /    M ICHAEL A. B RADLEY

 

Michael A. Bradley

Chief Executive Officer

Exhibit 31.2

CERTIFICATIONS

I, Gregory R. Beecher, certify that:

1. I have reviewed this quarterly report on Form 10-Q 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 registrant’s other certifying officer 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 registrant’s 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 registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s 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 registrant’s internal control over financial reporting.

Date: August 9, 2013

 

By:  

/ S /    G REGORY R. B EECHER

 

Gregory R. Beecher

Chief Financial Officer and Treasurer

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 Quarterly Report of Teradyne, Inc. (the “Company”) on Form 10-Q for the period ending June 30, 2013 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Michael A. Bradley, Chief Executive Officer of the Company, certify pursuant to 18 U.S.C (S) 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 as of the dates and for the periods expressed in the Report.

 

/ S /    M ICHAEL A. B RADLEY

Michael A. Bradley

Chief Executive Officer

August 9, 2013

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 Quarterly Report of Teradyne, Inc. (the “Company”) on Form 10-Q for the period ending June 30, 2013 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 (S) 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 as of the dates and for the periods expressed in the Report.

 

/ S /    G REGORY R. B EECHER

Gregory R. Beecher

Chief Financial Officer and Treasurer

August 9, 2013