Teradyne, Inc.
TERADYNE, INC (Form: 10-Q, Received: 05/08/2015 14:52:14)
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 April 5, 2015

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 May 1, 2015 was 214,540,853 shares.

 

 

 


Table of Contents

TERADYNE, INC.

INDEX

 

         Page No.  
PART I. FINANCIAL INFORMATION   
Item 1.  

Financial Statements (Unaudited):

  
 

Condensed Consolidated Balance Sheets as of April 5, 2015 and December 31, 2014

     1   
 

Condensed Consolidated Statements of Operations for the Three Months Ended April 5, 2015 and March 30, 2014

     2   
 

Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended April 5, 2015 and March 30, 2014

     3   
 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended April 5, 2015 and March 30, 2014

     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

     28   
Item 4.  

Controls and Procedures

     28   
PART II. OTHER INFORMATION   
Item 1.  

Legal Proceedings

     29   
Item 1A.  

Risk Factors

     29   
Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

     29   
Item 4.  

Mine Safety Disclosures

     30   
Item 6.  

Exhibits

     31   


Table of Contents

PART I

 

Item 1: Financial Statements

TERADYNE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

     April 5,
2015
     December 31,
2014
 
    

(in thousands,

except per share information)

 
ASSETS      

Current assets:

     

Cash and cash equivalents

   $ 218,945       $ 294,256   

Marketable securities

     649,219         533,787   

Accounts receivable, less allowance for doubtful accounts of $2,430 and $2,491 at April 5, 2015 and December 31, 2014, respectively

     175,783         151,034   

Inventories, net:

     

Parts

     72,134         70,821   

Assemblies in process

     15,927         10,347   

Finished goods

     32,990         23,961   
  

 

 

    

 

 

 
  121,051      105,129   

Deferred tax assets

  56,715      57,239   

Prepayments

  92,484      95,819   

Other current assets

  6,959      6,582   
  

 

 

    

 

 

 

Total current assets

  1,321,156      1,243,846   
  

 

 

    

 

 

 

Property, plant and equipment, net

  308,264      329,038   

Marketable securities

  402,722      470,789   

Deferred tax assets

  6,683      7,494   

Other assets

  10,280      10,419   

Retirement plans assets

  12,847      12,896   

Intangible assets, net

  176,792      190,600   

Goodwill

  273,438      273,438   
  

 

 

    

 

 

 

Total assets

$ 2,512,182    $ 2,538,520   
  

 

 

    

 

 

 
LIABILITIES

Current liabilities:

Accounts payable

$ 59,831    $ 47,763   

Accrued employees’ compensation and withholdings

  65,396      100,994   

Deferred revenue and customer advances

  74,252      71,603   

Other accrued liabilities

  68,943      51,997   

Accrued income taxes

  24,711      20,049   
  

 

 

    

 

 

 

Total current liabilities

  293,133      292,406   
  

 

 

    

 

 

 

Long-term deferred revenue and customer advances

  18,318      19,929   

Retirement plans liabilities

  106,224      108,460   

Deferred tax liabilities

  20,149      23,315   

Long-term other accrued liabilities

  17,136      15,430   
  

 

 

    

 

 

 

Total liabilities

  454,960      459,540   
  

 

 

    

 

 

 

Commitments and contingencies (See Note O)

SHAREHOLDERS’ EQUITY

Common stock, $0.125 par value, 1,000,000 shares authorized, 215,902 shares and 216,613 shares issued and outstanding at April 5, 2015 and December 31, 2014, respectively

  26,988      27,077   

Additional paid-in capital

  1,444,579      1,437,135   

Accumulated other comprehensive income

  6,084      4,689   

Retained earnings

  579,571      610,079   
  

 

 

    

 

 

 

Total shareholders’ equity

  2,057,222      2,078,980   
  

 

 

    

 

 

 

Total liabilities and shareholders’ equity

$ 2,512,182    $ 2,538,520   
  

 

 

    

 

 

 

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, 2014, are an integral part of the condensed

consolidated financial statements.

 

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Table of Contents

TERADYNE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

     For the Three Months
Ended
 
     April 5,
2015
    March 30,
2014
 
    

(in thousands,

except per share amount)

 

Revenues:

    

Products

   $ 272,325      $ 255,386   

Services

     70,076        65,624   
  

 

 

   

 

 

 

Total revenues

  342,401      321,010   

Cost of revenues:

Cost of products

  118,996      124,448   

Cost of services

  30,982      29,515   
  

 

 

   

 

 

 

Total cost of revenues (exclusive of acquired intangible assets amortization shown separately below)

  149,978      153,963   
  

 

 

   

 

 

 

Gross profit

  192,423      167,047   

Operating expenses:

Engineering and development

  71,450      67,085   

Selling and administrative

  72,041      78,003   

Acquired intangible assets amortization

  13,808      18,271   
  

 

 

   

 

 

 

Total operating expenses

  157,299      163,359   
  

 

 

   

 

 

 

Income from operations

  35,124      3,688   

Non-operating (income) expenses:

Interest income

  (1,816   (1,036

Interest expense

  162      6,417   

Other (income) expense, net

  (5,660   180   
  

 

 

   

 

 

 

Income (loss) before income taxes

  42,438      (1,873

Income tax provision (benefit)

  9,651      (2,802
  

 

 

   

 

 

 

Net income

$ 32,787    $ 929   
  

 

 

   

 

 

 

Net income per common share:

Basic

$ 0.15    $ 0.00   
  

 

 

   

 

 

 

Diluted

$ 0.15    $ 0.00   
  

 

 

   

 

 

 

Weighted average common shares—basic

  217,187      193,311   
  

 

 

   

 

 

 

Weighted average common shares—diluted

  218,812      236,484   
  

 

 

   

 

 

 

Cash dividend declared per common share

$ 0.06    $ 0.06   
  

 

 

   

 

 

 

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, 2014, are an integral part of the condensed

consolidated financial statements.

 

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TERADYNE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

     For the Three Months
Ended
 
     April 5,
2015
    March 30,
2014
 
     (in thousands)  

Net income

   $ 32,787      $ 929   
  

 

 

   

 

 

 

Other comprehensive income (loss), net of tax:

Unrealized gains on marketable securities:

Unrealized gains on marketable securities arising during period, net of tax of $704, $654

  1,799      1,139   

Less: Reclassification adjustment for gains included in net income, net of tax of $(169), $(102)

  (330   (176
  

 

 

   

 

 

 
  1,469      963   

Defined benefit pension and post-retirement plans:

Amortization of prior service benefit included in net periodic pension and post-retirement expense/income, net of tax of $(42), $(42)

  (74   (73
  

 

 

   

 

 

 

Other comprehensive income

  1,395      890   
  

 

 

   

 

 

 

Comprehensive income

$ 34,182    $ 1,819   
  

 

 

   

 

 

 

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, 2014, 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 Three Months
Ended
 
     April 5,
2015
    March 30,
2014
 
     (in thousands)  

Cash flows from operating activities:

    

Net income

   $ 32,787      $ 929   

Adjustments to reconcile net income to net cash provided by (used for) operating activities:

    

Depreciation

     19,345        15,259   

Amortization

     15,139        23,925   

Stock-based compensation

     7,963        15,233   

Provision for excess and obsolete inventory

     1,440        10,039   

Gain from the sale of an equity investment

     (4,782     —     

Deferred taxes

     (1,831     12,699   

Other

     (1,417     (141

Changes in operating assets and liabilities:

    

Accounts receivable

     (24,749     (58,882

Inventories

     5,960        2,635   

Prepayments and other assets

     3,146        (628

Accounts payable and other accrued expenses

     (20,150     (45,487

Deferred revenue and customer advances

     1,038        9,632   

Retirement plans contributions

     (1,019     (1,425

Accrued income taxes

     4,662        (9,609
  

 

 

   

 

 

 

Net cash provided by (used for) operating activities

  37,532      (25,821

Cash flows from investing activities:

Purchases of property, plant and equipment

  (21,149   (31,197

Purchases of available-for-sale marketable securities

  (335,635   (257,260

Proceeds from maturities of available-for-sale marketable securities

  140,222      280,322   

Proceeds from sales of available-for-sale marketable securities

  148,639      101,363   

Proceeds from the sale of an equity investment

  4,782      —     

Proceeds from life insurance

  1,098      4,391   
  

 

 

   

 

 

 

Net cash (used for) provided by investing activities

  (62,043   97,619   

Cash flows from financing activities:

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

  8,899      10,165   

Repurchase of common stock

  (46,650   —     

Dividend payments

  (13,049   —     

Payments of long-term debt

  —        (190,975
  

 

 

   

 

 

 

Net cash used for financing activities

  (50,800   (180,810
  

 

 

   

 

 

 

Decrease in cash and cash equivalents

  (75,311   (109,012

Cash and cash equivalents at beginning of period

  294,256      341,638   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

$ 218,945    $ 232,626   
  

 

 

   

 

 

 

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, 2014, are an integral part of the condensed

consolidated financial statements.

