Teradyne, Inc.
TERADYNE, INC (Form: 10-Q, Received: 08/14/2015 13:32:54)
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 July 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 August 7, 2015 was 210,834,989 shares.

 

 

 


Table of Contents

TERADYNE, INC.

INDEX

 

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

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

     1   
 

Condensed Consolidated Statements of Operations for the Three and Six Months Ended July 5, 2015 and June 29, 2014

     2   
 

Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended July 5, 2015 and June 29, 2014

     3   
 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended July 5, 2015 and June 29, 2014

     4   
  Notes to Condensed Consolidated Financial Statements      5   
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations      31   
Item 3.   Quantitative and Qualitative Disclosures about Market Risk      42   
Item 4.   Controls and Procedures      42   
PART II. OTHER INFORMATION   
Item 1.   Legal Proceedings      44   
Item 1A.   Risk Factors      44   
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds      45   
Item 4.   Mine Safety Disclosures      45   
Item 6.   Exhibits      46   


Table of Contents

PART I

 

Item 1: Financial Statements

TERADYNE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

     July 5, 
2015
    December 31, 
2014
 
    

(in thousands,

  except per share information)  

 
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 300,685      $ 294,256   

Marketable securities

     452,040        533,787   

Accounts receivable, less allowance for doubtful accounts of $2,424 and $2,491 at July 5, 2015 and December 31, 2014, respectively

     296,654        151,034   

Inventories, net:

    

Parts

     67,285        70,821   

Assemblies in process

     17,376        10,347   

Finished goods

     37,156        23,961   
  

 

 

   

 

 

 
     121,817        105,129   

Deferred tax assets

     58,345        57,239   

Prepayments

     80,249        95,819   

Other current assets

     6,596        6,582   
  

 

 

   

 

 

 

Total current assets

     1,316,386        1,243,846   
  

 

 

   

 

 

 

Property, plant and equipment, net

     291,929        329,038   

Marketable securities

     275,882        470,789   

Deferred tax assets

     6,836        7,494   

Other assets

     13,364        10,419   

Retirement plans assets

     13,850        12,896   

Intangible assets, net

     279,126        190,600   

Goodwill

     495,434        273,438   
  

 

 

   

 

 

 

Total assets

   $ 2,692,807      $ 2,538,520   
  

 

 

   

 

 

 
LIABILITIES     

Current liabilities:

    

Accounts payable

   $ 86,463      $ 47,763   

Accrued employees’ compensation and withholdings

     94,544        100,994   

Deferred revenue and customer advances

     77,347        71,603   

Other accrued liabilities

     85,470        50,247   

Contingent consideration

     15,092        895   

Accrued income taxes

     43,163        20,049   
  

 

 

   

 

 

 

Total current liabilities

     402,079        291,551   
  

 

 

   

 

 

 

Long-term deferred revenue and customer advances

     25,354        19,929   

Retirement plans liabilities

     107,557        108,460   

Deferred tax liabilities

     38,624        23,315   

Long-term other accrued liabilities

     24,468        13,830   

Long-term contingent consideration

     20,503        2,455   
  

 

 

   

 

 

 

Total liabilities

     618,585        459,540   
  

 

 

   

 

 

 

Commitments and contingencies (See Note P)

    
SHAREHOLDERS’ EQUITY     

Common stock, $0.125 par value, 1,000,000 shares authorized, 212,507 shares and 216,613 shares issued and outstanding at July 5, 2015 and December 31, 2014, respectively

     26,563        27,077   

Additional paid-in capital

     1,462,349        1,437,135   

Accumulated other comprehensive (loss) income

     (3,162     4,689   

Retained earnings

     588,472        610,079   
  

 

 

   

 

 

 

Total shareholders’ equity

     2,074,222        2,078,980   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 2,692,807      $ 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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TERADYNE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

     For the Three Months
Ended
    For the Six Months
Ended
 
     July 5,
2015
    June 29,
2014
    July 5,
2015
    June 29,
2014
 
     (in thousands, except per share amount)  

Revenues:

        

Products

   $ 437,243      $ 452,488      $ 709,568      $ 707,874   

Services

     75,496        73,079        145,572        138,703   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     512,739        525,567        855,140        846,577   

Cost of revenues:

        

Cost of products

     181,491        202,411        300,487        326,859   

Cost of services

     32,680        32,743        63,662        62,258   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     214,171        235,154        364,149        389,117   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     298,568        290,413        490,991        457,460   

Operating expenses:

        

Engineering and development

     75,832        73,414        147,282        140,499   

Selling and administrative

     77,073        77,489        149,114        155,492   

Acquired intangible assets amortization

     15,258        18,271        29,066        36,542   

Restructuring and other

     (385     572        (385     572   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     167,778        169,746        325,077        333,105   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     130,790        120,667        165,914        124,355   

Non-operating (income) expense:

        

Interest income

     (1,674     (1,266     (3,490     (2,302

Interest expense

     444        159        606        6,576   

Other (income) expense, net

     (116     382        (5,776     562   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     132,136        121,392        174,574        119,519   

Income tax provision

     29,257        20,187        38,908        17,385   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 102,879      $ 101,205      $ 135,666      $ 102,134   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per common share:

        

Basic

   $ 0.48      $ 0.52      $ 0.63      $ 0.53   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.48      $ 0.47      $ 0.62      $ 0.45   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares—basic

     213,845        194,408        215,516        193,860   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares—diluted

     215,496        216,568        217,154        226,526   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash dividend declared per common share

   $ 0.06     $ —        $ 0.12      $ 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
    For the Six Months
Ended
 
     July 5,
2015
    June 29,
2014
    July 5,
2015
    June 29,
2014
 
     (in thousands)  

Net income

   $ 102,879      $ 101,205      $ 135,666      $ 102,134   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income, net of tax:

        

Foreign currency translation adjustments, net of tax of $0

     (6,267     —          (6,267     —     

Available-for-sale marketable securities:

        

Unrealized (losses) gains on marketable securities arising during period, net of tax of $(1,648), $558, $(944), $1,242

     (2,675     1,165        (876     2,304   

Less: Reclassification adjustment for gains included in net income, net of tax of $(40), $(141), $(209), $(243)

     (231     (272     (561     (448
  

 

 

   

 

 

   

 

 

   

 

 

 
     (2,906     893        (1,437     1,856   

Defined benefit pension and post-retirement plans:

        

Amortization of net prior service benefit included in net periodic pension expense and post-retirement benefit income, net of tax of $(42), $(42), $(85), $(85)

     (74     (74     (147     (147
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income

     (9,247     819        (7,851     1,709   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 93,632      $ 102,024      $ 127,815      $ 103,843   
  

 

 

   

 

 

   

 

 

   

 

 

 

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 Six Months
Ended
 
    July 5,
2015
    June 29,
2014
 
    (in thousands)  

Cash flows from operating activities:

   

Net income

  $ 135,666      $ 102,134   

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

   

Depreciation

    36,230        33,785   

Amortization

    31,395        42,990   

Stock-based compensation

    15,405        23,530   

Provision for excess and obsolete inventory

    15,881        15,071   

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

    595        —     

Tax benefit related to employee stock compensation awards

    (892     (1,671

Contingent consideration adjustment

    (1,600     —     

Gain from the sale of an equity investment

    (5,406     —     

Deferred taxes

    (10,371     (5,697

Other

    1,154        1,165   

Changes in operating assets and liabilities, net of business acquired:

   

Accounts receivable

    (142,493     (143,125

Inventories

    23,500        18,469   

Prepayments and other assets

    14,054        27,000   

Accounts payable and other accrued expenses

    53,392        52,796   

Deferred revenue and customer advances

    5,685        13,800   

Retirement plans contributions

    (1,999     (2,388

Accrued income taxes

    23,261        5,495   
 

 

 

   

 

 

 

Net cash provided by operating activities

    193,457        183,354   

Cash flows from investing activities:

   

Purchases of property, plant and equipment

    (46,110     (91,389

Acquisition of business, net of cash acquired

    (282,332     —     

Purchases of available-for-sale marketable securities

    (590,250     (523,306

Proceeds from sales of available-for-sale marketable securities

    631,400        152,818   

Proceeds from maturities of available-for-sale marketable securities

    231,416        377,436   

Proceeds from the sale of an equity investment

    5,406        —     

Proceeds from life insurance

    1,098        4,391   
 

 

 

   

 

 

 

Net cash used for investing activities

    (49,372     (80,050

Cash flows from financing activities:

   

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

    17,878        10,643   

Tax benefit related to employee stock compensation awards

    892        1,671   

Repurchase of common stock

    (128,316     —     

Dividend payments

    (25,857     (11,656

Payment of revolving credit facility costs

    (2,253     —     

Payments of long-term debt

    —          (190,975
 

 

 

   

 

 

 

Net cash used for financing activities

    (137,656     (190,317
 

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

    6,429        (87,013

Cash and cash equivalents at beginning of period

    294,256        341,638   
 

 

 

   

 

 

 

Cash and cash equivalents at end of period

  $ 300,685      $ 254,625   
 

 

 

   

 

 

 

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 and collaborative robots. Teradyne’s automatic test equipment and collaborative robots products and services include:

 

    semiconductor test (“Semiconductor Test”) systems;

 

    wireless test (“Wireless Test”) systems;

 

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

 

    industrial automation (“Industrial Automation”) products include collaborative robots used by global manufacturing and light industrial customers to improve quality and increase manufacturing efficiency.

On June 11, 2015, Teradyne acquired Universal Robots A/S (“Universal Robots”) for approximately $284 million of cash plus up to an additional $65 million of cash if certain performance targets are met extending through 2018. Universal Robots is the leading supplier of collaborative robots which are low-cost, easy-to-deploy and simple-to-program robots that work side by side with production workers to improve quality and increase manufacturing efficiency.

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.

Revenue Recognition

Teradyne recognizes revenue when there is persuasive evidence of an arrangement, title and risk of loss have passed, delivery has occurred or the services have been rendered, the sales price is fixed or determinable and collection of the related receivable is reasonably assured. Title and risk of loss generally pass to Teradyne’s customers upon shipment or at delivery destination point. In circumstances where either title or risk of loss pass

 

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upon destination, acceptance or cash payment, Teradyne defers revenue recognition until such events occur except when title transfer is tied to cash payment outside the United States. Outside the United States, Teradyne recognizes revenue even if it retains a form of title to products delivered to customers, provided the sole purpose is to enable Teradyne to recover the products in the event of customer payment default and the arrangement does not prohibit the customer’s use or resale of the product in the ordinary course of business.

Teradyne’s equipment has non-software and software components that function together to deliver the equipment’s essential functionality. Revenue is recognized upon shipment or at delivery destination point, provided that customer acceptance criteria can be demonstrated prior to shipment. Certain contracts require Teradyne to perform tests of the product to ensure that performance meets the published product specifications or customer requested specifications, which are generally conducted prior to shipment. Where the criteria cannot be demonstrated prior to shipment, revenue is deferred until customer acceptance has been received. Teradyne also defers the portion of the sales price that is not due until acceptance, which represents deferred profit.

For multiple element arrangements, Teradyne allocates revenue to all deliverables based on their relative selling prices. In such circumstances, a hierarchy is used to determine the selling price for allocating revenue to deliverables as follows: (i) vendor-specific objective evidence of selling price (“VSOE”), (ii) third-party evidence of selling price (“TPE”), and (iii) best estimate of the selling price (“BESP”). For a delivered item to be considered a separate unit the delivered item must have value to the customer on a standalone basis and the delivery or performance of the undelivered item must be considered probable and substantially in Teradyne’s control.

Teradyne’s post-shipment obligations include installation, training services, one-year standard warranties, and extended warranties. Installation does not alter the product capabilities, does not require specialized skills or tools and can be performed by the customers or other vendors. Installation is typically provided within five days of product shipment and is completed within one to two days thereafter. Training services are optional and do not affect the customers’ ability to use the product. Teradyne defers revenue for the selling price of installation and training. Extended warranties constitute warranty obligations beyond one year and Teradyne defers revenue in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 605-20, “Separately Priced Extended Warranty and Product Maintenance Contracts” and ASC 605-25, “Revenue Recognition Multiple-Element Arrangements.” Service revenue is recognized over the contractual period or as services are performed.

Teradyne’s products are generally subject to warranty and related costs of the warranty are provided for in cost of revenue when product revenue is recognized. Teradyne classifies shipping and handling costs in cost of revenue. Teradyne generally does not provide its customers with contractual rights of return for any of its products.

 

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Translation of Non-U.S. Currencies

The functional currency for all non-U.S. subsidiaries is the U.S. dollar, except for the Industrial Automation segment for which the local currency is its functional currency. All foreign currency denominated monetary assets and liabilities are remeasured on a monthly basis into the functional currency using exchange rates in effect at the end of the period. All foreign currency denominated non-monetary assets and liabilities are remeasured into the functional currency using historical exchange rates. Net foreign exchange gains and losses resulting from remeasurement are included in other (income) expense, net. For Industrial Automation, assets and liabilities are translated into U.S. dollars using exchange rates in effect at the end of the period. Revenue and expense amounts are translated using an average of exchange rates in effect during the period. Translation adjustments are recorded within accumulated other comprehensive income (loss).

C. Recently Issued Accounting Pronouncements

On April 7, 2015, the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs,” which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability, consistent with the presentation for debt discount. The guidance in the new standard is limited to the presentation of debt issuance costs and does not affect the recognition and measurement of debt issuance costs. Therefore the amortization of such costs should continue to be calculated using the interest method and be reported as interest expense. For Teradyne, the standard is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those years. This ASU is expected to have no impact on Teradyne’s financial position and results of operations.

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, the FASB proposed a deferral of the effective date of the new revenue standard by one year, until January 1, 2018. This deferral was approved on July 22, 2015. 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

Universal Robots

On June 11, 2015, Teradyne acquired all of the outstanding equity of Universal Robots located in Odense, Denmark. Universal Robots is the leading supplier of collaborative robots which are low-cost, easy-to-deploy and simple-to-program robots that work side by side with production workers to improve quality and increase manufacturing efficiency. Universal Robots is a separate operating and reportable segment, Industrial Automation.

 

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The total purchase price of $317.7 million consisted of $283.9 million of cash paid and $33.8 million of contingent consideration, measured at fair value. The contingent consideration is payable upon the achievement of certain thresholds and targets for earnings before income taxes, depreciation and amortization (“EBITDA”) for calendar year 2015, revenue for the period from July 1, 2015 to December 31, 2017 and revenue for the period from July 1, 2015 to December 31, 2018. The maximum amount of contingent consideration that could be paid is $65 million.

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. Discount rates of 6 percent, 8 percent and 10 percent, respectively, were based on corporate bond yields adjusted for the level of difficulty to achieve and the term of the earn out payment. A significant portion of the risk in achieving the contingent consideration was captured in the probabilities assigned to meeting each target.

The Universal Robots 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 Universal Robots’ net tangible liabilities and identifiable intangible assets was based on their estimated fair values as of the acquisition date. The excess of the purchase price over the identifiable intangible assets and net tangible liabilities in the amount of $226.5 million was allocated to goodwill, which is not deductible for tax purposes. The purchase price allocation is preliminary pending the final determination of the fair value of contingent consideration, acquired assets and assumed liabilities.

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

 

     Purchase Price Allocation  
     (in thousands)  

Goodwill

   $ 226,501   

Intangible assets

     119,950   

Tangible assets acquired and liabilities assumed:

  

Current assets

     10,853   

Non-current assets

     3,415   

Accounts payable and current liabilities

     (11,453

Long-term deferred tax liabilities

     (25,736

Long-term other liabilities

     (5,844
  

 

 

 

Total purchase price

   $ 317,686   
  

 

 

 

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

 

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

Developed technology

   $ 88,890         4.9   

Trademarks and tradenames

     21,680         10.0   

Customer relationships

     9,380         2.0   
  

 

 

    

Total intangible assets

   $ 119,950         5.6   
  

 

 

    

For the period from June 12, 2015 to July 5, 2015, Universal Robots contributed $3.7 million of revenues and had a $(1.7) million loss from operations before income taxes.

 

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The following unaudited pro forma information gives effect to the acquisition of Universal Robots as if the acquisition occurred on January 1, 2014. The unaudited pro forma results are not necessarily indicative of what actually would have occurred had the acquisition been in effect for the periods presented:

 

     For the Three Months
Ended
     For the Six Months
Ended
 
     July 5,
2015
     June 29,
2014
     July 5,
2015
     June 29,
2014
 

Revenue

   $ 520,217       $ 533,578       $ 873,188       $ 861,774   

Net income

     99,719         94,138         126,644         86,362   

Net income per common share:

           

Basic

   $ 0.47       $ 0.48       $ 0.54       $ 0.45   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

   $ 0.46       $ 0.43       $ 0.58       $ 0.38   
  

 

 

    

 

 

    

 

 

    

 

 

 

Pro forma results for the three and six months ended July 5, 2015 were adjusted to exclude $1.0 million of acquisition related costs incurred in 2015, and $0.6 million of non-recurring expense related to the fair value adjustment to acquisition-date inventory.

Pro forma results for the six month ended June 29, 2014, were adjusted to include $1.6 million of non recurring expense related to fair value adjustment to acquisition-date inventory and $1.0 million of acquisition related costs.

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 and $1.8 million of contingent consideration, measured at fair value. The contingent consideration is 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.

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. 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.

 

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

 

     Purchase Price Allocation  
     (in thousands)  

Goodwill

   $ 10,516   

Intangible assets

     9,080   

Tangible assets acquired and liabilities assumed:

  

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   

Trademarks and tradenames

     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 July 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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Table of Contents

Teradyne uses the market and income approach techniques to value its financial instruments and there were no changes in valuation techniques during the three and six months ended July 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.

Realized losses recorded in the three and six months ended July 5, 2015 were $0.1 million and $0.1 million, respectively. There were no realized losses recorded in the three and six months ended June 29, 2014. Realized gains recorded in the three and six months ended July 5, 2015 were $0.4 million and $1.0 million, respectively. Realized gains recorded in the three and six months ended June 29, 2014 were $0.4 million and $0.7 million, respectively. Realized gains and realized losses are included in interest income and interest expense, respectively. 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 six months ended July 5, 2015 and June 29, 2014, there were no transfers in or out of Level 1, Level 2 or Level 3 financial instruments.

 

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

 

     July 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

   $ 154,396       $ —        $ —        $ 154,396   

Cash equivalents

     145,256         1,033         —          146,289   

Available-for-sale securities:

           

U.S. Treasury securities

     —          281,522         —          281,522   

U.S. government agency securities

     —          183,768         —          183,768   

Corporate debt securities

     —          122,696         —          122,696   

Certificates of deposit and time deposits

     —          76,876         —          76,876   

Commercial paper

     —          48,446         —          48,446   

Equity and debt mutual funds

     14,174         —          —          14,174   

Non-U.S. government securities

     —          440         —          440   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 313,826       $ 714,781       $ —        $ 1,028,607   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Contingent consideration

   $ —        $ —        $ 35,595       $ 35,595   

Derivatives

     —          87         —          87   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —        $ 87       $ 35,595       $ 35,682   
  

 

 

    

 

 

    

 

 

    

 

 

 

Reported as follows:

 

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

Assets

           

Cash and cash equivalents

   $ 299,652       $ 1,033       $ —        $ 300,685   

Marketable securities

     —          452,040         —          452,040   

Long-term marketable securities

     14,174         261,708         —          275,882   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 313,826       $ 714,781       $ —        $ 1,028,607   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Other current liabilities

   $ —        $ 87      $ —        $ 87   

Contingent consideration

     —          —          15,092         15,092   

Long-term contingent consideration

     —          —          20,503         20,503   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ —        $ 87      $ 35,595       $ 35,682   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     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       $ —         $ 149   

Contingent consideration

     —          —           895         895   

Long-term contingent consideration

     —          —           2,455         2,455   
  

 

 

    

 

 

    

 

 

    

 

 

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

 

 

    

 

 

    

 

 

    

 

 

 

Changes in the fair value of Level 3 contingent consideration for the three and six months ended July 5, 2015 and June 29, 2014 were as follows:

 

     For the Three Months
Ended
     For the Six Months
Ended
 
     July 5,
2015
     June 29,
2014
     July 5,
2015
     June 29,
2014
 
     (in thousands)  

Balance at beginning of period

   $ 3,350       $ 2,230       $ 3,350       $ 2,230   

Acquisition of Universal Robots

     33,845         —           33,845         —     

Fair value adjustment(a)

     (1,600      —           (1,600      —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at end of period

   $ 35,595       $ 2,230       $ 35,595       $ 2,230   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

 

(a) The fair value measurement of the contingent consideration for the earn-out in connection with the acquisition of ZTEC Instruments, Inc. was reduced to $0 because Teradyne and the Securityholder Representative, on behalf of the ZTEC securityholders, agreed to terminate the earn out prior to the end of the December 31, 2015 earn-out period, with no payout in connection with the resolution of indemnity claims asserted by both Teradyne and the Securityholder Representative.

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

 

Liability

  July 5,
2015
Fair Value
  Valuation
Technique
 

Unobservable Inputs

  Weighted
Average
 
    (in thousands)              

Contingent consideration

(Universal Robots)

  $33,845   Income approach-
discounted cash
flow
  EBITDA earn-out for calendar year 2015 probability     99
      Discount rate     6.0
      Revenue earn-out for period July 1, 2015—December 31, 2017 probability     72
      Discount rate     8.0
      Revenue earn-out for period July 1, 2015—December 31, 2018 probability     29
      Discount rate     10.0

Contingent consideration

(AIT)

  $1,750   Income approach-
discounted cash
flow
  Revenue earn-out for calendar years 2015 and 2016 probability     90
      Discount rate     4.7

The significant unobservable inputs used in the Universal Robots fair value measurement of contingent consideration are the probabilities of successful achievement of revenue thresholds and targets in the periods July 1, 2015—December 31, 2017 and July 1, 2015—December 31, 2018 and EBITDA threshold and target for calendar year 2015, and respective discount rates. Increases or decreases in the revenue and EBITDA 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 Universal Robots that could be paid is $65 million. The earn-out periods in connection with the Universal Robots acquisition end on December 31, 2015, December 31, 2017 and December 31, 2018.

The significant unobservable inputs used in the AIT fair value measurement of contingent consideration are the probabilities of successful achievement of calendar year 2015 and 2016 revenue thresholds and targets, 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.

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

 

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

Assets

           

Cash and cash equivalents

   $ 300,685       $ 300,685       $ 294,256       $ 294,256   

Marketable securities

     727,922         727,922         1,004,576         1,004,576   

Contingent consideration

     35,595         35,595         3,350         3,350   

Liabilities

           

Derivatives

   $ 87       $ 87       $ 149       $ 149   

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

 

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Table of Contents

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

 

     July 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

   $ 281,963       $ 221       $ (662   $ 281,522       $ 21,403   

U.S. government agency securities

     183,601         170         (3     183,768         10,341   

Corporate debt securities

     123,176         1,021         (1,501     122,696         61,348   

Certificates of deposit and time deposits

     76,849         32        (5     76,876         11,009   

Commercial paper

     48,438         10         (2     48,446         13,233   

Equity and debt mutual funds

     12,083         2,118         (27     14,174         1,074   

Non-U.S. government securities

     440         —          —         440         —    
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
   $ 726,550       $ 3,572       $ (2,200   $ 727,922       $ 118,408   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Reported as follows:

 

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

Marketable securities

   $ 451,854       $ 196       $ (10   $ 452,040       $ 53,028   

Long-term marketable securities

     274,696         3,376         (2,190     275,882         65,380   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
   $ 726,550       $ 3,572       $ (2,200   $ 727,922       $ 118,408   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

     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   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

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   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

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Table of Contents

As of July 5, 2015, the fair market value of investments with unrealized losses was $118.4 million. Of this value, $0.2 million had unrealized losses greater than one year and $118.2 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 July 5, 2015 and December 31, 2014, were temporary.

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

 

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

Due within one year

   $ 451,854       $ 452,040   

Due after 1 year through 5 years

     218,798         219,045   

Due after 5 years through 10 years

     6,481         6,512   

Due after 10 years

     37,334         36,151   
  

 

 

    

 

 

 

Total

   $ 714,467       $ 713,748   
  

 

 

    

 

 

 

Contractual maturities of investments held at July 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 monetary assets and liabilities denominated in foreign currencies.

The notional amount of foreign currency forward contracts was $100.7 million and $73.0 million at July 5, 2015 and December 31, 2014, respectively. The fair value of the outstanding contracts at July 5, 2015 and December 31, 2014 were losses of $0.1 million and $0.1 million, respectively.

In the three months ended July 5, 2015, Teradyne recorded a net realized gain of $1.6 million related to foreign currency forward contracts hedging net monetary positions. In the six months ended July 5, 2015, Teradyne recorded a net realized loss of $1.9 million related to foreign currency forward contracts hedging net monetary positions.

In the three and six months ended June 29, 2014, Teradyne recorded net realized losses of $1.1 million and $1.9 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.

 

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Table of Contents

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

 

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

Derivatives not designated as hedging instruments:

        

Foreign exchange contracts

   Other current liabilities    $ 87       $ 149   
     

 

 

    

 

 

 

Total derivatives

      $ 87       $ 149   
     

 

 

    

 

 

 

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

The following table summarizes the effect of derivative instruments recognized in the statement of operations during the three and six months ended July 5, 2015 and June 29, 2014. The table does not reflect the corresponding gains and losses from the remeasurement of monetary assets and liabilities denominated in foreign currencies. For the three months ended July 5, 2015, net losses from the remeasurement of monetary assets and liabilities denominated in foreign currencies were $2.1 million. For the six months ended July 5, 2015, net gains from the remeasurement of monetary assets and liabilities denominated in foreign currencies were $2.2 million. For the three and six months ended June 29, 2014, net gains from the remeasurement of monetary assets and liabilities denominated in foreign currencies were $0.7 million and $1.3 million, respectively.

 

    

Location of (Gains) Losses
Recognized in

Statement

of Operations

   For the Three Months
Ended
     For the Six Months
Ended
 
      July 5,
2015
    June 29,
2014
     July 5,
2015
     June 29,
2014
 
          (in thousands)  

Derivatives not designated as hedging instruments:

          

Foreign exchange contracts

   Other (income) expense, net    $ (1,547   $ 1,122       $ 1,878       $ 1,869   
     

 

 

   

 

 

    

 

 

    

 

 

 

Total Derivatives

      $ (1,547   $ 1,122       $ 1,878       $ 1,869   
     

 

 

   

 

 

    

 

 

    

 

 

 

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

F. Debt

Revolving Credit Facility

On April 27, 2015, Teradyne entered into a Credit Agreement (the “Credit Agreement”) with Barclays Bank PLC, as administrative agent and collateral agent, and the lenders party thereto. The Credit Agreement provides for a five-year, senior secured revolving credit facility of $350 million (the “Credit Facility”). The Credit Agreement further provides that, subject to customary conditions, Teradyne may seek to obtain from existing or new lenders incremental commitments under the Credit Facility in an aggregate principal amount not to exceed $150.0 million.