 

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TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

A. The Company

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

 

    semiconductor test (“Semiconductor Test”) systems;

 

    wireless test (“Wireless Test”) systems; and

 

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

B. Accounting Policies

Basis of Presentation

The consolidated interim financial statements include the accounts of Teradyne and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated. These interim financial statements are unaudited and reflect all normal recurring adjustments that are, in the opinion of management, necessary for the fair presentation of such interim financial statements. Certain prior year amounts were reclassified to conform to the current year presentation. The December 31, 2014 condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

The accompanying financial information should be read in conjunction with the consolidated financial statements and notes thereto contained in Teradyne’s Annual Report on Form 10-K, filed with the U.S. Securities and Exchange Commission (“SEC”) on February 27, 2015, for the year ended December 31, 2014.

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 May 2014, the FASB issued Accounting Standard Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606),” which will replace numerous requirements in U.S. GAAP, including industry-specific requirements, and provide companies with a single revenue recognition model for recognizing revenue from contracts with customers. The core principle of the new standard is that a company should recognize revenue to show the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled to in exchange for those goods or services. On April 1, 2015, FASB proposed a deferral of the effective date of the new revenue standard by one year, until January 1, 2018. For Teradyne, the standard will be effective in the first quarter of 2018. Early adoption is permitted but not before the original effective date (that is, annual periods beginning after December 15, 2016). The two permitted transition methods under the new standard are the full retrospective method, in which case the standard would be applied to each prior reporting period presented, or the modified retrospective method, in which case the cumulative effect of applying the standard would be recognized at the date of initial application. Teradyne has not yet selected a transition method. Teradyne is currently evaluating the impact of this ASU on its financial position and results of operations.

D. ACQUISITIONS

Business

Avionics Interface Technologies, LLC.

On October 31, 2014, Teradyne acquired substantially all of the assets and liabilities of Avionics Interface Technologies, LLC (“AIT”) located in Omaha, Nebraska. AIT is a supplier of equipment for testing state-of-the-art data communication buses. The acquisition of AIT complements Teradyne’s Defense/Aerospace line of bus test instrumentation for commercial and defense avionics systems. AIT is included in Teradyne’s System Test segment.

The total purchase price of $21.2 million consisted of $19.4 million of cash paid to acquire AIT’s assets and liabilities and $1.8 million in fair value of contingent consideration payable upon achievement of certain revenue and gross margin targets in 2015 and 2016. The maximum amount of contingent consideration that could be paid is $2.1 million.

 

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The valuation of the contingent consideration utilized the following assumptions: (1) probability of meeting each target; (2) expected timing of meeting each target; and (3) discount rate reflecting the risk associated with the expected payments. The probabilities and timing for each target were estimated based on a review of the historical and projected results. A discount rate of 4.7 percent was selected based on the estimated cost of debt for the business, as a significant portion of the risk in achieving the contingent consideration was captured in the probabilities assigned to meeting each target.

The AIT acquisition was accounted for as a business combination and, accordingly, the results have been included in Teradyne’s consolidated results of operations from the date of acquisition. The allocation of the total purchase price to AIT’s net tangible and identifiable intangible assets was based on their estimated fair values as of the acquisition date. The excess of the purchase price over the identifiable intangible and net tangible assets in the amount of $10.5 million was allocated to goodwill, which is deductible for tax purposes.

The following table represents the allocation of the final purchase price:

 

     Purchase Price Allocation  
     (in thousands)  

Goodwill

   $ 10,516   

Intangible assets

     9,080   

Tangible assets acquired and liabilities assumed:

  

Other current assets

     2,452   

Non-current assets

     359   

Accounts payable and current liabilities

     (1,164
  

 

 

 

Total purchase price

$ 21,243   
  

 

 

 

Teradyne estimated the fair value of intangible assets using the income approach. Acquired intangible assets are amortized on a straight-line basis over their estimated useful lives. Components of these intangible assets and their estimated useful lives at the acquisition date are as follows:

 

     Fair Value      Estimated Useful
Life
 
     (in thousands)      (in years)  

Customer relationships

   $ 5,630         5.0   

Developed technology

     2,580         4.8   

Trademark

     380         5.0   

Non-compete agreement

     320         4.0   

Customer order backlog

     170         0.3   
  

 

 

    

Total intangible assets

$ 9,080      4.8   
  

 

 

    

E. Financial Instruments and Derivatives

Cash Equivalents

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

Marketable Securities

Teradyne accounts for its investments in debt and equity securities in accordance with the provisions of Accounting Standards Codification (“ASC”) 320-10, “ Investments—Debt and Equity Securities. ” ASC 320-10 requires that certain debt and equity securities be classified into one of three categories; trading, available-for-sale or held-to-maturity securities. As of April 5, 2015, Teradyne’s investments in debt and equity securities were classified as available-for-sale and recorded at their fair market value.

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

 

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

 

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

 

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

 

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Teradyne uses the market and income approach techniques to value its financial instruments and there were no changes in valuation techniques during the three months ended April 5, 2015. As defined in ASC 820-10 “ Fair Value Measurements and Disclosures, ” fair value is the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. ASC 820-10 requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:

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

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

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

Teradyne’s available-for-sale fixed income securities are classified as Level 2. Contingent consideration is classified as Level 3. The vast 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 months ended April 5, 2015 and March 30, 2014. Realized gains recorded in the three months ended April 5, 2015 and March 30, 2014, were $0.5 million and $0.3 million, respectively. Realized gains are included in interest income. Unrealized gains and losses are included in accumulated other comprehensive income (loss). The cost of securities sold is based on the specific identification method.

During the three months ended April 5, 2015 and March 30, 2014, there were no transfers in or out of Level 1, Level 2 or Level 3 financial instruments.

The following table sets forth by fair value hierarchy Teradyne’s financial assets and liabilities that were measured at fair value on a recurring basis as of April 5, 2015 and December 31, 2014.

 

                                                                                                           
     April 5, 2015  
     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

   $ 115,982       $ —        $ —        $ 115,982   

Cash equivalents

     100,794         2,169         —          102,963   

Available-for-sale securities:

           

U.S. Treasury securities

     —          427,119         —          427,119   

U.S. government agency securities

     —          232,187         —          232,187   

Corporate debt securities

     —          160,877         —          160,877   

Commercial paper

     —          130,298         —          130,298   

Certificates of deposit and time deposits

     —          87,052         —          87,052   

Equity and debt mutual funds

     13,962         —          —          13,962   

Non-U.S. government securities

     —          446         —          446   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 230,738    $ 1,040,148    $ —     $ 1,270,886   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

Contingent consideration

$ —     $ —     $ 3,350    $ 3,350   

Derivatives

  —       19      —       19   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ —     $ 19    $ 3,350    $ 3,369   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Reported as follows:

 

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

Assets

           

Cash and cash equivalents

   $ 216,776       $ 2,169       $ —        $ 218,945   

Marketable securities

     —          649,219         —          649,219   

Long-term marketable securities

     13,962         388,760         —          402,722   
  

 

 

    

 

 

    

 

 

    

 

 

 
$ 230,738    $ 1,040,148    $ —     $ 1,270,886   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

Other accrued liabilities

$ —     $ 19   $ 3,350    $ 3,369   
  

 

 

    

 

 

    

 

 

    

 

 

 
$ —     $ 19   $ 3,350    $ 3,369   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

                                                                                                           
     December 31, 2014  
     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

   $ 111,471       $ —        $ —        $ 111,471   

Cash equivalents

     160,218         22,567         —          182,785   

Available-for-sale securities:

           

U.S. Treasury securities

     —           402,154         —          402,154   

U.S. government agency securities

     —          258,502         —          258,502   

Corporate debt securities

     —          141,467         —          141,467   

Commercial paper

     —          140,638         —          140,638   

Certificates of deposit and time deposits

     —          49,036         —          49,036   

Equity and debt mutual funds

     12,333         —          —          12,333   

Non-U.S. government securities

     —          446         —          446   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 284,022    $ 1,014,810    $ —     $ 1,298,832   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

Contingent consideration

$ —     $ —     $ 3,350    $ 3,350   

Derivatives

  —        149      —        149   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ —     $ 149   $ 3,350    $ 3,499   
  

 

 

    

 

 

    

 

 

    

 

 

 

Reported as follows:

 

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

Assets

           

Cash and cash equivalents

   $ 271,689       $ 22,567       $ —        $ 294,256   

Marketable securities

     —           533,787         —          533,787   

Long-term marketable securities

     12,333         458,456         —          470,789   
  

 