Proceeds from the Credit Facility may be used for general corporate purposes and working capital. During the three months ended July 5, 2015, Teradyne incurred $2.3 million in costs related to the revolving credit facility. These costs are being amortized over the five year term of the revolving credit facility and are included in interest expense in the statement of operations. As of August 14, 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

 

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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. As of July 5, 2015, we were in compliance with all covenants.

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.

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 semiannually 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.

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 and six months ended July 5, 2015 and June 29, 2014 was as follows:

 

     For the Three Months
Ended
     For the Six Months
Ended
 
     July 5,
2015
     June 29,
2014
     July 5,
2015
     June 29,
2014
 
     (in thousands)  

Contractual interest expense on the coupon

   $ —        $ —        $ —        $ 1,757   

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

     —          —          —          4,493   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense on the convertible debt

   $ —        $ —        $ —        $ 6,250   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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G. Prepayments

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

 

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

Contract manufacturer prepayments

   $ 55,674       $ 65,972   

Prepaid maintenance and other services

     6,920         7,343   

Prepaid taxes

     5,124         11,462   

Other prepayments

     12,531         11,042   
  

 

 

    

 

 

 

Total prepayments

   $ 80,249       $ 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:

 

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

Extended warranty

   $ 43,299       $ 43,300   

Product maintenance and training

     36,836         30,500   

Customer advances

     8,159         8,875   

Undelivered elements and other

     14,407         8,857   
  

 

 

    

 

 

 

Total deferred revenue and customer advances

   $ 102,701       $ 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
    For the Six Months
Ended
 
     July 5,
    2015    
    June 29,
    2014    
    July 5,
2015
    June 29,
2014
 
     (in thousands)  

Balance at beginning of period

   $ 7,423      $ 6,615      $ 8,942      $ 6,660   

Acquisition

     372        —          372        —     

Accruals for warranties issued during the period

     3,926        5,399        6,287        8,257   

Adjustments related to pre-existing warranties

     (797     (302     (1,828     (442

Settlements made during the period

     (2,696     (2,639     (5,545     (5,402
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 8,228      $ 9,073      $ 8,228      $ 9,073   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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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
     For the Six Months
Ended
 
     July 5,
2015
     June 29,
2014
     July 5,
2015
     June 29,
2014
 
     (in thousands)  

Balance at beginning of period

   $ 40,704       $ 33,949       $ 43,300       $ 34,909   

Acquisition

     699         —           699         —     

Deferral of new extended warranty revenue

     8,172         11,960         12,376         14,321   

Recognition of extended warranty deferred revenue

     (6,276      (5,857      (13,076      (9,178
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at end of period

   $ 43,299       $ 40,052       $ 43,299       $ 40,052   
  

 

 

    

 

 

    

 

 

    

 

 

 

J. Stock-Based Compensation

Teradyne grants 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 six months ended July 5, 2015 and June 29, 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 Six Months
Ended
 
     July 5,
2015
    June 29,
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

 

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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.

During the six months ended July 5, 2015, Teradyne granted 1.5 million of service-based restricted stock unit awards to employees at a weighted average grant date fair value of $17.26 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 six months ended June 29, 2014, Teradyne granted 1.6 million of service-based restricted stock unit awards to employees at a weighted average grant date fair value of $18.12 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 Six Months
Ended
 
     July 5,
2015
    June 29,
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.

 

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Table of Contents

K. Accumulated Other Comprehensive Income

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

 

     For the Six Months
Ended July 5, 2015
 
     Foreign
Currency
Translation
Adjustments
    Unrealized
Gains
(Losses) 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 loss before reclassifications, net of tax of $0, $(944)

     (6,267     (876     —         (7,143

Amounts reclassified from accumulated other comprehensive income, net of tax of $(209), $(85)

     —         (561     (147     (708
  

 

 

   

 

 

   

 

 

   

 

 

 

Net current period other comprehensive loss, net of tax of $0, $(1,153), $(85)

     (6,267     (1,437     (147     (7,851
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at July 5, 2015, net of tax of $0, $445, $(538)

   $ (6,267   $ 928      $ 2,177      $ (3,162
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     For the Six Months Ended
June 29, 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 $1,242, $0

     2,304        —         2,304   

Amounts reclassified from accumulated other comprehensive income, net of tax of $(243), $(85)

     (448     (147     (595
  

 

 

   

 

 

   

 

 

 

Net current period other comprehensive income, net of tax of $999, $(85)

     1,856        (147     1,709   
  

 

 

   

 

 

   

 

 

 

Balance at June 29, 2014, net of tax of $1,793, $(369)

   $ 3,237      $ 2,472      $ 5,709   
  

 

 

   

 

 

   

 

 

 

 

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Reclassifications out of accumulated other comprehensive income to the statement of operations for the three and six months ended July 5, 2015 and June 29, 2014, were as follows:

 

Details about Accumulated Other Comprehensive Income

Components

  For the Three Months
Ended
    For the Six
Months

Ended
    Affected Line Item
in the Statements
of Operations
    July 5,
2015
    June 29,
2014
    July 5,
2015
    June 29,
2014
     
    (in thousands)      

Available-for-sale marketable securities:

         

Unrealized gains, net of tax of $40, $141, $209, $243

  $ 231      $ 272      $ 561      $ 448      Interest income

Amortization of defined benefit pension and postretirement plans:

         

Prior service benefit, net of tax of $42, $42, $85, $85

    74        74        147        147      (a)
 

 

 

   

 

 

   

 

 

   

 

 

   

Total reclassifications, net of tax of $82, $183, $294, $328

  $ 305      $ 346      $ 708      $ 595      Net income
 

 

 

   

 

 

   

 

 

   

 

 

   

 

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

L. Goodwill and Intangible Assets

The changes in the carrying amounts of goodwill by segment are as follows:

 

     Wireless
Test
     Industrial
Automation
     System Test
Group
     Total  
     (in thousands)  

Balance at December 31, 2014

   $ 262,922       $ —         $ 10,516       $ 273,438   

Goodwill acquired during period

     —          226,501         —          226,501   

Foreign currency translation adjustment

     —          (4,505      —          (4,505
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at July 5, 2015

   $ 262,922       $ 221,996       $ 10,516       $ 495,434   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

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

Developed technology

   $ 432,656       $ 244,514       $ 188,142         5.9 years   

Customer relationships

     155,831         100,500         55,331         7.5 years   

Tradenames and trademarks

     51,668         16,275         35,393         5.3 years   

Non-compete agreement

     320         60         260         4.0 years   

Customer order backlog

     170         170         —           0.3 years   
  

 

 

    

 

 

    

 

 

    

Total intangible assets

   $ 640,645       $ 361,519       $ 279,126         6.6 years   
  

 

 

    

 

 

    

 

 

    

 

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Table of Contents
     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   
  

 

 

    

 

 

    

 

 

    

Aggregate intangible asset amortization expense was $15.3 million and $29.1 million, respectively, for the three and six months ended July 5, 2015 and $18.3 million and $36.5 million, respectively, for the three and six months ended June 29, 2014. Estimated intangible asset amortization expense for each of the five succeeding fiscal years is as follows:

 

Year

   Amortization Expense  
     (in thousands)  

2015 (remainder)

   $ 39,932   

2016

     79,863   

2017

     71,269   

2018

     44,440   

2019

     23,591   

Thereafter

     20,031   

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
     For the Six Months
Ended
 
     July 5,
2015
     June 29,
2014
     July 5,
2015
     June 29,
2014
 
     (in thousands, except per share amounts)  

Net income for basic and diluted net income per share

   $ 102,879       $ 101,205       $ 135,666       $ 102,134   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares-basic

     213,845         194,408         215,516         193,860   

Effect of dilutive potential common shares:

           

Incremental shares from assumed conversion of convertible notes (1)

     —          —          —           10,026   

Convertible note hedge warrant shares (2)

     —          20,406         —           20,674   

Restricted stock units

     978         705         940         878   

Stock options

     603         1,006         649         1,056   

Employee stock purchase plan

     70         43         49         32   
  

 

 

    

 

 

    

 

 

    

 

 

 

Dilutive potential common shares

     1,651         22,160         1,638         32,666   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares-diluted

     215,496         216,568         217,154         226,526   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income per common share-basic

   $ 0.48       $ 0.52       $ 0.63       $ 0.53   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income per common share-diluted

   $ 0.48       $ 0.47       $ 0.62       $ 0.45   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(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,

 

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Table of Contents
  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 and six months ended July 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 and six months ended June 29, 2014 excludes the effect of the potential exercise of stock options to purchase approximately 0.3 million shares because the effect would have been anti-dilutive.

N. Restructuring and Other

Other

During the three and six months ended July 5, 2015, Teradyne recorded a $1.6 million gain from the decrease in the fair value of the ZTEC contingent consideration liability, partially offset by $1.0 million of acquisition costs related to Universal Robots.

Restructuring

During the six months ended July 5, 2015, Teradyne recorded $0.3 million of severance charges related to headcount reductions of 4 people, primarily in Semiconductor Test. During the six months ended June 29, 2014, Teradyne recorded $0.6 million of severance charges related to headcount reductions of 28 people, primarily in Wireless Test.

O. 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.

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 six months ended July 5, 2015, Teradyne contributed $1.2 million to the U.S. supplemental executive defined benefit pension plan and $0.4 million to certain qualified plans for non-U.S. subsidiaries.

 

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For the three and six months ended July 5, 2015 and June 29, 2014, Teradyne’s net periodic pension cost was comprised of the following:

 

     For the Three Months Ended  
     July 5, 2015      June 29, 2014  
     United
States
     Foreign      United
States
     Foreign  
     (in thousands)  

Service cost

   $ 615       $ 263       $ 563       $ 248   

Interest cost

     3,289         385         3,223         509   

Expected return on plan assets

     (3,634      (215      (3,125      (259

Amortization of prior service cost

     34         —          34         —    

Actuarial (gain) loss

     (3      —          362         —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total net periodic pension cost

   $ 301       $ 433       $ 1,057       $ 498   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     For the Six Months Ended  
     July 5, 2015      June 29, 2014  
     United
States
     Foreign      United
States
     Foreign  
     (in thousands)  

Service cost

   $ 1,231       $ 510       $ 1,109       $ 498   

Interest cost

     6,571         744         6,438         1,014   

Expected return on plan assets

     (7,259      (410      (6,250      (475

Amortization of prior service cost

     67         —          67         —    

Actuarial (gain) loss

     (3      —          362         —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total net periodic pension cost

   $ 607       $ 844       $ 1,726       $ 1,037   
  

 

 

    

 

 

    

 

 

    

 

 

 

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 and six months ended July 5, 2015 and June 29, 2014, Teradyne’s net periodic postretirement benefit income was comprised of the following:

 

     For the Three Months
Ended
     For the Six Months
Ended
 
     July 5,
2015
     June 29,
2014
     July 5,
2015
     June 29,
2014
 
     (in thousands)  

Service cost

   $ 12       $ 17       $ 24       $ 29   

Interest cost

     59         82         118         168   

Amortization of prior service benefit

     (150      (150      (299      (299

Actuarial gain

     (19      (247      (19      (247
  

 

 

    

 

 

    

 

 

    

 

 

 

Total net periodic post-retirement benefit

   $ (98    $ (298    $ (176    $ (349
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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P. Commitments and Contingencies

Purchase Commitments

As of July 5, 2015, Teradyne had entered into purchase commitments for certain components and materials. The purchase commitments covered by the agreements aggregate to approximately $230.3 million, of which $222.9 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.

Q. Income Taxes

The effective tax rate for the three months ended July 5, 2015 and June 29, 2014 was 22.1% and 16.6%, respectively. The effective tax rate for the six months ended July 5, 2015 and June 29, 2014 was 22.3% and 14.6%, respectively. The effective tax rates for these periods were 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. The tax rate for the six months ended July 5, 2015 was increased by additions to the uncertain tax positions for transfer pricing included in the projected annual effective tax rate partially offset by $1.7 million of discrete tax benefits composed of $0.7 million from disqualifying dispositions of incentive stock options and employee stock purchase plan shares and $1.0 million from other discrete tax benefits. The rate for the six months ended June 29, 2014 was also reduced by $2.9 million of discrete tax benefits composed of $1.2 million from disqualifying dispositions of incentive stock options and employee stock purchase plan shares and $1.7 million of other discrete tax benefits.

On a quarterly basis, Teradyne evaluates the realizability of the deferred tax assets by jurisdiction and assesses the need for a valuation allowance. At July 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 July 5, 2015 and December 31, 2014, Teradyne had $33.3 million and $30.4 million, respectively, of reserves for uncertain tax positions. The $2.9 million net increase in reserves for uncertain tax positions relates primarily to transfer pricing exposures.

As of July 5, 2015, Teradyne anticipated the liability for uncertain tax positions could decrease by approximately $0.5 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 related to transfer pricing exposures.

Teradyne recognizes interest and penalties related to income tax matters in income tax expense. As of July 5, 2015 and December 31, 2014, $0.5 million and $0.6 million respectively of interest and penalties were 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 six months ended July 5, 2015 was $6.2 million or $0.03 per diluted share. The tax savings due to the tax holiday for the six months ended June 29, 2014 was $6.1 million or $0.03 per diluted share. 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.

 

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R. Segment Information

Teradyne has four operating segments (Semiconductor Test, Wireless Test, System Test and Industrial Automation), 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. The Industrial Automation segment includes operations related to the design, manufacturing and marketing of collaborative robots. Each operating segment has a segment manager who is directly accountable to and maintains regular contact with Teradyne’s chief operating decision maker (Teradyne’s chief executive officer) to discuss operating activities, financial results, forecasts, and plans for the segment.

Teradyne evaluates performance based on several factors, of which the primary financial measure is business segment income before income taxes. The accounting policies of the business segments in effect are described in Note B: “Accounting Policies” in Teradyne’s Annual Report on Form 10-K for the year ended December 31, 2014, unless updated in this form 10-Q, where applicable.

Segment information for the three and six months ended July 5, 2015 and June 29, 2014 is as follows:

 

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

Three months ended July 5, 2015:

           

Revenues

  $ 400,315      $ 62,879      $ 45,822      $ 3,723      $ —       $ 512,739   

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

    129,546        6,841        (4,333     (1,700     1,782        132,136   

Total assets (3)

    649,087        485,857        95,544        358,276        1,104,043        2,692,807   

Three months ended June 29, 2014:

           

Revenues

  $ 421,434      $ 68,699      $ 35,434      $ —       $ —       $ 525,567   

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

    107,270        14,229        (715     —          608        121,392   

Total assets (3)

    747,492        638,012        71,644        —          1,173,515        2,630,663   

Six months ended July 5, 2015:

           

Revenues

  $ 671,232      $ 96,927      $ 83,258      $ 3,723      $ —       $ 855,140   

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

    172,671        (3,600     (3,328     (1,700     10,531        174,574   

Total assets (3)

    649,087        485,857        95,544        358,276        1,104,043        2,692,807   

Six months ended June 29, 2014:

           

Revenues

  $ 683,171      $ 89,909      $ 73,497      $ —       $ —       $ 846,577   

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

    141,870        (10,856     (267     —          (11,228     119,519   

Total assets (3)

    747,492        638,012        71,644        —          1,173,515        2,630,663   

 

(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.
(3) Total business assets are directly attributable to each business. Corporate assets consist of cash and cash equivalents, marketable securities and certain other assets.

 

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Included in the Semiconductor Test segment are charges in the following line items in the statements of operations:

 

     For the Three Months
Ended
     For the Six Months
Ended
 
     July 5, 
2015
     June 29, 
2014
     July 5, 
2015
     June 29, 
2014
 
     (in thousands)  

Cost of revenues—inventory charge

   $ 6,409       $ 3,713       $ 6,940       $ 9,918   

Restructuring and other

     305         —           305         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,714       $ 3,713       $ 7,245       $ 9,918   
  

 

 

    

 

 

    

 

 

    

 

 

 

Included in the Wireless Test segment are charges in the following line items in the statements of operations:

 

     For the Three Months
Ended
     For the Six Months
Ended
 
     July 5,
2015
     June 29,
2014
     July 5,
2015
     June 29,
2014
 
     (in thousands)  

Cost of revenues—inventory charge

   $ 330       $ 879       $ 1,176       $ 3,972   

Restructuring and other

     —           426         —           426   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 330       $ 1,305       $ 1,176       $ 4,398   
  

 

 

    

 

 

    

 

 

    

 

 

 

Included in the System Test segment are charges in the following line items in the statements of operations:

 

     For the Three Months
Ended
     For the Six Months
Ended
 
     July 5,
2015
     June 29,
2014
     July 5,
2015
     June 29,
2014
 
     (in thousands)  

Cost of revenues—inventory charge

   $ 7,702       $ 440       $ 7,765       $ 1,181   

Restructuring and other

     —           146         —           146   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 7,702       $ 586       $ 7,765       $ 1,327   
  

 

 

    

 

 

    

 

 

    

 

 

 

Included in the Industrial Automation segment are charges in the following line item in the statements of operations:

 

     For the Three Months
Ended
     For the Six Months
Ended
 
     July 5,
2015
     June 29,
2014
     July 5,
2015
     June 29,
2014
 
     (in thousands)  

Cost of revenues—inventory step-up (1)

   $ 595       $ —        $ 595       $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 595       $ —        $ 595       $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

     For the Three Months
Ended
     For the Six Months
Ended
 
     July 5,
    2015    
    June 29,
    2014    
     July 5,
2015
    June 29,
2014
 
     (in thousands)  

Restructuring and other—ZTEC contingent consideration adjustment

   $ (1,600   $ —         $ (1,600   $ —     

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

     (624     —           (5,406     —     

Restructuring and other—Universal Robots acquisition costs

     960        —           960        —     

Selling and administrative—stock-based compensation expense (2)

     —          —           —          6,598   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ (1,264   $ —         $ (6,046   $ 6,598   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

(1) Included in the cost of revenues for the three and six months ended July 5, 2015 is the cost for purchase accounting inventory step-up.
(2) Expense related to the January 2014 retirement of Teradyne’s former chief executive officer; see Note J: “Stock-Based Compensation”.

S. 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 July 5, 2015 totaled 6.5 million shares of common stock for $128.3 million at an average price of $19.74 per share.

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 and May 2015, Teradyne’s Board of Directors declared a quarterly cash dividend of $0.06 per share. Dividend payments for the three and six months ended July 5, 2015 were $12.8 million and $25.9 million, respectively.

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. Dividend payments for the three and six months ended June 29, 2014 were $11.7 million.

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.

 

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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 and collaborative robots. 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 and collaborative robots products and services include:

 

    semiconductor test (“Semiconductor Test”) systems;

 

    wireless test (“Wireless Test”) systems;

 

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

 

    industrial automation (“Industrial Automation”) products include collaborative robots used by global manufacturing and light industrial customers to improve quality and increase manufacturing efficiency.

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, and distributors that sell collaborative robots.

On June 11, 2015, we acquired Universal Robots A/S (“Universal Robots”) for approximately $284 million of cash plus up to an additional $65 million of cash if certain performance targets are met extending through 2018. Universal Robots is the leading supplier of collaborative robots which are low-cost, easy-to-deploy and simple-to-program robots that work side by side with production workers to improve quality and increase manufacturing efficiency. Universal Robots is a separate operating and reportable segment, Industrial Automation. The acquisition of Universal Robots provides a growth engine to our business and complements our existing System Test and Wireless Test segments.

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 intend to continue to invest in our business, grow market share in our markets and expand further our addressable markets while tightly managing our costs.

 

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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. Except for below, there have been no significant changes during the six months ended July 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.

Revenue Recognition

We recognize revenues when there is persuasive evidence of an arrangement, title and risk of loss have passed, delivery has occurred or the services have been rendered, the sales price is fixed or determinable and collection of the related receivable is reasonably assured. Title and risk of loss generally pass to our customers upon shipment or at delivery destination point. In circumstances where either title or risk of loss pass upon destination, acceptance or cash payment, we defer revenue recognition until such events occur except when title transfer is tied to cash payment outside the United States. Outside the United States, we recognize revenue even if we retain a form of title to products delivered to customers, provided the sole purpose is to enable us to recover the products in the event of customer payment default and the arrangement does not prohibit the customer’s use or resale of the product in the ordinary course of business.

Our equipment has non-software and embedded software components that function together to deliver the equipment’s essential functionality. Revenue is recognized upon shipment or at delivery destination point, provided that customer acceptance criteria can be demonstrated prior to shipment. Certain contracts require us to perform tests of the product to ensure that performance meets the published product specifications or customer requested specifications, which are generally conducted prior to shipment. Where the criteria cannot be demonstrated prior to shipment, revenue is deferred until customer acceptance has been received. We also defer the portion of the sales price that is not due until acceptance, which represents deferred profit.

For multiple element arrangements, we allocate revenue to all deliverables based on their relative selling prices. In such circumstances, a hierarchy is used to determine the selling price for allocating revenue to deliverables as follows: (i) vendor-specific objective evidence of selling price (“VSOE”), (ii) third-party evidence of selling price (“TPE”), and (iii) best estimate of the selling price (“BESP”). For a delivered item to be considered a separate unit, the delivered item must have value to the customer on a standalone basis and the delivery or performance of the undelivered item must be considered probable and substantially in our control.

Our post-shipment obligations include installation, training services, one-year standard warranties, and extended warranties. Installation does not alter the product capabilities, does not require specialized skills or

 

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tools and can be performed by the customers or other vendors. Installation is typically provided within five days of product shipment and is completed within one to two days thereafter. Training services are optional and do not affect the customers’ ability to use the product. We defer revenue for the selling price of installation and training. Extended warranties constitute warranty obligations beyond one year and we defer revenue in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 605-20, “Separately Priced Extended Warranty and Product Maintenance Contracts” and ASC 605-25, “Revenue Recognition Multiple-Element Arrangements.” Service revenue is recognized over the contractual period or as services are performed.

Our products are generally subject to warranty and the related costs of the warranty are provided for in cost of revenues when product revenue is recognized. We classify shipping and handling costs in cost of revenues.

We do not provide our customers with contractual rights of return for any of our products.

Translation of Non-U.S. Currencies

The functional currency for all non-U.S. subsidiaries is the U.S. dollar, except for the Industrial Automation segment for which the local currency is its functional currency. All foreign currency denominated monetary assets and liabilities are re-measured on a monthly basis into the functional currency using exchange rates in effect at the end of the period. All foreign currency denominated non-monetary assets and liabilities are re-measured into the functional currency using historical exchange rates. Net foreign exchange gains and losses resulting from re-measurement are included in other (income) expense, net. For Industrial Automation, assets and liabilities are translated into U.S. dollars using exchange rates in effect at the end of the period. Revenue and expense amounts are translated using an average of exchange rates in effect during the period. Translation adjustments are recorded within accumulated other comprehensive income (loss).

 

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SELECTED RELATIONSHIPS WITHIN THE CONDENSED CONSOLIDATED

STATEMENTS OF OPERATIONS

 

     For the Three Months
Ended
    For the Six Months
Ended
 
     July 5,
2015
    June 29,
2014
    July 5,
2015
    June 29,
2014
 

Percentage of revenues:

        

Revenues:

        

Products

     85     86     83     84

Services

     15        14        17        16   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     100        100        100        100   

Cost of revenues:

        

Cost of products

     35        39        35        39   

Cost of services

     6        6        7        7   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     42        45        43        46   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     58        55        57        54   

Operating expenses:

        

Engineering and development

     15        14        17        17   

Selling and administrative

     15        15        17        18   

Acquired intangible assets amortization

     3        3        3        4   

Restructuring and other

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     33        32        38        39   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     26        23        19        15   

Non-operating (income) expenses

        

Interest income

     —          —          —          —     

Interest expense

     —          —          —          1  

Other (income) expense, net

     —          —          (1     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     26        23        20        14   

Income tax provision

     6        4        5        2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     20     19     16     12
  

 

 

   

 

 

   

 

 

   

 

 

 

Results of Operations

Second Quarter 2015 Compared to Second 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
 
     July 5,
2015
     June 29,
2014
 

Semiconductor Test

     1.0         1.3   

Wireless Test

     1.3         0.8   

System Test

     1.0         1.1   

Industrial Automation

     1.4         —     

Total Company

     1.0         1.2   

 

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Revenues

Revenues by our four reportable segments were as follows:

 

     For the Three Months
Ended
     Dollar
Change
 
     July 5,
2015
     June 29,
2014
    
     (in millions)  

Semiconductor Test

   $ 400.3       $ 421.5       $ (21.2

Wireless Test

     62.9         68.7         (5.8

System Test

     45.8         35.4         10.4   

Industrial Automation

     3.7         —           3.7   
  

 

 

    

 

 

    

 

 

 
   $ 512.7       $ 525.6       $ (12.9
  

 

 

    

 

 

    

 

 

 

The decrease in Semiconductor Test revenues of $21.2 million, or 5%, was primarily due to lower memory test product sales. The decrease in Wireless Test revenue of $5.8 million, or 8%, was primarily driven by lower connectivity test system sales. The increase in System Test revenue of $10.4 million, or 29%, was primarily due to higher sales in Storage Test of 3.5” hard disk drive testers for cloud storage.

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

 

     For the Three Months
Ended
 
     July 5,
2015
    June 29,
2014
 

Taiwan

     26     30

China

     18        19   

United States

     12        11   

Singapore

     8        6   

Japan

     8        2   

Philippines

     7        4   

Europe

     6        5   

Korea

     5        13   

Malaysia

     5        5   

Thailand

     4        4   

Rest of World

     1        1   
  

 

 

   

 

 

 
     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
 
     July 5,
2015
    June 29,
2014
   
     (in millions)  

Gross Profit

   $ 298.6      $ 290.4      $ 8.2   

Percent of Total Revenues

     58.2     55.3     2.9   

 

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Gross profit as a percent of revenue increased by 2.9 points as a result of a 4.3 point increase related to product mix and sales of previously leased testers in Semiconductor Test, partially offset by a 1.4 point decrease due to higher excess and obsolete inventory provisions in Storage Test and Semiconductor Test.

We assess the carrying value of our inventory on a quarterly basis by estimating future demand and comparing that demand against on-hand and on-order inventory positions. Forecasted revenue information is obtained from 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 July 5, 2015, we recorded an inventory provision of $14.4 million included in cost of revenues primarily due to $7.7 million related to a downward revision to previously forecasted demand levels for our 2.5” hard disk drive testers in Storage Test and $6.0 million related to product transition in Semiconductor Test. Of the $14.4 million of total excess and obsolete provisions, $7.7 million was related to System Test, $6.4 million was related to Semiconductor Test, and $0.3 million was related to Wireless Test.

During the three months ended June 29, 2014, we recorded an inventory provision of $5.0 million included in cost of revenues primarily due to downward revisions to previously forecasted demand levels. Of the $5.0 million of total excess and obsolete provisions, $3.7 million was related to Semiconductor Test, $0.9 million was related to Wireless Test, and $0.4 million was related to System Test.