 

    

 

 

    

 

 

    

 

 

 
$ 284,022    $ 1,014,810    $ —     $ 1,298,832   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

Other current liabilities

$ —     $ 149    $ 1,750    $ 1,899   

Long-term other accrued liabilities

  —       —       1,600      1,600   
  

 

 

    

 

 

    

 

 

    

 

 

 
$ —     $ 149    $ 3,350    $ 3,499   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Changes in the fair value of Level 3 contingent consideration for the three months ended April 5, 2015 and March 30, 2014 were as follows:

 

     Contingent Consideration  
     (in thousands)  

Balance at December 31, 2013

   $ 2,230   

Payments

     —    
  

 

 

 

Balance at March 30, 2014

  2,230   

Payments

  —    
  

 

 

 

Balance at June 29, 2014

  2,230   

Fair value adjustment

  (630
  

 

 

 

Balance at September 28, 2014

  1,600   

Acquisition of AIT

  1,750   
  

 

 

 

Balance at December 31, 2014

  3,350   

Payments

  —    
  

 

 

 

Balance at April 5, 2015

$ 3,350   
  

 

 

 

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

 

Liability

   April 5,
2015
Fair Value
     Valuation
Technique
  

Unobservable Inputs

   Weighted
Average
 
     (in thousands)                   
Contingent consideration (ZTEC)    $ 1,600       Income approach-
discounted cash
flow
  

Revenue earn-out-probability for calendar year 2015 revenue

     0
        

Customer orders-probability of achievement during earn-out period (acquisition date through December 31, 2015)

     40
        

Discount rate for revenue earn-out

     N/A   
        

Discount rate for customer orders

     5.2

Contingent consideration

(AIT)

   $ 1,750       Income approach-
discounted cash
flow
  

Revenue earn-out-probability for calendar year 2015 and 2016

     90
         Discount rate for revenue earn-out      4.7

The significant unobservable inputs used in the ZTEC Instruments, Inc. (“ZTEC”) fair value measurement of contingent consideration are the probabilities of successful achievement of calendar year 2015 revenue and customer orders, and a discount rate. Increases or decreases in the revenue and customer order probabilities and the period in which results will be achieved would result in a higher or lower fair value measurement. The maximum amount of contingent consideration in connection with the acquisition of ZTEC that could be paid is $5.0 million. The earn-out period in connection with the ZTEC acquisition ends on December 31, 2015.

The significant unobservable inputs used in the AIT fair value measurement of contingent considerations are the probabilities of successful achievement of calendar year 2015 and 2016 revenue, and a discount rate. Increases or decreases in the revenue probabilities and the period in which results will be achieved would result in a higher or lower fair value measurement. The maximum amount of contingent consideration in connection with the acquisition of AIT that could be paid is $2.1 million. The earn-out periods in connection with the AIT acquisition end on December 31, 2015 and December 31, 2016, respectively.

 

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The carrying amounts and fair values of Teradyne’s financial instruments at April 5, 2015 and December 31, 2014 were as follows:

 

     April 5, 2015      December 31, 2014  
     Carrying Value      Fair Value      Carrying Value      Fair Value  
     (in thousands)  

Cash and cash equivalents

   $ 218,945       $ 218,945       $ 294,256       $ 294,256   

Marketable securities

     1,051,941         1,051,941         1,004,576         1,004,576   

Contingent consideration

     3,350         3,350         3,350         3,350   

Derivatives

     19         19         149         149   

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

The following tables summarize the composition of available-for-sale marketable securities at April 5, 2015 and December 31, 2014:

 

     April 5, 2015  
     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

   $ 426,637       $ 625       $ (143   $ 427,119       $ 217,722   

U.S. government agency securities

     231,747         443         (3     232,187         15,032   

Corporate debt securities

     158,051         2,986         (160     160,877         51,495   

Commercial paper

     130,227         72         (1     130,298         8,945   

Certificates of deposit and time deposits

     87,043         24        (15     87,052         25,705   

Equity and debt mutual funds

     11,823         2,147         (8     13,962         161   

Non-U.S. government securities

     446         —          —         446         —    
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
$ 1,045,974    $ 6,297    $ (330 $ 1,051,941    $ 319,060   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Reported as follows:

 

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

Marketable securities

   $ 649,066       $ 224       $ (71   $ 649,219       $ 223,414   

Long-term marketable securities

     396,908         6,073         (259     402,722         95,646   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
$ 1,045,974    $ 6,297    $ (330 $ 1,051,941    $ 319,060   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

     December 31, 2014  
     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

   $ 402,197       $ 362       $ (405   $ 402,154       $ 317,771   

U.S. government agency securities

     258,452         135         (85     258,502         104,642   

Corporate debt securities

     139,374         2,414         (321     141,467         96,998   

Commercial paper

     140,616         26         (4     140,638         41,747   

Certificates of deposit and time deposits

     49,048         11         (23     49,036         20,684   

Equity and debt mutual funds

     10,492         1,870         (29 )     12,333         1,234   

Non-U.S. government securities

     446         —          —         446         —    
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
$ 1,000,625    $ 4,818    $ (867 $ 1,004,576    $ 583,076   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

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Table of Contents

Reported as follows:

 

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

Marketable securities

   $ 533,833       $ 99       $ (145   $ 533,787       $ 240,234   

Long-term marketable securities

     466,792         4,719         (722     470,789         342,842   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
$ 1,000,625    $ 4,818    $ (867 $ 1,004,576    $ 583,076   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

As of April 5, 2015, the fair market value of investments with unrealized losses was $319.1 million. Of this value, $0.3 million had unrealized losses greater than one year and $318.8 million had unrealized losses less than one year. As of December 31, 2014, the fair market value of investments with unrealized losses was $583.1 million. Of this value, $2.3 million had unrealized losses greater than one year and $580.8 million had unrealized losses less than one year.

Teradyne reviews its investments to identify and evaluate investments that have an indication of possible impairment. Based on this review, Teradyne determined that the unrealized losses related to these investments, at April 5, 2015 and December 31, 2014, were temporary.

The contractual maturities of investments held at April 5, 2015 were as follows:

 

     April 5, 2015  
     Cost      Fair Market
Value
 
     (in thousands)  

Due within one year

   $ 649,066       $ 649,219   

Due after 1 year through 5 years

     343,120         343,744   

Due after 5 years through 10 years

     5,663         5,952   

Due after 10 years

     36,302         39,064   
  

 

 

    

 

 

 

Total

$ 1,034,151    $ 1,037,979   
  

 

 

    

 

 

 

Contractual maturities of investments held at April 5, 2015 exclude equity and debt mutual funds as they do not have contractual maturity dates.

Derivatives

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

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

The notional amount of foreign currency forward contracts was $96.2 million and $73.0 million at April 5, 2015 and December 31, 2014, respectively. The fair value of the outstanding contracts was $0.0 million and a loss of $0.1 million at April 5, 2015 and December 31, 2014, respectively.

 

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Table of Contents

In the three months ended April 5, 2015 and March 30, 2014, Teradyne recorded net realized losses of $3.4 million and $0.7 million, respectively, related to foreign currency forward contracts hedging net monetary positions. Gains and losses on foreign currency forward contracts and foreign currency remeasurement gains and losses on monetary assets and liabilities are included in other (income) expense, net.

The following table summarizes the fair value of derivative instruments at April 5, 2015 and December 31, 2014:

 

     Balance Sheet Location    April 5,
2015
     December 31,
2014
 
          (in thousands)  

Derivatives not designated as hedging instruments:

        

Foreign exchange contracts

   Other current liabilities    $ 19       $ 149   
     

 

 

    

 

 

 

Total derivatives

$ 19    $ 149   
     

 

 

    

 

 

 

Teradyne had no offsetting foreign exchange contracts at April 5, 2015 and December 31, 2014.

The following table summarizes the effect of derivative instruments recognized in the statement of operations during the three months ended April 5, 2015 and March 30, 2014. The table does not reflect the corresponding gains from the remeasurement of the monetary assets and liabilities denominated in foreign currencies. For the three months ended April 5, 2015 and March 30, 2014, gains from the remeasurement of the monetary assets and liabilities denominated in foreign currencies were $4.3 million and $0.6 million, respectively.

 

         For the Three
Months Ended
 
   Location of Losses (Gains)
Recognized in Statements of Operations
  April 5,
2015
     March 30,
2014
 
         (in thousands)  

Derivatives not designated as hedging instruments:

       

Foreign exchange contracts

   Other (income) expense, net   $ 3,425       $ 747   
    

 

 

    

 

 

 

Total derivatives

$ 3,425    $ 747   
    

 

 

    

 

 

 

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

F. 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 was denominated in Japanese Yen). The loan had a term of 5 years and a fixed interest rate of 0.8%. Approximately $6.0 million of the loan was collateralized by a real estate mortgage on Teradyne K.K.’s building and land in Kumamoto, Japan and approximately $4.0 million was unsecured. Teradyne, Inc. guaranteed payment of the loan obligation. The principal was amortized over the term of the loan with semiannual principal payments of approximately $1.0 million on September 30 and March 30 each year. The final principal and interest payments were made during the three months ended March 30, 2014.