During the three months ended July 5, 2015 and June 29, 2014, we scrapped $0.8 million and $2.3 million of inventory, respectively. During the three months ended July 5, 2015 and June 29, 2014, we sold $2.6 million and $2.1 million of previously written-down or written-off inventory, respectively. As of July 5, 2015, we had inventory related reserves for inventory which had been written-down or written-off totaling $122.8 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
 
     July 5,
2015
    June 29,
2014
   
     (in millions)  

Engineering and Development

   $ 75.8      $ 73.4      $ 2.4   

Percent of Total Revenues

     14.8     14.0  

The increase of $2.4 million in engineering and development expenses was due primarily to increased spending in System Test and higher variable compensation.

Selling and Administrative

Selling and administrative expenses were as follows:

 

     For the Three Months
Ended
    Dollar
Change
 
     July 5,
2015
    June 29,
2014
   
     (in millions)  

Selling and Administrative

   $ 77.1      $ 77.5      $ (0.4

Percent of Total Revenues

     15.0     14.7  

 

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The decrease of $0.4 million in selling and administrative was due primarily to lower spending in Semiconductor Test partially offset by higher variable compensation.

Restructuring and Other

Other

During the three months ended July 5, 2015, we recorded a $1.6 million gain from the decrease in the fair value of the ZTEC contingent consideration, partially offset by $1.0 million of acquisition costs related to Universal Robots.

Restructuring

During the three months ended July 5, 2015, we recorded $0.3 million of severance charges related to headcount reductions of 4 people, primarily in Semiconductor Test. During the three months ended June 29, 2014, we recorded $0.6 million of severance charges related to headcount reductions of 28 people, primarily in Wireless Test.

Income Taxes

The effective tax rate for the three months ended July 5, 2015 and June 29, 2014 was 22.1% and 16.6%, respectively. The increase in the effective tax rate is primarily attributable to a projected increase in income subject to tax in the United States as compared to lower rate, in foreign jurisdictions and an increase in uncertain tax positions for transfer pricing.

Six Months of 2015 Compared to Six Months of 2014

Revenues

Revenues by our four reportable segments were as follows:

 

     For the Six Months
Ended
        
     July 5,
2015
     June 29,
2014
     Dollar
Change
 
     (in millions)  

Semiconductor Test

   $ 671.2       $ 683.2       $ (12.0

Wireless Test

     96.9         89.9         7.0   

System Test

     83.3         73.5         9.8   

Industrial Automation

     3.7         —           3.7   
  

 

 

    

 

 

    

 

 

 
   $ 855.1       $ 846.6       $ 8.5   
  

 

 

    

 

 

    

 

 

 

The decrease in Semiconductor Test revenues of $12.0 million, or 2%, was primarily due to lower SOC product volume, driven by the application processors and microcontrollers markets. The increase in Wireless Test revenue of $7.0 million, or 8%, was primarily due to higher cellular test product volume. The increase in System Test revenue of $9.8 million, or 13%, was primarily due to higher sales in Storage Test due to 3.5” hard disk drive testers for cloud storage.

 

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

 

     For the Six Months
Ended
 
     July 5,
2015
    June 29,
2014
 

Taiwan

     28     29

China

     16        17   

United States

     13        12   

Korea

     8        10   

Japan

     8        4   

Singapore

     7        8   

Europe

     6        6   

Malaysia

     5        5   

Philippines

     5        4   

Thailand

     3        4   

Rest of World

     1        1   
  

 

 

   

 

 

 
     100     100
  

 

 

   

 

 

 

Gross Profit

Our gross profit was as follows:

 

     For the Six Months
Ended
    Dollar/Point
Change
 
     July 5,
2014
    June 29,
2014
   
     (in millions)  

Gross Profit

   $ 491.0      $ 457.5      $ 33.5   

Percent of Total Revenue

     57.4     54.0     3.4   

Gross profit as a percent of revenue increased by 3.4 points primarily due to an increase of 3.7 points related to product mix and sales of previously leased testers in Semiconductor Test, partially offset by higher warranty costs.

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

During the six months ended July 5, 2015, we recorded an inventory provision of $15.9 million included in cost of revenues primarily due to $7.7 million related to a downward revision to previously forecasted demand levels for our 2.5” hard disk drive testers in Storage Test and $6.0 million related to product transition in Semiconductor Test. Of the $15.9 million of total excess and obsolete provisions, $7.8 million was related to System Test, $6.9 million was related to Semiconductor Test, and $1.2 million was related to Wireless Test.

During the six months ended June 29, 2014, we recorded an inventory provision of $15.1 million included in cost of revenues with $9.0 million due to downward revisions to previously forecasted demand levels and $6.1 million related to product transition in Semiconductor Test. Of the $15.1 million of total excess and obsolete provisions, $9.9 million was related to Semiconductor Test, $4.0 million was related to Wireless Test, and $1.2 million was related to System Test.

 

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During the six months ended July 5, 2015 and June 29, 2014, we scrapped $1.4 million and $3.3 million of inventory, respectively. During the six months ended July 5, 2015 and June 29, 2014, we sold $4.5 million and $3.6 million, respectively, of previously written-down or written-off inventory. As of July 5, 2015 we had inventory related reserves for inventory which had been written-down or written-off totaling $122.8 million. We have no pre-determined timeline to scrap the remaining inventory.

Engineering and Development

Engineering and development expenses were as follows:

 

     For the Six Months
Ended
    Dollar
Change
 
     July 5
2015
    June 29,
2014
   
     (in millions)  

Engineering and Development

   $ 147.3      $ 140.5      $ 6.8   

Percent of Total Revenue

     17.2     16.6  

The increase of $6.8 million in engineering and development expenses 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 Six Months
Ended
    Dollar
Change
 
     July 5,
2015
    June 29,
2014
   
     (in millions)  

Selling and Administrative

   $ 149.1      $ 155.5      $ (6.4

Percent of Total Revenue

     17.4     18.4  

The decrease of $6.4 million in selling and administrative expenses was due primarily to a one-time $6.6 million stock-based compensation charge related to Michael Bradley’s (retired Chief Executive Officer) Retirement Agreement in the six months ended June 29, 2014, partially offset by higher variable compensation.

Restructuring and Other

Other

During the six months ended July 5, 2015, we recorded a $1.6 million fair value adjustment to decrease the ZTEC acquisition contingent consideration, partially offset by $1.0 million of acquisition costs related to Universal Robots.

Restructuring

During the six months ended July 5, 2015, we recorded $0.3 million of severance charges related to headcount reductions of 4 people, primarily in Semiconductor Test. During the six months ended June 29, 2014, we recorded $0.6 million of severance charges related to headcount reductions of 28 people, primarily in Wireless Test.

Income Taxes

The effective tax rate for the six months ended July 5, 2015 and June 29, 2014 was 22.3% and 14.6%, respectively. The increase in the effective tax rate is primarily attributable to a projected increase in income

 

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subject to tax in the United States as compared to lower rates in foreign jurisdictions as well as an increase in uncertain tax positions for transfer pricing. The effective tax rate for the six months ended July 5, 2015 was reduced by discrete tax benefits of $1.7 million composed of $0.7 million from disqualifying dispositions of incentive stock options and employee stock purchase plan shares and $1.0 million of other discrete tax benefits. The effective tax rate for the six months ended June 29, 2014 was reduced by discrete tax benefits of $2.9 million composed of $1.2 million from disqualifying dispositions of incentive stock options and employee stock purchase plan shares and $1.7 million of other discrete tax benefits.

Contractual Obligations

The following table reflects our contractual obligations as of July 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

   $ 230,288       $ 222,882       $ 7,406       $ —        $ —        $ —    

Retirement Plan Contributions

     111,651         4,145         8,260         8,885         90,361         —    

Operating Lease Obligations

     62,441         15,326         20,191         12,368         14,556         —    

Fair Value of Contingent Consideration

     35,595         15,092         15,410         5,093         —          —    

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

     88,446         —          25,354         —          —          63,092   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 528,421       $ 257,445       $ 76,621       $ 26,346       $ 104,917       $ 63,092   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(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 $270.2 million in the six months ended July 5, 2015, to $1,029 million.

In the six months ended July 5, 2015, changes in operating assets and liabilities used cash of $24.6 million. This was due to a $104.9 million increase in operating assets and an $80.3 million increase in operating liabilities.

The increase in operating assets was due to a $142.5 million increase in accounts receivable due to higher sales, partially offset by a $23.5 million decrease in inventories and a $14.1 million decrease in prepayments and other assets. The increase in operating liabilities was due to a $40.6 million increase in other accrued liabilities, a $31.2 million increase in accounts payable due to higher sales, a $23.2 million increase in accrued income taxes, and a $5.7 million increase in customer advance payments and deferred revenue, partially offset by a $18.4 million decrease in accrued employee compensation due primarily to variable compensation and employee stock compensation awards’ payroll tax payments, and $2.0 million of retirement plan contributions.

Investing activities during the six months ended July 5, 2015 used cash of $49.4 million, due to $590.3 million used for purchases of marketable securities, $282.3 million used for the acquisition of Universal Robots, and $46.1 million used for purchases of property, plant and equipment, partially offset by proceeds from maturities and sales of marketable securities of $231.4 million and $631.4 million, respectively, proceeds from the sale of an equity investment of $5.4 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 $45.3 million was primarily due to higher purchases of testers for customer leasing in the six months ended June 29, 2014.

 

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Financing activities during the six months ended July 5, 2015 used cash of $137.7 million, due to $128.3 million used for repurchase of 6.5 million shares of common stock at an average price of $19.74 per share, $25.9 million used for dividend payments, and $2.3 million used for debt issuance costs related to our April, 2015 revolving credit facility, partially offset by $17.9 million from the issuance of common stock under employee stock purchase and stock option plans and $0.9 million from the tax benefit related to employee stock compensation awards.

In the six months ended June 29, 2014, changes in operating assets and liabilities used cash of $27.9 million. This was due to a $97.7 million increase in operating assets and a $69.7 million increase in operating liabilities.

The increase in operating assets was due to a $143.1 million increase in accounts receivable due to higher sales, partially offset by a $27.0 million decrease in prepayments and other assets and an $18.5 million decrease in inventories due to higher sales. The increase in operating liabilities was due to a $39.3 million increase in accounts payable due to higher sales, a $37.9 million increase in other accrued liabilities, a $13.8 million increase in customer advance payments and deferred revenue and a $5.5 million increase in accrued income taxes, partially offset by a $20.1 million decrease in accrued employee compensation due primarily to variable compensation and employee stock compensation awards’ payroll tax payments, a $4.3 million convertible note interest payment, and $2.4 million of retirement plan contributions.

Investing activities during the six months ended June 29, 2014 used cash of $80.1 million, due to $523.3 million used for purchases of marketable securities and $91.4 million used for purchases of property, plant and equipment, partially offset by proceeds from maturities and sales of marketable securities that provided cash of $377.4 million and $152.8 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.

Financing activities during the six months ended June 29, 2014 used cash of $190.3 million. $191.0 million of cash was used for payments on long-term debt and $11.7 million was used for dividend payments, partially offset by $10.6 million from the issuance of common stock under employee stock purchase and stock option plans and $1.7 million from the tax benefit related to employee stock compensation awards.

In January 2014, our Board of Directors declared an initial quarterly cash dividend of $0.06 per share that was paid on June 2, 2014. In the six months ended June 29, 2014, dividend payments were $11.7 million.

In January 2015 and May 2015, our Board of Directors declared a quarterly cash dividend of $0.06 per share. In the six months ended July 5, 2015, dividend payments were $25.9 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 July 5, 2015, we repurchased 6.5 million shares of common stock at an average price of $19.74, for a total cost of $128.3 million.

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 our Board of Directors which will consider, among other things, our 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 $455 million of cash, cash equivalents and marketable securities outside the U.S. that if repatriated would incur additional taxes. Determination of the additional taxes that would be incurred

 

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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.

Recently Issued Accounting Pronouncements

On April 7, 2015, the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs,” which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability, consistent with the presentation for debt discount. The guidance in the new standard is limited to the presentation of debt issuance costs and does not affect the recognition and measurement of debt issuance costs. Therefore the amortization of such costs should continue to be calculated using the interest method and be reported as interest expense. The standard is effective for our financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those years. This ASU is expected to have no impact on our financial position and results of operations.

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, the FASB proposed a deferral of the effective date of the new revenue standard by one year, until January 1, 2018. This deferral was approved on July 22, 2015. The standard will be effective in our 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 Part 2 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

 

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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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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.

Restrictive covenants in the agreement governing our senior secured revolving credit facility may restrict our ability to pursue business strategies.

The agreement governing our senior secured revolving credit facility limits our ability, among other things, to: incur additional secured indebtedness; sell, transfer, license or dispose of assets; consolidate or merge; enter into transactions with our affiliates; and incur liens. In addition, our senior secured revolving credit facility contains financial and other restrictive covenants that limit our ability to engage in activities that may be in our long term best interest, such as, subject to permitted exceptions, making capital expenditures in excess of certain thresholds, making investments, loans and other advances, and prepaying any additional indebtedness while our indebtedness under our senior secured revolving credit facility is outstanding. Our failure to comply with financial and other restrictive covenants could result in an event of default, which if not cured or waived, could result in the lenders requiring immediate payment of all outstanding borrowings or foreclosing on collateral pledged to them to secure the indebtedness.

We may not fully realize the benefits of our acquisitions or strategic alliances.