Convertible Senior Notes

On March 31, 2009, Teradyne entered into an underwriting agreement regarding a public offering of $175.0 million aggregate principal amount of 4.50% convertible senior notes due March 15, 2014 (the “Notes”). On April 1, 2009, the underwriters exercised their option to purchase an additional $15.0 million aggregate principal amount of the Notes for a total aggregate principal amount of $190.0 million. The Notes bore interest at a rate of 4.50% per annum, payable semi-annually in arrears on March 15 and September 15 of each year, beginning on September 15, 2009. The Notes had a maturity date of March 15, 2014. Substantially all of the Notes were converted prior to March 15, 2014 and were “net share settled,” meaning that the holders received, for each $1,000 in principal amount of Notes, $1,000 in cash and approximately 131.95 shares of Teradyne common stock (calculated by taking 182.65 shares, being the fixed number specified in the Notes purchase agreement, less 50.7 shares). The 50.7 shares were determined, as specified in the Notes purchase agreement, by dividing the $1,000 principal amount by the $19.74 average trading price of Teradyne’s common stock over the 25 day trading period from February 5, 2014 to March 12, 2014.

Teradyne satisfied the Notes “net share settlement” by paying the aggregate principal amount of $190 million in cash and issuing 25.1 million shares of common stock. On March 13, 2014, Teradyne exercised its call option agreement entered into with Goldman, Sachs & Co. (the “hedge counterparty”) at the time of issuance of the Notes and received 25.1 million shares of Teradyne’s common stock, which Teradyne retired.

 

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Table of Contents

From June 17, 2014 to September 17, 2014, the hedge counterparty exercised its warrant agreement entered into with Teradyne at the time of issuance of the Notes. The warrants were net share settled. In 2014, Teradyne issued 21.2 million shares of its common stock for warrants exercised at a weighted average strike price of $7.6348 per share.

The interest expense on Teradyne’s convertible senior notes for the three months ended April 5, 2015 and March 30, 2014 was as follows:

 

     For the Three Months
Ended
 
     April 5,
2015
     March 30,
2014
 
     (in thousands)  

Contractual interest expense on the coupon

   $ —         $ 1,757   

Amortization of the discount component and debt issue fees recognized as interest expense

     —           4,493   
  

 

 

    

 

 

 

Total interest expense on the convertible debt

$ —      $ 6,250   
  

 

 

    

 

 

 

G. Prepayments

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

 

     April 5,
2015
     December 31,
2014
 
     (in thousands)  

Contract manufacturer prepayments

   $ 62,439       $ 65,972   

Prepaid taxes

     10,375         11,462   

Prepaid maintenance and other services

     7,056         7,343   

Other prepayments

     12,614         11,042   
  

 

 

    

 

 

 

Total prepayments

$ 92,484    $ 95,819   
  

 

 

    

 

 

 

H. Deferred Revenue and Customer Advances

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

 

     April 5,
2015
     December 31,
2014
 
     (in thousands)  

Extended warranty

   $ 40,704       $ 43,300   

Product maintenance and training

     29,820         30,500   

Customer advances

     8,884         8,875   

Undelivered elements and other

     13,162         8,857   
  

 

 

    

 

 

 

Total deferred revenue and customer advances

$ 92,570    $ 91,532   
  

 

 

    

 

 

 

I. Product Warranty

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

 

     For the Three Months
Ended
 
     April 5,
2015
     March 30,
2014
 
     (in thousands)  

Balance at beginning of period

   $ 8,942       $ 6,660   

Accruals for warranties issued during the period

     2,361         2,858   

Adjustments related to pre-existing warranties

     (1,031      (140

Settlements made during the period

     (2,849      (2,763
  

 

 

    

 

 

 

Balance at end of period

$ 7,423    $ 6,615   
  

 

 

    

 

 

 

 

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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 on the balance sheet.

 

     For the Three Months
Ended
 
     April 5,
2015
     March 30,
2014
 
     (in thousands)  

Balance at beginning of period

   $ 43,300       $ 34,909   

Deferral of new extended warranty revenue

     4,204         2,361   

Recognition of extended warranty deferred revenue

     (6,800      (3,321
  

 

 

    

 

 

 

Balance at end of period

$ 40,704    $ 33,949   
  

 

 

    

 

 

 

J. Stock-Based Compensation

Commencing in January 2014, Teradyne granted performance-based restricted stock units (“PRSUs”) to its executive officers with a performance metric based on relative total shareholder return (“TSR”). Teradyne’s three-year TSR performance will be measured against the Philadelphia Semiconductor Index, which consists of thirty companies in the semiconductor device and capital equipment industries. The final number of TSR PRSUs that vest will vary based upon the level of performance achieved from 200% of the target shares to 0% of the target shares. The TSR PRSUs will vest upon the three-year anniversary of the grant date. Beginning with PRSUs granted in January 2014, if the recipient’s employment ends prior to the determination of the performance percentage due to (1) permanent disability or death or (2) retirement or termination other than for cause, after attaining both at least age sixty and at least ten years of service, then all or a portion of the recipient’s PRSUs (based on the actual performance percentage achieved on the determination date) will vest on the date the performance percentage is determined. Except as set forth in the preceding sentence, no TSR PRSUs will vest if the executive officer is no longer an employee at the end of the three-year period.

The TSR PRSUs are valued using a Monte Carlo simulation model. The number of units expected to be earned, based upon the achievement of the TSR market condition, is factored into the grant date Monte Carlo valuation. Compensation expense is recognized on a straight-line basis over the three-year service period. Compensation expense is recognized regardless of the eventual number of units that are earned based upon the market condition, provided the executive officer remains an employee at the end of the three-year period. Compensation expense is reversed if at any time during the three-year service period the executive officer is no longer an employee, subject to the retirement and termination eligibility provisions noted above.

During the three months ended April 5, 2015 and March 30, 2014, Teradyne granted 0.2 million and 0.1 million, respectively, TSR PRSUs with a grant date fair value of $18.21 and $22.06, respectively. The fair value was estimated using the Monte Carlo simulation model with the following assumptions:

 

     For the Three Months
Ended
 
     April 5,
2015
    March 30,
2014
 

Risk-free interest rate

     0.77     0.75

Teradyne volatility-historical

     28.2     36.1

Philadelphia Semiconductor Index volatility-historical

     19.7     24.6

Dividend yield

     1.33     1.25

Expected volatility was based on the historical volatility of Teradyne’s stock and the Philadelphia Semiconductor Index over the most recent three year period. The risk-free interest rate was determined using the U.S. Treasury yield curve in effect at the time of grant. Dividend yield was based upon an estimated annual dividend amount of $0.24 per share divided by Teradyne’s stock price on the grant date of $18.10 for 2015 grants and $19.16 for 2014 grants.

 

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Table of Contents

During the three months ended April 5, 2015, Teradyne granted 1.4 million of service-based restricted stock unit awards to employees at a weighted average grant date fair value of $17.14 and 0.1 million of service-based stock options to executive officers at a weighted average grant date fair value of $4.43.

During the three months ended March 30, 2014, Teradyne granted 1.6 million of service-based restricted stock unit awards to employees at a weighted average grant date fair value of $18.19 and 0.1 million of service-based stock options to executive officers at a weighted average grant date fair value of $5.49.

Restricted stock unit awards granted to employees vest in equal annual installments over four years. Stock options vest in equal annual installments over four years, and have a term of seven years from the date of grant.

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

 

     For the Three Months
Ended
 
     April 5,
2015
    March 30,
2014
 

Expected life (years)

     4.0        4.0   

Risk-free interest rate

     1.1     1.2

Volatility-historical

     33.4     38.8

Dividend yield

     1.33     1.25

Teradyne determined the stock options’ expected life based upon historical exercise data for executive officers, the age of the executive officers and the terms of the stock option grant. Volatility was determined using historical volatility for a period equal to the expected life. The risk-free interest rate was determined using the U.S. Treasury yield curve in effect at the time of grant. Dividend yield was based upon an estimated annual dividend amount of $0.24 per share divided by Teradyne’s stock price on the grant date, of $18.10 for 2015 grants and $19.16 for 2014 grants.

Effective January 31, 2014, Michael Bradley retired as Chief Executive Officer of Teradyne. On January 22, 2014, Teradyne entered into an agreement (the “Retirement Agreement”) with Mr. Bradley. Under the Retirement Agreement, Mr. Bradley’s unvested restricted stock units and stock options granted prior to his retirement date will continue to vest in accordance with their terms through January 31, 2017; and any vested options or options that vest during that period may be exercised for the remainder of the applicable option term. In the Retirement Agreement, Mr. Bradley agreed to be bound by non-competition and non-solicitation restrictions through January 31, 2017. Mr. Bradley continues to serve on Teradyne’s Board of Directors. In the three months ended March 30, 2014, Teradyne recorded a one-time charge to stock-based compensation expense of $6.6 million related to the Retirement Agreement.

K. Accumulated Other Comprehensive Income

Changes in accumulated other comprehensive income, which is presented net of tax, consist of the following:

 

    

For the Three Months Ended

April 5, 2015

        
     Unrealized Gains on
Marketable Securities
     Retirement Plans
Prior Service Credit
     Total  
     (in thousands)  

Balance at December 31, 2014, net of tax of $1,598, $(453)

   $ 2,365       $ 2,324       $ 4,689   
  

 

 

    

 

 

    

 

 

 

Other comprehensive income before reclassifications, net of tax of $704

  1,799      —       1,799   

Amounts reclassified from accumulated other comprehensive income, net of tax of $(169), $(42)

  (330   (74   (404
  

 

 

    

 

 

    

 

 

 

Net current period other comprehensive income, net of tax of $535, $(42)

  1,469      (74   1,395   
  

 

 

    

 

 

    

 

 

 

Balance at April 5, 2015, net of tax of $2,133, $(495)

$ 3,834    $ 2,250    $ 6,084   
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents
    

For the Three Months Ended

March 30, 2014

        
     Unrealized Gains on
Marketable Securities
     Retirement Plans
Prior Service Credit
     Total  
     (in thousands)  

Balance at December 31, 2013, net of tax of $794, $(284)

   $ 1,381       $ 2,619       $ 4,000   
  

 

 

    

 

 

    

 

 

 

Other comprehensive income before reclassifications, net of tax of $654

  1,139      —       1,139   

Amounts reclassified from accumulated other comprehensive income, net of tax of $(102), $(42)

  (176   (73   (249
  

 

 

    

 

 

    

 

 

 

Net current period other comprehensive income, net of tax of $552, $(42)

  963      (73   890   
  

 

 

    

 

 

    

 

 

 

Balance at March 30, 2014, net of tax of $1,346, $(326)

$ 2,344    $ 2,546    $ 4,890   
  

 

 

    

 

 

    

 

 

 

Reclassifications out of accumulated other comprehensive income to the statement of operations for the three months ended April 5, 2015 and March 30, 2014, were as follows:

 

Details about Accumulated Other Comprehensive Income Components

   For the Three Months Ended      Affected Line Item
in the Statements
of Operations
     April 5,
2015
     March 30,
2014
      
     (in thousands)       

Available-for-sale marketable securities:

        

Unrealized gains, net of tax of $169, $102

   $ 330       $ 176       Interest income

Amortization of defined benefit pension and postretirement plans:

        

Prior service benefit, net of tax of $42, $42

     74         73       (a)
  

 

 

    

 

 

    

Total reclassifications, net of tax of $211, $144

$ 404    $ 249    Net income
  

 

 

    

 

 

    

 

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

L. Intangible Assets

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

 

     April 5, 2015  
     Gross
Carrying
Amount
     Accumulated
Amortization
     Net
Carrying
Amount
     Weighted
Average
Useful Life
 
     (in thousands)  

Developed technology

   $ 345,513       $ 233,749       $ 111,764         6.2 years   

Customer relationships

     146,635         97,192         49,443         7.7 years   

Tradenames and trademarks

     30,414         15,109         15,305         9.0 years   

Non-compete agreement

     320         40         280         4.0 years   

Customer order backlog

     170         170         —          0.3 years   
  

 

 

    

 

 

    

 

 

    

Total intangible assets

$ 523,052    $ 346,260    $ 176,792      6.8 years   
  

 

 

    

 

 

    

 

 

    

 

     December 31, 2014  
     Gross
Carrying
Amount
     Accumulated
Amortization
     Net
Carrying
Amount
     Weighted
Average
Useful Life
 
     (in thousands)  

Developed technology

   $ 345,513       $ 224,059       $ 121,454         6.2 years   

Customer relationships

     146,635         93,998         52,637         7.7 years   

Tradenames and trademarks

     30,414         14,205         16,209         9.0 years   

Non-compete agreement

     320         20         300         4.0 years   

Customer order backlog

     170         170         —          0.3 years   
  

 

 

    

 

 

    

 

 

    

Total intangible assets

$ 523,052    $ 332,452    $ 190,600      6.8 years   
  

 

 

    

 

 

    

 

 

    

 

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Aggregate intangible asset amortization expense was $13.8 million and $18.3 million, respectively, for the three months ended April 5, 2015 and March 30, 2014. Estimated intangible asset amortization expense for each of the five succeeding fiscal years is as follows:

 

Year

   Amortization Expense  
     (in thousands)  

2015 (remainder)

   $ 41,423   

2016

     55,231   

2017

     49,046   

2018

     24,405   

2019

     4,889   

Thereafter

     1,798   

M. 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
 
     April 5,
2015
     March 30,
2014
 
    

(in thousands, except per

share amounts)

 

Net income for basic and diluted net income per share

   $ 32,787       $ 929   
  

 

 

    

 

 

 

Weighted average common shares-basic

  217,187      193,311   

Effect of dilutive potential common shares:

Incremental shares from assumed conversion of convertible notes (1)

  —       20,052   

Convertible note hedge warrant shares (2)

  —       20,942   

Restricted stock units

  901      1,051   

Stock options

  696      1,106   

Employee stock purchase plan

  28      22   
  

 

 

    

 

 

 

Dilutive potential common shares

  1,625      43,173   
  

 

 

    

 

 

 

Weighted average common shares-diluted

  218,812      236,484   
  

 

 

    

 

 

 

Net income per common share-basic

$ 0.15    $ 0.00   
  

 

 

    

 

 

 

Net income per common share-diluted

$ 0.15    $ 0.00   
  

 

 

    

 

 

 

 

(1) Incremental shares from the assumed conversion of the convertible notes were calculated using the difference between the average Teradyne stock price for the period and the conversion price of $5.48, multiplied by 34.7 million shares. The result of this calculation, representing the total intrinsic value of the convertible debt, was divided by the average Teradyne stock price for the period.
(2) Convertible note hedge warrant shares were calculated using the difference between the average Teradyne stock price for the period and the warrant price of $7.6650, multiplied by 34.7 million shares. The result of this calculation, representing the total intrinsic value of the warrant, was divided by the average Teradyne stock price for the period. Teradyne’s call option on its common stock (convertible note hedge transaction) was excluded from the calculation of diluted shares because the effect was anti-dilutive. See Note F: “Debt” regarding the convertible note hedge transaction.

The computation of diluted net income per common share for the three months ended April 5, 2015 excludes the effect of the potential exercise of stock options to purchase approximately 0.2 million shares because the effect would have been anti-dilutive.

The computation of diluted net income per common share for the three months ended March 30, 2014 excludes the effect of the potential exercise of stock options to purchase approximately 0.4 million shares because the effect would have been anti-dilutive.

N. Retirement Plans

ASC 715, “Compensation—Retirement Benefits” requires an employer with defined benefit plans or other postretirement benefit plans to recognize an asset or a liability on its balance sheet for the overfunded or underfunded status of the plans. The pension asset or liability represents a difference between the fair value of the pension plan’s assets and the projected benefit obligation.

 

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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.

In the three months ended April 5, 2015, Teradyne contributed $0.6 million to the U.S. supplemental executive defined benefit pension plan and $0.2 million to certain qualified plans for non-U.S. subsidiaries.

For the three months ended April 5, 2015 and March 30, 2014, Teradyne’s net periodic pension cost was comprised of the following:

 

     For the Three Months Ended  
     April 5, 2015      March 30, 2014  
     United
States
     Foreign      United
States
     Foreign  
     (in thousands)  

Service cost

   $ 616       $ 247       $ 546       $ 250   

Interest cost

     3,282         358         3,215         505   

Expected return on plan assets

     (3,624      (195      (3,126      (216

Amortization of prior service cost

     33         —          34         —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total net periodic pension cost

$ 307    $ 410    $ 669    $ 539   
  

 

 

    

 

 

    

 

 

    

 

 

 

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, medical and dental benefits up to age 65. Death benefits provide a fixed sum to retirees’ survivors and are available to all retirees. Substantially all of Teradyne’s current U.S. employees could become eligible for these benefits, and the existing benefit obligation relates primarily to those employees.