In June 2015, we acquired Universal Robots. We may not be able to realize the benefit of acquiring Universal Robots or successfully grow Universal Robots’ business. We may continue to acquire additional

 

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businesses, form strategic alliances or create joint ventures with third parties that we believe will complement or augment our existing businesses. We may not be able to realize the expected synergies and cost savings from the integration with our existing operations of other businesses or technologies that we may acquire. In addition, the integration process for our acquisitions may be complex, costly and time consuming and include unanticipated issues, expenses and liabilities. We may have difficulty in developing, manufacturing and marketing the products of a newly acquired company in a manner that enhances the performance of our combined businesses or product lines and allows us to realize value from expected synergies. Following an acquisition, we may not achieve the revenue or net income levels that justify the acquisition. Acquisitions may also result in one-time charges (such as acquisition-related expenses, write-offs or restructuring charges) or in the future, impairment of goodwill, that adversely affect our operating results. Additionally, we may fund acquisitions of new businesses, strategic alliances or joint ventures by utilizing our cash, incurring debt, issuing shares of our common stock, or by other means.

 

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

In January 2015, our Board of Directors cancelled our 2010 stock repurchase program and authorized a new stock repurchase program for up to $500 million of common stock, $300 million of which we intend to repurchase in 2015. The cumulative repurchases as of July 5, 2015, totaled 6.5 million shares of common stock for $128.3 million at an average price of $19.74.

The following table includes information with respect to repurchases we made of our common stock during the three months ended July 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
 

April 6, 2015 – May 3, 2015

    1,380       $ 18.77         1,380     $ 427,461   

May 4, 2015 – May 31, 2015

    1,224       $ 20.25         1,218      $ 402,816   

June 1, 2015 – July 5, 2015

    1,504       $ 20.77         1,499      $ 371,685   
 

 

 

     

 

 

     

 

 

   
    4,108        (1)      $ 19.94        (1)        4,096     
 

 

 

     

 

 

     

 

 

   

 

(1) Includes 11,979 shares at an average price of $21.18, 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

    2.1    Share Sale and Purchase Agreement by and among Teradyne Holdings Denmark ApS, Teradyne, Inc., and the shareholders of Universal Robots A/S, dated May 13, 2015 (filed herewith)
  10.1    Credit Agreement among Teradyne, Inc., Barclays Bank PLC, as the administrative agent and collateral agent, and the lenders party thereto dated April 27, 2015 filed as Exhibit 10.1 to Teradyne’s Current Report on Form 8-K filed April 27, 2015
  10.2    Amendment No. 1 to Credit Agreement, dated as of May 19, 2015, among Teradyne, Inc., Barclays Bank PLC, as the administrative agent and collateral agent, and the lenders party thereto (filed herewith)
  10.3    2006 Equity and Cash Compensation Incentive Plan, as amended, filed as Appendix A to Teradyne’s Notice and Proxy Statement on Schedule 14A filed April 2, 2015
  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

 

46


Table of Contents

SIGNATURES

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

 

TERADYNE, INC.
Registrant

/ S / G REGORY R. B EECHER        

Gregory R. Beecher

Vice President,

Chief Financial Officer and Treasurer

(Duly Authorized Officer

and Principal Financial Officer)

August 14, 2015

 

47

Exhibit 2.1

 

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SHARE SALE AND PURCHASE AGREEMENT

concerning Universal Robots A/S

CVR no. 29 13 80 60


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CONTENTS

 

         Page  

1

  DEFINITIONS, INTERPRETATION AND ENTIRE AGREEMENT      6   

2

  PURPOSE AND BACKGROUND      17   

3

  CONCLUSION OF AGREEMENT      17   

4

  SALE AND PURCHASE OF SHARES      18   

5

  PURCHASE PRICE      18   

6

  EARN OUT      19   

7

  CONTINGENT BONUS OBLIGATIONS      26   

8

  OPERATIONS UNTIL CLOSING      27   

9

  COOPERATION AND FURTHER COVENANTS      29   

10

  CLOSING CONDITIONS      31   

11

  TERMINATION      31   

12

  CLOSING MECHANICS      32   

13

  ACTIONS AFTER CLOSING; PURCHASE PRICE ADJUSTMENT      34   

14

  SPECIAL INDEMNIFICATIONS      36   

15

  WARRANTIES      38   

16

  SELLERS’ LIABILITY, LIMITATIONS AND CLAIMS PROCEDURE      39   

17

  GUARANTEE      42   

18

  RESTRICTIVE COVENANTS      42   

19

  CONFIDENTIALITY AND PUBLICATION      43   

20

  GOVERNING LAW AND DISPUTES      44   

21    

  OTHER PROVISIONS      45   

 

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SCHEDULES

 

Schedule 1.1(a):    Accounting Policies
Schedule 1.1(b):    Annual Report
Schedule 1.1(c):    Illustrative calculations of Debt
Schedule 1.1(d):    Due Diligence Information (CD Rom of the VDR)
Schedule 1.1(e):    EBITDA
Schedule 1.1(f):    Escrow Agreement
Schedule 1.1(g):    List of Subsidiaries
Schedule 3.1(a):    Transcripts from the Danish Business Authority
Schedule 3.1(b):    Minutes of board meeting in the Company (approval of the Agreement)
Schedule 3.2(a):    Buyer’s signing documents
Schedule 3.2(b):    Buyer’s approval of the Agreement
Schedule 6.2.1:    Illustrative calculations of the EBITDA Earn Out, the Forecast Revenue Earn Out and the Outperformance Revenue Earn Out
Schedule 6.8:    The Group’s Budget Assumptions & Comments 2015-2018, dated 26-11-2014
Schedule 12.4(a):    Form of No MAC Declaration
Schedule 15.1:    Sellers’ Warranties
Schedule 19.4:    Joint press release
Schedule 21.2:    Addresses

 

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This

SHARE SALE AND PURCHASE AGREEMENT

was concluded on 13 May 2015 between on the one side

Vækstfonden

CVR no. 16 29 46 75

Strandvejen 104A, 3.

2900 Hellerup

Denmark

(“VF”)

BKI Holding ApS

CVR no. 28 48 23 37

Ediths Allé 12, Dyrup

5220 Odense SV

Denmark

(“BKIH”)

ANBE af 2006 ApS

CVR no. 29 78 31 01

Dyrupgårdvænget 81, Dyrup

5250 Odense SV

Denmark

(“ANBE”)

Esben Østergaard

Hunderupvej 63

5000 Odense C

Denmark

(“EØ”)

Kristian Kassow

Edvard Thomasens Vej 33, 4. Th.

2300 København S

Denmark

(“KK”)

 

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Kasper Støy

Johan Semps Gade 5, 1.

1402 København K

Denmark

(“KS”)

Clas Nylandsted Andersen

Revningevej 209

5300 Kerteminde

Denmark

(“CNA”)

Lasse Kieffer

Grønlandsgade 27, 1.

5000 Odense C

Denmark

(“LK”)

Thomas Visti Jensen

Tesdorpfsvej 15

5000 Odense C

Denmark

(“TVJ”)

Enrico Krog Iversen

Dyrupgårdvænget 81, Dyrup

5250 Odense SV

Denmark

(“EKI”)

Niels Erik Kildemoes

Falen 27B, 3. th.

5000 Odense C

Denmark

(“NEK”)

Niels Jul Jacobsen

Ulriksholmvej 27

5230 Odense M

Denmark

(“NJJ”)

(each of VF, BKIH, ANBE, EØ, KK, KS, CNA, LK, TVJ, EKI, NEK and NJJ referred to as a “Seller” and collectively the “Sellers”)

 

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and on the other side

Teradyne Holdings Denmark ApS

CVR no. 36 73 68 79

c/o Bech-Bruun Law firm

Langelinie Allé 35

2100 Copenhagen

Denmark

(the “Buyer”)

and

Teradyne, Inc.

600 Riverpark Drive

North Reading, MA 01864

USA

(the “Guarantor”)

concerning 100% of the issued and outstanding shares in Universal Robots A/S (the “Company”).

WHEREAS, on the date hereof the Sellers have the power to cause and direct the transfer of the Shares (as defined) and desire to sell the Shares to Buyer, and Buyer desires to purchase the Shares from Sellers, upon the terms and subject to the conditions hereinafter set forth:

 

1 DEFINITIONS, INTERPRETATION AND ENTIRE AGREEMENT

 

1.1 In the Agreement, the following words and expressions have the meanings stated below, unless the context requires otherwise.

 

Accelerated Earn Out Payments    as stated in clause 6.8.7.
Accounting Policies    the Company’s accounting principles, policies, practices and procedures together with the estimates and assessments all as applied by the Group and as described in Schedule 1.1(a) , to the extent in accordance with Danish GAAP and accepted by the Company’s auditor, however, provided that with respect to the Company’s treatment of foreign exchange gains and losses, it has been agreed with the Company’s auditor that the Company operates during the financial year with budgeted foreign exchange rates, and on a frequent basis (not necessarily daily basis) the foreign exchange is being traded to DKK and gains and losses are treated as part of Revenues. Gains/losses from conversion of debt/receivables by year-end is as well treated as Revenues.

 

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Accounts Date    31 December 2014.
Adjustment Amount    the difference, if any, between the Preliminary Purchase Price and the Closing Purchase Price; see clause 13.2.
Affiliate    with respect to any Person, any other Person directly or indirectly controlling, controlled by or under common control with such Person. For the purposes of this definition “control” when used in respect of any Person means the power to direct the management and policies of such Person, directly or indirectly, whether through ownership of voting securities, by contract or otherwise, and the terms “controlling” and “controlled” have correlative meanings.
Agreement    this agreement, including all Schedules and Exhibits hereto which are hereby incorporated by reference herein.
Annual Report    the Company’s consolidated and audited annual report as of the Accounts Date, see Schedule 1.1(b) .
Basket    as stated in clause 16.4.2(b).
Breach    any misrepresentation, incorrectness, incompleteness and/or breach of any of the Sellers’ Warranties.
Business Day    any day other than a Saturday or Sunday on which banks are generally open for business and not required or authorized by Law to be closed in Denmark and Massachusetts, United States of America (disregarding banking business being conducted exclusively through the Internet).
Buyer’s Knowledge    the actual knowledge that either of Eric Truebenbach, Mark Jagiela, Gregory Beecher, Charles Gray, Mark Kohalmy, Michael Callahan or Walter Vahey had on the Signing Date.
Cash    cash, cash equivalents, short term and long term marketable securities and related interest receivables as determined in accordance with the Accounting Policies, provided, that such amount shall be reduced in any event by any amounts necessary to satisfy any checks-in-transit and overdrafts of any Group Company and increased in any event by any deposits-in-transit.

 

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Cap    as stated in clause 16.4.3.
Closing    the Parties’ fulfilment of the obligations described in clause 12.
Closing Date    the date on which Closing takes place; see clause 12.1.
Closing Memorandum    minutes of the meeting at which Closing takes place.
Closing Purchase Price    as stated in clause 5.2.
Company    Universal Robots A/S, CVR no. 29 13 80 60, a limited liability company incorporated and registered in accordance with Danish legislation.
Confidential Information    as stated in clause 19.2.
Contingent EBITDA Earn Out Bonuses    as stated in clause 7.1.
Contingent Escrow Account Bonuses    as stated in clause 7.1.
Contingent Forecast Revenue Earn Out Bonuses    as stated in clause 7.1.
Contingent Outperformance Revenue Earn Out Bonuses    as stated in clause 7.1.
Corporate Documents    the charter and other documents by which any Person (other than an individual) establishes its legal existence or which govern its internal affairs, including its articles of incorporation or association and/or its by-laws.
Cut-Off Date    as stated in clause 11.1(a).
De Minimis Threshold    as stated in clause 16.4.2(a).

 

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Debt   

means the sum of the following items (expressed as a positive number):

 

(i) all liabilities for borrowed money, including all obligations evidenced by notes, bonds, debentures or similar instruments and all obligations under loans from any Seller, including, in each case, (A) all accrued and unpaid interest, costs, fees as well as (B) any prepayment penalties payable in connection with the transactions contemplated by this Agreement, regardless of whether due on the Effective Date, it being understood that, with respect to the Secured Debt, the respective accrued costs, fees and prepayment penalties in connection with the release of the Secured Debt shall equal those stated in the Pay-Off Amounts,

 

(ii) all liabilities under any capitalized lease, including accrued interest,

 

(iii) any corporate income Tax liabilities and provisions,

 

(iv) any residual amounts, including taxes, payable for any pre-closing dividends payable to any Person other than the Buyer or any of its Affiliates,

 

(v) all outstanding transaction costs, including fees and expenses of legal counsel, financial advisors and consultants and cost of establishing and maintaining the virtual data room incurred by the Group Companies, whether or not due, invoiced or billed prior to the Effective Date,

 

(vi) all bonuses and other transaction-related payments to be paid by the Group Companies to any director, officer, employee or consultant of the Group in connection with the transaction contemplated by this Agreement, except for (a) such bonuses and payments that have been paid before the Effective Date and (b) the Contingent EBITDA Earn Out Bonuses, Contingent Escrow Account Bonuses, Contingent Forecast Earn Out Bonuses and the Contingent Outperformance Revenue Earn Out Bonuses, and

 

(vii) any outstanding portions of the purchase price owed by the Company to IFU in connection with the acquisition of IFU’s shares in Universal Robots (Shanghai) Co. Ltd.

 

Schedule 1.1(c) sets forth, for illustrative purposes only, Sellers’ estimate of the Group’s consolidated Debt as of the Effective Date.