For the three months ended April 5, 2015 and March 30, 2014, Teradyne’s net periodic postretirement benefit income was comprised of the following:

 

     For the Three Months
Ended
 
     April 5,
2015
     March 30,
2014
 
     (in thousands)  

Service cost

   $ 12       $ 13   

Interest cost

     59         86   

Amortization of prior service benefit

     (149      (150
  

 

 

    

 

 

 

Total net periodic postretirement benefit income

$ (78 $ (51
  

 

 

    

 

 

 

O. Commitments and Contingencies

Purchase Commitments

As of April 5, 2015, Teradyne had entered into purchase commitments for certain components and materials. The purchase commitments covered by the agreements aggregate to approximately $189.5 million, of which $180.8 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, the ultimate disposition of these matters will not have a material adverse effect on Teradyne’s results of operations, financial condition or cash flows.

 

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P. Income Taxes

For the three months ended April 5, 2015, Teradyne had income before income taxes of $42.4 million and recognized income tax expense of $9.7 million resulting in an effective tax rate of 22.7%. The tax rate was lower than the expected federal statutory rate of 35% primarily because of the favorable effect of statutory rates applicable to income earned outside the United States which reduced the projected annual effective tax rate below the expected statutory rate of 35%. The tax rate was reduced further by a $0.5 million discrete tax benefit related to disqualifying dispositions of incentive stock options and employee stock purchase plan shares and a $1.2 million discrete tax benefit related to non-taxable foreign exchange gains.

For the three months ended March 30, 2014, Teradyne had a loss before income taxes of $1.9 million and recognized an income tax benefit of $2.8 million resulting in an effective tax rate of 149.6%. The tax rate for the three months ended March 30, 2014 was higher than the expected statutory rate of 35% primarily as a result of a $1.0 million discrete tax benefit related to disqualifying dispositions of incentive stock options and employee stock purchase plan shares and a $1.0 million discrete tax benefit related to decreases in uncertain tax positions resulting from changes in positions and the expiration of statutes.

On a quarterly basis, Teradyne evaluates the realizability of the deferred tax assets by jurisdiction and assesses the need for a valuation allowance. At April 5, 2015, Teradyne believes that it will ultimately realize the deferred tax assets recorded on the condensed consolidated balance sheet. However, should Teradyne believe that it is more likely than not that the deferred tax assets would not be realized, the tax provision would increase in the period in which Teradyne determined that the realizability was not likely. Teradyne considers the probability of future taxable income and historical profitability, among other factors, in assessing the realizability of the deferred tax assets.

As of April 5, 2015 and December 31, 2014, Teradyne had $30.3 million and $30.4 million, respectively, of reserves for uncertain tax positions. The $0.1 million net decrease in reserves for uncertain tax positions relates to the expiration of statutes of limitations. As of April 5, 2015, Teradyne anticipated the liability for uncertain tax positions could decrease by approximately $0.7 million over the next twelve months, primarily as a result of the expiration of statutes of limitations and settlements with tax authorities. The potential decrease is primarily related to transfer pricing exposures and research credits.

Teradyne recognizes interest and penalties related to income tax matters in income tax expense. As of April 5, 2015 and December 31, 2014, $0.6 million of interest and penalties was included in the reserve for uncertain tax positions.

Teradyne qualifies for a tax holiday in Singapore by fulfilling the requirements of an agreement with the Singapore Economic Development Board under which certain headcount and spending requirements must be met. The tax savings due to the tax holiday for the three months ended April 5, 2015 was $1.1 million. The impact of the tax holiday on earnings per share was not material. For the three months ended March 30, 2014, there was no incremental benefit from the tax holiday. The tax holiday is currently expected to expire on December 31, 2015. Teradyne is in discussion with the Singapore Economic Development Board with respect to extension of the tax holiday for periods after December 31, 2015.

Q. Segment Information

Teradyne has three operating segments (Semiconductor Test, Wireless Test and System 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 the design, manufacturing and marketing of wireless test products and services. The System Test segment includes operations related to the design, manufacturing and marketing of products and services for defense/aerospace instrumentation test, storage test and circuit-board test. 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.

 

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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, 2014.

Segment information for the three months ended April 5, 2015 and March 30, 2014 is as follows:

 

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

Three months ended April 5, 2015:

            

Revenues

   $ 270,917       $ 34,048      $ 37,436       $ —       $ 342,401   

Income (loss) before taxes (1)(2)

     43,125         (10,441     1,005         8,749        42,438   

Three months ended March 30, 2014:

            

Revenues

   $ 261,737       $ 21,210      $ 38,063       $ —       $ 321,010   

Income (loss) before taxes (1)(2)

     34,600         (25,085     448         (11,836     (1,873

 

(1) Interest income, interest expense, and other (income) expense, net are included in Corporate and Eliminations.
(2) Included in the income (loss) before income taxes for each of the segments are charges related to inventory and other.

Included in the Semiconductor Test segment are charges and credits in the following line item in the statements of operations:

 

     For the Three Months
Ended
 
     April 5, 2015      March 30, 2014  
     (in thousands)  

Cost of revenues - inventory charge

   $ 531       $ 6,205   

Included in the Wireless Test segment are charges and credits in the following line item in the statements of operations:

 

     For the Three Months
Ended
 
     April 5, 2015      March 30, 2014  
     (in thousands)  

Cost of revenues - inventory charge

   $ 846       $ 3,093   

Included in the System Test segment are charges and credits in the following line item in the statements of operations:

 

     For the Three Months
Ended
 
     April 5, 2015      March 30, 2014  
     (in thousands)  

Cost of revenues - inventory charge

   $ 63       $ 741   

Included in Corporate and Eliminations are charges and credits in the following line items in the statements of operations:

 

     For the Three Months
Ended
 
     April 5, 2015      March 30, 2014  
     (in thousands)  

Other (income) expense, net - gain from the sale of an equity investment

   $ (4,782    $ —     

Selling and administrative - stock-based compensation charge (1)

     —           6,598   

 

(1) See Note J: “Stock-Based Compensation” regarding the stock-based compensation charge.

R. Shareholders’ Equity

Stock Repurchase Program

In January 2015, the Board of Directors authorized Teradyne to repurchase up to $500 million of common stock, $300 million of which Teradyne intends to repurchase in 2015. The cumulative repurchases as of April 5, 2015 totaled 2.4 million shares of common stock for $46.7 million at an average price of $19.40 per share.

 

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Table of Contents

Dividend

Holders of Teradyne’s common stock are entitled to receive dividends when they are declared by Teradyne’s Board of Directors.

In January 2015, Teradyne’s Board of Directors declared a quarterly cash dividend of $0.06 per share that was paid on March 24, 2015 to shareholders of record as of February 27, 2015. Dividend payments for the three months ended April 5, 2015 were $13.0 million.

In January 2014, Teradyne’s Board of Directors declared an initial quarterly cash dividend of $0.06 per share that was paid on June 2, 2014 to shareholders of record as of May 9, 2014.

While Teradyne declared a quarterly cash dividend and authorized a share repurchase program, it may reduce or eliminate the cash dividend or share repurchase program in the future. Future cash dividends and stock repurchases are subject to the discretion of Teradyne’s Board of Directors which will consider, among other things, Teradyne’s earnings, capital requirements and financial condition.

S. Subsequent Events

On April 27, 2015, Teradyne entered into a credit agreement (the “Credit Agreement”) with Barclays Bank PLC, as administrative agent and collateral agent, and the lenders party thereto. The Credit Agreement provides for a five-year, senior secured revolving credit facility of $350.0 million (the “Credit Facility”). The Credit Agreement further provides that, subject to customary conditions, Teradyne may seek to obtain from existing or new lenders incremental commitments under the Credit Facility in an aggregate principal amount not to exceed $150.0 million.

Proceeds from the Credit Facility may be used for general corporate purposes and working capital. As of May 8, 2015, Teradyne has not borrowed any funds under the Credit Facility.

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

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

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

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

 

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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, 2014. 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

 

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

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 October 2014, we acquired Avionics Interface Technologies, LLC (“AIT”), a supplier of equipment for testing state-of-the-art data communication buses. The acquisition of AIT complements our Defense/Aerospace line of bus test instrumentation for commercial and defense avionics systems. AIT is included in our System Test segment.

We believe our recent acquisitions have enhanced our opportunities for growth. We will continue to invest in our business, grow market share in our markets and expand further our addressable markets while tightly managing our costs.

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 and electronics industries. Historically, these demand fluctuations have resulted in significant variations in our results of operations. The sharp swings in the semiconductor and electronics industries in recent years have generally affected the semiconductor and electronics test equipment and services industries more significantly than the overall capital equipment sector.

In the fourth quarter of 2014, we performed our annual goodwill impairment test and recorded a goodwill impairment charge of $98.9 million in our Wireless Test segment as a result of decreased projected demand attributable to an estimated smaller future wireless test market due to reuse of wireless test equipment, price competition and different testing techniques. Further reductions in the size of the wireless test market may occur, which may result in additional goodwill impairment charges, increased risk of excess and obsolete inventories, asset write-offs and restructuring charges.

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 three months ended April 5, 2015 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, 2014.

 

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Table of Contents

SELECTED RELATIONSHIPS WITHIN THE CONDENSED CONSOLIDATED

STATEMENTS OF OPERATIONS

 

     For the Three Months
Ended
 
     April 5,
2015
    March 30,
2014
 

Percentage of revenues:

    

Revenues:

    

Products

     80     80

Services

     20        20   
  

 

 

   

 

 

 

Total revenues

  100      100   

Cost of revenues:

Cost of products

  35      39   

Cost of services

  9      9   
  

 

 

   

 

 

 

Total cost of revenues (exclusive of acquired intangible assets amortization shown separately below)

  44      48   
  

 

 

   

 

 

 

Gross profit

  56      52   

Operating expenses:

Engineering and development

  21      21   

Selling and administrative

  21      24   

Acquired intangible assets amortization

  4      6   
  

 

 

   

 

 

 

Total operating expenses

  46      51   
  

 

 

   

 

 

 

Income from operations

  10      1   

Non-operating (income) expenses:

Interest income

  (1   —    

Interest expense

  —       2   

Other (income) expense, net

  (2   —    
  

 

 

   

 

 

 

Income (loss) before income taxes

  12      (1

Income tax provision (benefit)

  3      (1
  

 

 

   

 

 

 

Net income

  10   —  
  

 

 

   

 

 

 

Results of Operations

First Quarter 2015 Compared to First Quarter 2014

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
 
     April 5,
2015
     March 30,
2014
 

Semiconductor Test

     1.5         1.4   

Wireless Test

     0.8         2.7   

System Test

     1.8         0.7   

Total Company

     1.4         1.4   

 

 

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Table of Contents

Revenues

Revenues by our three reportable segments were as follows:

 

     For the Three Months
Ended
     Dollar
Change
 
     April 5,
2015
     March 30,
2014
    
     (in millions)  

Semiconductor Test

   $ 270.9       $ 261.7       $ 9.2   

Wireless Test

     34.1         21.2         12.9   

System Test

     37.4         38.1         (0.7
  

 

 

    

 

 

    

 

 

 
$ 342.4    $ 321.0    $ 21.4   
  

 

 

    

 

 

    

 

 

 

The increase in Semiconductor Test revenues of $9.2 million, or 4%, from the three months ended March 30, 2014 to the three months ended April 5, 2015, was primarily due to higher system-on-a-chip (“SOC”) product sales. The increase in Wireless Test revenue of $12.9 million, or 61%, was primarily driven by higher cellular system sales. The decrease in System Test revenue of $0.7 million, or 2%, was primarily due to lower sales of Storage Test systems.

Revenues by country as a percentage of total revenues were as follows (1):

 

     For the Three Months
Ended
 
     April 5,
2015
    March 30,
2014
 

Taiwan

     30     27

United States

     14        14   

China

     13        14   

Korea

     13        7   

Japan

     7        7   

Europe

     6        7   

Malaysia

     5        5   

Singapore

     5        11   

Philippines

     3        3   

Thailand

     2        3   

Rest of World

     2        2   
  

 

 

   

 

 

 
  100   100
  

 

 

   

 

 

 

 

(1) Revenues attributable to a country are based on location of customer site.

Gross Profit

Our gross profit was as follows:

 

     For the Three Months
Ended
    Dollar/Point
Change
 
     April 5,
2015
    March 30,
2014
   
     (in millions)  

Gross Profit

   $ 192.4      $ 167.0      $ 25.4   

Percent of Total Revenues

     56.2     52.0     4.2   

Gross profit as a percent of revenue increased by 4.2 points from the three months ended March 30, 2014 to the three months ended April 5, 2015. This increase was a result of an increase of 2.9 points related to product mix in Semiconductor Test and higher Wireless Test sales, an increase of 2.7 points due to lower excess and obsolete inventory provisions, partially offset by higher warranty costs.

 

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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 April 5, 2015, we recorded an inventory provision of $1.4 million included in cost of revenues primarily due to downward revisions to previously forecasted demand levels. Of the $1.4 million of total excess and obsolete provisions, $0.8 million was related to Wireless Test, $0.5 million was related to Semiconductor Test, and $0.1 million was related to System Test.

During the three months ended March 30, 2014, we recorded an inventory provision of $10.0 million included in cost of revenues of which $6.1 million related to product transitions in Semiconductor Test and $3.9 million due to downward revisions to previously forecasted demand levels. Of the $10.0 million of total excess and obsolete provisions, $6.2 million was related to Semiconductor Test, $3.1 million was related to Wireless Test, and $0.7 million was related to System Test.

During the three months ended April 5, 2015 and March 30, 2014, we scrapped $0.6 million and $0.9 million of inventory, respectively. During the three months ended April 5, 2015 and March 30, 2014, we sold $1.9 million and $1.4 million of previously written-down or written-off inventory. As of April 5, 2015, we had inventory related reserves for inventory which had been written-down or written-off totaling $110.9 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
 
     April 5,
2015
    March 30,
2014
   
     (in millions)  

Engineering and Development

   $ 71.5      $ 67.1      $ 4.4   

Percent of Total Revenues

     20.9     20.9  

The increase of $4.4 million in engineering and development expenses from the three months ended March 30, 2014 to the three months ended April 5, 2015 was due primarily to increased spending in Semiconductor Test and higher variable compensation.

Selling and Administrative

Selling and administrative expenses were as follows:

 

     For the Three Months
Ended
    Dollar
Change
 
     April 5,
2015
    March 30,
2014
   
     (in millions)  

Selling and Administrative

   $ 72.0      $ 78.0      $ (6.0

Percent of Total Revenues

     21.0     24.3  

The decrease of $6.0 million in selling and administrative expenses from the three months ended March 30, 2014 to the three months ended April 5, 2015 was primarily due to a one-time $6.6 million stock-based compensation charge in 2014 related to Michael Bradley’s (retired Chief Executive Officer) Retirement Agreement, partially offset by higher variable compensation.

Income Taxes

For the three months ended April 5, 2015, we had income before income taxes of $42.4 million and recognized income tax expense of $9.7 million resulting in an effective tax rate of 22.7%. For the three months ended March 30, 2014, we had a loss before taxes of $1.9 million and recognized an income tax benefit of $2.8 million resulting in an effective tax rate of 149.6%. The change in the tax rate resulted primarily from a projected increase in income subject to tax in the United States as compared to lower rate foreign jurisdictions.

 

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Contractual Obligations

The following table reflects our contractual obligations as of April 5, 2015:

 

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

Purchase Obligations

   $ 189,510       $ 180,844       $ 8,666       $ —        $ —        $ —    

Retirement Plan Contributions

     110,296         4,123         8,224         8,842         89,107         —    

Operating Lease Obligations

     49,856         12,329         16,083         9,219         12,225         —    

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

     55,603         —          18,318         —          —          37,285   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 405,265    $ 197,296    $ 51,291    $ 18,061    $ 101,332    $ 37,285   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

Liquidity and Capital Resources

Our cash, cash equivalents and marketable securities balances decreased by $27.9 million in the three months ended April 5, 2015, to $1,271 million. Cash activity for the three months ended April 5, 2015 and March 30, 2014 was as follows:

 

     For the Three Months
Ended
 
     April 5,
2015
     March 30,
2014
 
     (in millions)  

Cash provided by (used for) operating activities:

     

Net income, adjusted for non-cash items

   $ 68.6       $ 77.9   

Change in operating assets and liabilities

     (31.1      (103.8
  

 

 

    

 

 

 

Net cash provided by (used for) operating activities

  37.5      (25.8
  

 

 

    

 

 

 

Net cash (used for) provided by investing activities

  (62.0   97.6   
  

 

 

    

 

 

 

Net cash used for financing activities

  (50.8   (180.8
  

 

 

    

 

 

 

Decrease in cash and cash equivalents

$ (75.3 $ (109.0
  

 

 

    

 

 

 

In the three months ended April 5, 2015, changes in operating assets and liabilities used cash of $31.1 million. This was due to a $15.6 million increase in operating assets and a $15.5 million decrease in operating liabilities.

The increase in operating assets was due to a $24.7 million increase in accounts receivable due to higher sales, partially offset by a $6.0 million decrease in inventories and a $3.1 million decrease in prepayments and other assets. The decrease in operating liabilities was due to a $45.2 million decrease in accrued employee compensation due primarily to variable compensation and employee stock award payroll tax payments, and $1.0 million of retirement plan contributions, partially offset by a $13.9 million increase in other accrued liabilities, a $11.1 million increase in accounts payable due to higher sales, a $4.7 million increase in accrued income taxes and a $1.0 million increase in customer advance payments and deferred revenue.