 

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Disputed Matters    the items on which the Parties are unable to agree following an Objection with respect to (i) the draft Final Purchase Price Calculation as described in clause 13.2.3, (ii) the draft calculation of the EBITDA Earn Out Calculation as described in clause 6.2.4, or (iii) a Quarterly Product Revenue Statement as described in clause 6.6.
Disclosed    any written information fairly disclosed by the Sellers or on behalf of the Sellers in the Due Diligence Information or in this Agreement (the “Disclosed Information”) in a way that would allow a reasonably diligent person skilled in the field to which the information relates (e.g. business administration, accounting, regulatory, legal, etc.), given the nature and context of the disclosure, to reasonably discern the relevance of such matter, including the substance of any potential claim, loss, liability or disadvantage based on reading and analysing the said information, provided that (i) if the relevant information (or relevant elements of a subject matter) has been disclosed in the Due Diligence Information, it has been disclosed in a document or several documents contained in one or more data room folders where, based on the location of such folder or folders, as the case may be, in the data room and its labelling, such facts or circumstances could have been reasonably expected to be disclosed and (ii), if there is inconsistent information within the Disclosed Information, only the more recent facts and circumstances shall be deemed disclosed, unless it would be a reasonable assumption, in the given context of such inconsistencies, that the former facts and circumstances were still relevant.
Disclosed Information    as stated in the definition of “Disclosed”.
DKK    Danish Kroner, the valid currency of Denmark.
Due Diligence Information    the written information provided to the Buyer in the virtual data room established in connection with the transactions contemplated by this Agreement, included in Schedule 1.1(d) and any further written information provided to the Buyer between 8 May 2015 and the Signing Date.

 

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Earn Out Payments    as stated in clause 6.1.
Earn Out Payments Cap Amount    an aggregate amount for the total Earn Out Payments of USD 65,000,000.
Earn Outs    the EBITDA Earn Out, Forecast Revenue Earn Out and Outperformance Revenue Earn Out.
EBITDA    as set forth in Schedule 1.1(e) and as determined in accordance with the Accounting Policies, but in any case excluding (a) charges related to the acquisition of the Group by the Buyer, (b) gains or losses from the sale of long-lived assets or extraordinary items not being in the ordinary course of business, (c) financial income, and (d) financial expenses.
EBITDA Earn Out    the Earn Out Payment described in clause 6.2.
EBITDA Earn Out Calculation    as stated in clause 6.2.3.
EBITDA Earn Out Period    1 January 2015 – 31 December 2015.
EBITDA Target    the Group’s budgeted consolidated EBITDA amounting to DKK 88,000,000.
EBITDA Threshold    DKK 70,400,000.
Effective Date    24:00 h on the Closing Date.
Encumbrances    as defined in Schedule 15.1 .
Enterprise Value    USD 285,000,000.
Escrow Account    the account with the Escrow Agent in the joint names of the Sellers’ Representative and the Buyer.
Escrow Agent    Danske Bank A/S.
Escrow Agreement    the agreement between the Sellers’ Representative, the Buyer and the Escrow Agent relating to the operation of the Escrow Account on the agreed terms set out in Schedule 1.1(f) .
Escrow Amount    an aggregate amount of USD 28,500,000.

 

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Expert    a state authorized public accountant appointed by the Grant Thornton, Statsautoriseret Revisionspartnerselskab among its Danish partners. If Grant Thornton, Statsautoriseret Revisionspartnerselskab is unwilling to appoint the Expert among its partners, the Expert will be a state authorized public accountant otherwise agreed by Sellers’ Representative and Buyer, or, failing such agreement within 10 Business Days after Grant Thornton, Statsautoriseret Revisionspartnerselskab refused to appoint the Expert, upon request of either Sellers’ Representative or Buyer appointed by “FSR-Danish Auditors” from an internationally recognised auditing firm not having provided substantial services (substantial services for the purposes of this Agreement being understood as services involving fees of an amount equivalent to more than DKK 500,000 annually) to any of the Parties or the Group for the past 3 years, but none of Deloitte, PWC, KPMG or EY.
Final Purchase Price Calculation    as set out in clause 13.2.1.
Forecast Revenue Earn Out    as set out in clause 6.3.
Forecast Revenue Target    DKK 2,058,454,000.
Forecast Revenue Hurdle    DKK 1,646,763,200.
Forecast Revenue Period    the period running from 1 July 2015 – 31 December 2017.
Governmental Authority    any national, supranational, foreign, provincial, state, municipal or local government, governmental, regulatory or administrative authority, agency, body, branch or bureau, instrumentality or commission or any court, tribunal, or judicial or arbitral body.
Group    the Company and the Subsidiaries.
Group Company    a company in the Group.
Group Companies    several or all of the companies in the Group.
IFU    the Investment Fund for Developing Countries, an independent self-governing fund with legal personality, established by Act of Parliament having its principal office at Fredericiagade 27, 1310 Copenhagen K, Denmark.

 

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Interest    an annual interest rate of 2% p.a. with the calculation of interest being made on the basis of days actually elapsed and 365 days per year.
Law    any national, supranational, state, provincial, municipal or local statute, law, constitution, ordinance, code, regulation, directive, rule, order, requirement or rule of law (including common law) or code issued, enacted, adopted, promulgated, implemented or otherwise put into effect by or under the authority of any Governmental Authority or parliament.
Loss    any damage, direct loss and expense (including reasonable attorneys’ fees and other expenses in connection with any claim) suffered by the Buyer or any of its Affiliates (including the Group) in respect of a Breach, but always excluding any indirect or consequential losses including loss of profit, as further qualified in clause 16.2.1.
Material Adverse Change    any result, occurrence, fact, change, event or effect which individually or in the aggregate has a material adverse effect on the Group’s consolidated (i) revenue for the period 1 January 2015 – 31 December 2015 equal to or exceeding DKK 96,827,400 or (ii) EBITDA for the period 1 January 2015 – 31 December 2015 equal to or exceeding DKK 17,600,000, except to the extent resulting from (A) global economic conditions, (B) conditions generally affecting the Group’s industry, or (C) a substantial downturn in financial markets, provided that such event does not affect the Group as a whole in a substantially disproportionate manner.
Merger Condition    as stated in clause 10.1.
Notice    as stated in clause 21.2.
Objection    any objection of the Sellers’ Representative to the Buyer’s draft (i) Final Purchase Price Calculation, (ii) EBITDA Earn Out Calculation, or (iii) a Quarterly Product Revenue Statement.
Outperformance Revenue Earn Out    as described in clause 6.4.
Outperformance Revenue Hurdle    DKK 3,478,639,000, ref. Schedule 6.2.1 .

 

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Outperformance Revenue Period    the period running from 1 July 2015 – 31 December 2018.
Outperformance Revenue Target    DKK 3,890,329,800.
Parties    the Sellers and the Buyer.
Party    a Seller or the Buyer.
Pay-Off Amounts    such amounts in such currencies as notified under clause 12.2(b) as being the amount required, if any: (i) to discharge the indebtedness (whether or not due and payable) owed under or in connection with the Secured Debt at the Closing Date (for the avoidance of doubt, including the outstanding principal amount of any drawing and any accrued but unpaid interest thereon at the Closing Date); (ii) to release all guarantees and security in relation to the Secured Debt at the Closing Date; and (iii) to terminate the Secured Debt at the Closing Date (such amount being inclusive of any applicable break costs, prepayment or early termination fees and other related fees or fees of a similar nature), assuming such discharge, release and termination takes effect from the Closing Date.
Person    any individual, corporation, partnership, firm, joint venture, association, joint stock company, trust, incorporated or non-incorporated organisation, country, state, city, municipality, government, political subdivision, agency, authority, or instrumentality of a government or other entity.
Preliminary Purchase Price    as stated in clause 12.3.
Preliminary Purchase Price Calculation    as stated in clause 12.3.
Products    the Group’s current and future (i) product range of robots, including any of the UR3 Robot, UR5 Robot and the UR10 Robot and including any modifications or upgrades, (ii) related spare parts, (iii) maintenance services, (iv) software embedded in the robots, (v) extended warranties offerings, and (vi) training services.
Purchase Price    as stated in clause 5.1.

 

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Quarterly Product Revenue Statement    as stated in clause 6.5.2.
Revenues    any and all revenues generated by the Company and any Subsidiaries; such Revenues for purpose of calculating the Earn Out Payments to be adjusted and determined in accordance with the principles set out in clause 6.8.
Schedule    a schedule to the Agreement.
Secured Debt    the Company’s outstanding commitments as of the Closing Date under the overdraft facility agreement with Danske Bank.
Sellers’ Bank Account    a USD client account of Accura Advokatpartnerselskab with Nordea Bank Danmark A/S, reg. no. 2191, account no. 5036344085, IBAN: DK7020005036344085 and SWIFT/BIC: NDEADKKK.
Sellers’ Knowledge    the actual knowledge that either of EKI, Klaus M. Vestergaard (CFO), EØ, Michael Bo Larsen (Head of R&D), Troels Hornsved (Supply Chain & Assembly Director), LK or Lisa Hansen had on the Signing Date.
Sellers’ Representative    as stated in clause 21.1.
Sellers’ Warranties    as described in Schedule 15.1 .
Shares    the shares issued by the Company consisting of DKK 218,312 class A shares and DKK 327,803 class B shares of DKK 1 each, equal to 100% of the Company’s total issued nominal share capital of DKK 546,115.
Signing Date    the date on which the Sellers, the Buyer and the Guarantor have signed the Agreement.
SKAT    as stated in clause 13.3.2.
Subsidiaries    the companies set out in Schedule 1.1(g) and any further subsidiaries which the Company may have from time to time.

 

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Taxes    any and all taxes and tax liabilities, whether actual or deferred or contingent, payable to or imposed by a Governmental Authority in respect of income taxes, sales and use taxes, transfer taxes, franchise taxes, value-added taxes, withholding taxes, stamp duties, customs duties, payroll taxes, social security taxes and charges, environmental taxes and property taxes and all other taxes and public duties of any kind and any fees, penalties and interest amounts relating thereto.
Title Warranties    the Warranties in clauses 2.1, 2.2, 2.3, 2.4, 3.5 and 3.6 of Schedule 15.1 .
Third Party Claim    as stated in clause 16.6.1.
Third Party Rights    any type of legal charge, lien, right of first refusal, purchase option, retention of title, option or title, in each case in favour of a third Person.
USD    United States Dollar, being the valid currency of the United States of America.
Warranties    the warranties given by the Sellers or the Buyer in accordance with clause 15 and Schedule 15.1 as the case may be.

 

1.2 The Agreement is the result of the Parties’ negotiations, and it cannot be interpreted against a Party as a consequence of such Party having drafted one or more of the provisions of the Agreement.

 

1.3 The words “include”, “includes” or “including” and similar expressions mean for the purpose of this Agreement “including, but not limited to”.

 

1.4 Defined terms in the singular include the plural and vice versa, unless the context requires otherwise.

 

1.5 The table of contents and the headings of the Agreement are for guidance only and have no legal effect on the understanding or interpretation of the provisions of the Agreement.

 

1.6 The terms defined in this Agreement have the defined meanings when used in any Schedule, appendix, certificate or other document delivered or made available pursuant thereto.

 

1.7 References to a Person are also to its successors and permitted assigns.

 

1.8 Unless the context otherwise requires, references to any agreement shall mean such agreement as amended or modified from time to time.

 

1.9 References to any Law shall be as amended from time to time and shall include all rules and regulations promulgated thereunder.

 

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1.10 Unless the context otherwise requires, references to any time shall refer to time in Denmark.

 

1.11 The Agreement contains the entire agreement between the Parties concerning the Buyer’s acquisition of the Shares and supersedes all previous agreements between the Parties and the Guarantor on the subject matter.

 

1.12 With respect to the conversion of currencies, the following shall apply:

 

  (a) The conversion of foreign currencies into DKK in connection with the preparation of the Preliminary Purchase Price Calculation, Final Purchase Price Calculation, the EBITDA Earn Out Calculation and the Quarterly Product Revenue Statements shall be made pursuant to the currency exchange and conversion provisions contained in the Accounting Policies.

 

  (b) The conversion of DKK amounts stated in the Preliminary Purchase Price Calculation and Final Purchase Price Calculation into USD for purposes of payment of the Preliminary Purchase Price and Adjustment Amount, if any, shall be calculated by applying the exchange rate as published by the Danish Central Bank ( Nationalbanken ) for a transaction between the two currencies in question quoted as at the close of business (in Copenhagen) on (i) the day immediately preceding the date on which the Sellers’ Representative delivers the final Preliminary Purchase Price Calculation to the Buyer with respect to the Preliminary Purchase Price, and (ii) the Closing Date with respect to the Adjustment Amount.

 

  (c) With respect to any Loss or other claim under any of the Sellers’ Warranties as well as any other claims pursuant to this Agreement other than claims comprised in paragraph (b) above incurred in a currency not being USD, such amount shall be raised and settled in the relevant currency of the underlying Loss.

 

2 PURPOSE AND BACKGROUND

At Closing the Sellers will own the Shares and wish to sell them to the Buyer, and the Buyer wishes to acquire the Shares on the terms and conditions set out in the Agreement.

 

3 CONCLUSION OF AGREEMENT

 

3.1 As of the Signing Date, the Sellers have provided the Buyer with documentation evidencing:

 

  (a) that the Agreement has been duly executed and delivered by duly authorized Persons who may represent the relevant Sellers that are limited liability companies; see Schedule 3.1(a) ; and

 

  (b) that the Sellers have obtained all requisite corporate approvals for the execution and delivery of this Agreement by Sellers including approval of the contemplated share sale from the Company’s board of directors pursuant to the Company’s articles of association and statements from each of the Sellers irrevocably waiving any pre-emption rights to the Shares, see Schedule 3.1(b) .

 

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3.2 As of the Signing Date, the Buyer and the Guarantor have provided the Sellers with documentation evidencing:

 

  (a) that the Agreement has been duly executed and delivered by Persons authorized to represent the Buyer and the Guarantor; see Schedule 3.2(a) ; and

 

  (b) that the Buyer and the Guarantor have obtained all requisite corporate approvals, including approval of their board of directors, for the execution and delivery of this Agreement by the Buyer and the Guarantor; see Schedule 3.2(b) .