Investing activities during the three months ended April 5, 2015 used cash of $62.0 million, due to $335.6 million used for purchases of marketable securities and $21.1 million used for purchases of property, plant and equipment, partially offset by proceeds from maturities and sales of marketable securities of $140.2 million and $148.6 million, respectively, proceeds from the sale of an equity investment of $4.8 million, and proceeds from life insurance of $1.1 million related to the cash surrender value from the cancellation of Teradyne owned life insurance policies. The decrease in purchases of property, plant and equipment of $10.1 million was primarily due to higher purchases of testers for customer leases in the three months ended March 30, 2014.

 

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Financing activities during the three months ended April 5, 2015 used cash of $50.8 million, due to the repurchase of 2.4 million shares of common stock for $46.7 million at an average price of $19.40 per share, and $13.0 million used for dividend payments, partially offset by $8.9 million provided by the issuance of common stock under employee stock purchase and stock option plans.

In the three months ended March 30, 2014, changes in operating assets and liabilities used cash of $103.8 million. This was due to a $56.9 million increase in operating assets and a $46.9 million decrease in operating liabilities.

The increase in operating assets was due to a $58.9 million increase in accounts receivable due to higher sales and an increase in shipments later in the quarter and a $0.6 million increase in prepayments and other assets, partially offset by a $2.6 million decrease in inventories. The decrease in operating liabilities was due to a $48.0 million decrease in accrued employee compensation due primarily to variable compensation and employee stock award payroll tax payments, a $9.6 million decrease in accrued income taxes, a $4.3 million convertible debt interest payment, $1.4 million of retirement plan contributions, and a $0.9 million decrease in other accrued liabilities, partially offset by a $7.7 million increase in accounts payable due to higher sales and a $9.6 million increase in customer advance payments and deferred revenue.

Investing activities during the three months ended March 30, 2014 provided cash of $97.6 million, due to proceeds from maturities and sales of marketable securities that provided cash of $280.3 million and $101.4 million, respectively, and proceeds from life insurance of $4.4 million related to the cash surrender value from the cancellation of Teradyne owned life insurance policies on its retired chief executive officer, partially offset by $257.3 million used for purchases of marketable securities and $31.2 million used for purchases of property, plant and equipment.

Financing activities during the three months ended March 30, 2014 used cash of $180.8 million. $191.0 million of cash was used for payments on long-term debt related to convertible debt and the loan in Japan, partially offset by $10.2 million provided from the issuance of common stock under employee stock purchase and stock option plans.

In January 2015, our Board of Directors declared a quarterly dividend of $0.06 per share to be paid on March 24, 2015 to shareholders of record as of February 27, 2015. In the three months ended April 5, 2015, dividend payments were $13.0 million.

In January 2015, our Board of Directors authorized the repurchase of up to $500 million of common stock, $300 million of which we intend to repurchase in 2015. As of April 5, 2015 we repurchased 2.4 million shares of common stock for $46.7 million at an average price of $19.40.

While we declared a quarterly cash dividend and authorized a share repurchase program, we may reduce or eliminate the cash dividend or share repurchase program in the future. Future cash dividends and stock repurchases are subject to the discretion of Teradyne’s Board of Directors which will consider, among other things, Teradyne’s earnings, capital requirements and financial condition.

We believe our cash, cash equivalents and marketable securities balance will be sufficient to pay our quarterly dividend, execute our authorized share repurchase program and meet our working capital and expenditure needs for at least the next twelve months. 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 $650 million of cash outside the U.S. that if repatriated would incur additional taxes. Determination of the additional taxes that would be incurred is not practicable due to uncertainty regarding the remittance structure, the mix of earnings and earnings and profit pools in the year of remittance, and overall complexity of the calculation. Inflation has not had a significant long-term impact on earnings.

Equity Compensation Plans

As discussed in Note N: “Stock Based Compensation” in our 2014 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 May 2014, the FASB issued Accounting Standard Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606,” which will replace numerous requirements in U.S. GAAP, including industry-specific requirements, and provide companies with a single revenue recognition model for recognizing revenue from contracts with customers. The core principle of the new standard is that a company should recognize revenue to show the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled to in exchange for those goods or services. On April 1, 2015, FASB proposed a deferral of the effective date of the new revenue standard by one year, until January 1, 2018. For us, the standard will be effective in the first quarter of 2018. Early adoption is permitted but not before the original effective date (that is, annual periods beginning after December 15, 2016). The two permitted transition methods under the new standard are the full retrospective method, in which case the standard would be applied to each prior reporting period presented, or the modified retrospective method, in which case the cumulative effect of applying the standard would be recognized at the date of initial application. We have not yet selected a transition method. We are currently evaluating the impact of this ASU on our financial position and 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 February 27, 2015. 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, 2014.

 

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, the ultimate disposition of these matters will not have a material adverse effect on our results of operations, financial condition or cash flows.

 

Item 1A: Risk Factors

In addition to 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, 2014, 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.

We may incur indebtedness.

On April 27, 2015, we entered into a five-year, senior secured revolving credit facility of $350.0 million. Subject to customary conditions, we may seek to obtain from existing or new lenders incremental commitments under the credit facility in an aggregate principal amount not to exceed $150.0 million. We have not borrowed any funds under this credit facility. We could borrow funds under this credit facility at any time for general corporate purposes and working capital. Incurring indebtedness, among other things, could:

 

    make it difficult to pay other obligations;

 

    make it difficult to obtain any necessary future financing for working capital, capital expenditures, debt service requirements or other purposes;

 

    require the dedication of a substantial portion of any cash flow from operations to service our indebtedness, thereby reducing the amount of cash flow available for other purposes, including capital expenditures; and

 

    limit our flexibility in planning for, or reacting to, changes in our business and the markets in which we compete.

Our senior secured revolving credit facility contains customary restrictive covenants.

The agreement governing our senior secured revolving credit facility contains financial and other restrictive covenants that limit our ability to engage in certain activities, such as, subject to permitted exceptions, making capital expenditures in excess of certain thresholds, incurring additional secured indebtedness, and other customary restrictive covenants. Our failure to comply with financial and other restrictive covenants could result in immediate payment of any outstanding borrowings under the facility.

 

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

In January 2015, Teradyne’s Board of Directors cancelled the 2010 stock repurchase program and authorized a new stock repurchase program for up to $500 million of common stock, $300 million of which Teradyne intends to repurchase in 2015. The cumulative repurchases as of April 5, 2015, totaled 2.4 million shares of common stock for $46.7 million at an average price of $19.40.

 

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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 April 5, 2015 (in thousands except per share price):

 

Period

   (a) Total
Number of
Shares
(or Units)
Purchased
    (b) Average
Price Paid per
Share (or Unit)
    (c) Total Number of
Shares (or Units)
Purchased as Part of
Publicly Announced
Plans or Programs
     (d) Maximum Number
(or Approximate Dollar
Value) of Shares (or
Units) that may Yet Be
Purchased Under the
Plans or Programs
 

January 1, 2015 – February 1, 2015

     496     $ 19.35       —        $ 500,000   

February 2, 2015 – March 1, 2015

     806     $ 19.41       802      $ 484,428   

March 2, 2015 – April 5, 2015

     1,603     $ 19.40       1,602       $ 453,350   
  

 

 

   

 

 

   

 

 

    
  2,905 (1) $ 19.39 (1)   2,404  
  

 

 

   

 

 

   

 

 

    

 

(1) Includes 0.5 million shares at an average price of $19.35, withheld from employees for the payment of taxes.

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

 

Item 4: Mine Safety Disclosures

Not Applicable

 

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Table of Contents
Item 6: Exhibits

 

Exhibit

Number

  

Description

  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 of Principal Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)
  32.2    Certification of Principal Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)
101.INS    XBRL Instance Document
101.SCH    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

 

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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)

May 8, 2015

 

32

Exhibit 31.1

CERTIFICATIONS

I, Mark E. Jagiela, 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: May 8, 2015

 

By:  

/ S /    M ARK E. J AGIELA        

  Mark E. Jagiela
  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: May 8, 2015

 

By:  

/ S /    G REGORY R. B EECHER        

  Gregory R. Beecher
  Chief Financial Officer

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Teradyne, Inc. (the “Company”) on Form 10-Q for the period ending April 5, 2015 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Mark E. Jagiela, Chief Executive Officer of the Company, certify pursuant to 18 U.S.C (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 ARK E. J AGIELA        

Mark E. Jagiela
Chief Executive Officer
May 8, 2015

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 April 5, 2015 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
May 8, 2015