 

4 SALE AND PURCHASE OF SHARES

 

4.1 The Sellers agree to sell the Shares to the Buyer, free and clear of any Encumbrances and including all rights to undistributed dividends, and the Buyer agrees to acquire the Shares free and clear of any Encumbrances and including all rights to undistributed dividends from the Sellers, subject to the terms set out in the Agreement.

 

4.2 With effect from and after the Closing Date, the Buyer shall own all rights attaching to the Shares, including title, voting rights and the right to receive dividends.

 

5 PURCHASE PRICE

 

5.1 The purchase price for the Shares, including each element thereof, shall be calculated and paid in USD and shall be equal to the Closing Purchase Price plus the Earn Out Payments, if any (the “Purchase Price”).

 

5.2 The “Closing Purchase Price” shall be the Enterprise Value plus

 

  (a) the Cash of the Group, and less

 

  (b) the Debt of the Group ,

in each case determined as of the Effective Date on a consolidated basis and applying the Accounting Policies as further set forth in this Agreement, provided that if the Parties agreed on any deviations from the Accounting Policies in this Agreement, such agreements shall prevail over the Accounting Policies.

 

5.3 The final Cash and final Debt shall be determined in accordance with the procedures set forth in clause 13.2.

 

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6 EARN OUT

 

6.1 The Sellers shall be entitled to receive additional consideration with respect to the (i) EBITDA Earn Out, (ii) Forecast Revenue Earn Out, and (iii) Outperformance Revenue Earn Out (collectively referred to as the “Earn Out Payments”) payable by the Buyer, subject to certain financial performance conditions being satisfied as specified in clause 6.2 through 6.5 and 6.8.

 

6.2 EBITDA Earn Out

 

6.2.1 The Sellers shall be eligible for an Earn Out Payment of up to USD 15,000,000 depending on the Group’s consolidated EBITDA during the EBITDA Earn Out Period as illustrated in Schedule 6.2.1 and determined in accordance with the principles set forth in clause 6.8.

 

6.2.2 If the Group’s consolidated EBITDA for the EBITDA Earn Out Period exceeds the EBITDA Threshold, the Buyer is obliged to pay an Earn Out Payment related to the EBITDA Earn Out to the Sellers as illustrated in Schedule 6.2.1 . Accordingly, the Sellers shall be entitled to a linear Earn Out Payment of USD 0.85227 for every DKK 1 consolidated EBITDA of the Group exceeding the EBITDA Threshold during the EBITDA Earn Out Period up to a maximum Earn Out Payment with respect to the EBITDA Earn Out of USD 15,000,000 if the EBITDA Target is met or exceeded.

 

6.2.3 The Buyer shall no later than 5 Business Days after the completion of the audit of the Group’s consolidated annual report for the EBITDA Earn Out Period by Notice to the Sellers’ Representative provide a draft calculation of the Earn Out Payment with respect to the EBITDA Earn Out (ref. clause 6.2.2) applying the provisions of clause 6 and Schedule 6.2.1 and accompanied by all relevant documentation, including the Group’s audited consolidated annual report for the EBITDA Earn Out Period (the “EBITDA Earn Out Calculation”).

 

6.2.4 If the Sellers’ Representative disagrees with any element of the Buyer’s draft EBITDA Earn Out Calculation, the Sellers’ Representative must give Notice of an Objection to the Buyer no later than 25 Business Days after receipt of the Buyer’s draft EBITDA Earn Out Calculation. The provisions set out in clause 13.2.4 shall apply in case the Sellers’ Representative provides a Notice of Objection to the Buyer’s draft EBITDA Earn Out Calculation.

 

6.2.5 Any Earn Out Payment provided for in this clause 6.2 shall be paid in cash USD to the Sellers’ Bank Account. To the extent the Buyer’s draft EBITDA Earn Out Calculation provides for an Earn Out Payment to be paid in accordance with this clause 6.2, the Buyer shall make such payment when delivering the draft EBITDA Earn Out Calculation to the Sellers’ Representative (see clause 6.2.3). Any additional Earn Out Payment including Interest, if any, shall be paid within 10 Business Days after such point in time where all Objections to the Buyer’s draft EBITDA Earn Out Calculation, if any, have been finally resolved in accordance with the provisions set out in clause 13.2.4. From the date where the Buyer delivered its calculation of the EBITDA Earn Out Calculation pursuant to clause 6.2.3 Interest shall accrue until payment has been made in full.

 

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6.3 Forecast Revenue Earn Out

 

6.3.1 The Sellers shall be eligible for an additional Earn Out Payment with respect to the Forecast Revenue Earn Out of up to USD 25,000,000 depending on the consolidated Revenues of the Group during the Forecast Revenue Period as illustrated in Schedule 6.2.1 . Accordingly, the Sellers shall be entitled to an additional linear Earn Out Payment of USD 0.06073 for every DKK 1 of consolidated Revenues of the Group during the Forecast Revenue Period that exceeds the Forecast Revenue Hurdle up to a maximum Earn Out Payment with respect to the Forecast Revenue Earn Out of USD 25,000,000 if the Forecast Revenue Target is met or exceeded.

 

6.4 Outperformance Revenue Earn Out

The Sellers shall be eligible for an additional Earn Out Payment with respect to the Outperformance Revenue Earn Out of up to USD 25,000,000 depending on the consolidated Revenues of the Group during the Outperformance Revenue Period and as illustrated in Schedule 6.2.1 . Accordingly, the Sellers shall be entitled to an additional linear Earn Out Payment of USD 0.06073 for every DKK 1 consolidated Revenues of the Group during the Outperformance Revenue Period that exceeds the Outperformance Revenue Hurdle up to a maximum Earn Out Payment with respect to the Outperformance Revenue Earn Out of USD 25,000,000 if the Outperformance Revenue Target is met or exceeded.

 

6.5 Determination of Revenues; Quarterly Product Revenue Statements

 

6.5.1 The Revenues shall be determined in accordance with the principles set forth in clause 6.8.

 

6.5.2 Following the Closing Date, no later than 40 calendar days following the end of its fiscal quarter and 90 calendar days following the end of its fiscal year (and for the third quarter of 2015 only for the period from 1 July 2015 through the end of its third fiscal quarter), the Buyer shall by Notice to the Sellers’ Representative provide a statement setting forth the consolidated Revenues of the Group during the previous fiscal quarter of the Buyer (the “Quarterly Product Revenue Statement”). Further, a Quarterly Product Revenue Statement relating to a fourth quarter shall always be accompanied by the Group’s consolidated audited annual report for the relevant fiscal year. Such obligation to prepare Quarterly Product Revenue Statements shall expire once the Quarterly Product Revenue Statement has been prepared that follows (i) the fiscal quarter of the Buyer during which the Outperformance Revenue Target has been reached or (ii) the end of the Outperformance Revenue Period.

 

6.5.3 The Sellers’ Representative shall be entitled to request access to and the Buyer shall be obligated to provide the Sellers’ Representative with any underlying information and documentation reasonably required by the Sellers’ Representative in order to review the Quarterly Product Revenue Statements, including the relevant parts of the Buyer’s and the Group’s accounts and, if existing, auditor’s long form audit reports.

 

6.5.4

Without prejudice for any subsequent Objections made by the Sellers’ Representative, the Sellers’ Representative and a representative of the Buyer shall meet by conference call each quarter to discuss the Quarterly Product Revenue Statement and to give the Sellers’ Representative the opportunity to discuss any items concerning the conduct of the Buyer or the

 

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  Group until the lapse of the Outperformance Revenue Period. So long as EKI is an employee of the Group, EKI shall participate in the meeting and shall in good faith report on any issues concerning the conduct of the Buyer or the Group until lapse of the Outperformance Revenue Period that has or could reasonably be expected to have a material impact on the Group’s ability to achieve the EBITDA or Revenues required to achieve one or more of the Earn Outs. EKI may not, neither in these nor any other discussions, whether relating to the Earn Outs or any other issues, disclose to the other Sellers any confidential information relating to the Group, the Buyer or any of its Affiliates, except for facts and circumstances that already have been disclosed by or on behalf of the Buyer to the other Sellers or the Sellers’ Representative.

 

6.6 Objection to the Quarterly Product Revenue Statement

 

6.6.1 If the Sellers’ Representative disagrees with any element of any Quarterly Product Revenue Statement, the Sellers’ Representative must give Notice of an Objection to the Buyer no later than 25 Business Days after the Sellers’ Representative’s receipt of a Quarterly Product Revenue Statement covering the fourth quarter in a given calendar year (accompanied by the Group’s consolidated audited annual report for the relevant fiscal year), it being understood that the Sellers’ Representative may only file one Notice of Objection for each Quarterly Product Revenue Statement, provided that if the Buyer for whatever reason restates a former Quarterly Product Revenue Statement, then the Sellers’ Representative is not prevented from submitting an additional Notice of Objection concerning the period covered by the Quarterly Product Revenue Statement being restated. The Sellers’ Representative must describe in detail each Objection including, if applicable, the Sellers’ Representative’s calculation of the relevant Earn Out Payment and refer to the provisions of the Agreement that the Sellers invoke in support of their position. Unless (i) any Objection has been served on the Buyer within the time frame stipulated above and (ii) the Objection contains all such information as specified in the immediate preceding sentence, the respective Quarterly Product Revenue Statements will be final and binding on the Parties.

 

6.6.2 If the Sellers give Notice of an Objection in accordance with clause 6.6.1, the procedures and time frames stipulated in clause 13.2.4 shall apply mutatis mutandis with regard to determining the Revenues and Earn Out Payment relating to either the Forecast Revenue Earn Out or the Outperformance Revenue Earn Out.

 

6.7 Due date of Earn Out Payments relating to the Forecast Revenue Earn Out and Outperformance Revenue Earn Out

The Earn Out Payments provided for in clause 6.3 and 6.4 (Forecast Revenue Earn Out and Outperformance Revenue Earn Out, respectively) shall become due and payable in cash in USD to the Sellers’ Bank Account 3 Business Days after delivery by the Buyer of the Quarterly Product Revenue Statement following the earlier of (i) the fiscal quarter of the Buyer during which Revenues resulting in attainment of the maximum Earn Out Payment of USD 25,000,000 achievable under the Forecast Revenue Earn Out and Outperformance Revenue Earn Out, respectively, have been achieved, and (ii), as regards the Forecast Revenue Earn Out, 1 April 2018, and, as regards the Outperformance Revenue Earn Out, 1 April 2019, it being understood that, if the Sellers’ Representative gives Notice of an Objection in accordance

 

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with clause 6.6.1, the Buyer shall initially only be obliged to pay the undisputed amount to the Sellers and then subsequently, when the Revenues and the relevant Earn Out Payment have been finally determined in accordance with clause 13.2.4, the Buyer shall pay the additional Earn Out Payment including Interest, if any, to the Sellers’ Bank Account. From the relevant due date (as described above) with respect to the Forecast Revenue Earn Out and Outperformance Revenue Earn Out, as the case may be, Interest shall accrue until payment has been made in full.

 

6.8 Accounting Policies, Conduct of business during the Earn Out period

 

6.8.1 For purpose of determining the EBITDA Earn Out, the Forecast Revenue Earn Out and the Outperformance Revenue Earn Out, respectively, the relevant EBITDA and Revenues shall be determined by applying the Accounting Policies, except that, (i) when calculating the EBITDA for the purposes of the EBITDA Earn Out, the following costs shall be excluded:

 

  a) any costs related to the transactions contemplated by this Agreement,

 

  b) any management fees, overhead costs, administration contributions or similar charges charged by the Buyer or its Affiliates after the Closing Date to the Group Companies, regardless of whether such amounts have been actually paid to the Buyer or any Affiliate of Buyer or merely allocated in the accounts of any of the Group Companies,

 

  c) any material changes to the executive compensation plans existing on the Signing Date introduced by the Buyer or any of its Affiliates, and

 

  d) any operating expenses imposed on the Group by the Buyer or any Affiliate of the Buyer without the written consent of the Sellers’ Representative and that are not included in Schedule 6.8 ,

and (ii) that, when calculating the Revenues for purposes of determining the Forecast Revenue Earn Out and the Outperformance Revenue Earn Out,

 

  a) if Products are sold from a Group Company to the Buyer or an Affiliate of the Buyer that is not a Group Company (including if such sales are made to sell the Products on to third Persons), such sales to the Buyer or its Affiliates shall be deemed to have been made at the Group’s distributor list prices applicable at the time of the sale net of any standard distributor discounts and rebates (e.g. bonus),

 

  b) Revenues are calculated net of all types of discounts / rebates,

 

  c)

any amounts that do not become collectible (whether due to credit memo or bad debt) will not count as Revenues and will be reduced from the Revenues calculation during the period in which such amounts become uncollectible (e.g. written-off); if such amounts turn out to be uncollectible after a Quarterly Product Revenue Statement has been delivered, including the final Quarterly Product Revenue Statement relating to the Forecast Revenue Earn Out or Outperformance Revenue Earn Out, the Buyer may make corresponding adjustments in any subsequent Quarterly Product Revenue

 

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  Statement or submit an additional Quarterly Product Revenue Statement, and the Sellers shall repay to the Buyer any Earn Out Payments that they already received with respect to such uncollectible amounts, always provided that if the Company or any Subsidiary has recovered or will be entitled to recover such amount (or any part thereof) under a trade credit insurance then an adjustment shall only be made with respect to the residual amount not being covered by the trade credit insurance, and further provided that if the Group after the Closing Date will not maintain the Group’s past practice with respect to taking out trade credit insurances, the uncollectible amounts shall be calculated as if such practice had been maintained on substantially similar terms as those in place as of the Effective Date,

 

  d) Revenues exclude VAT, and

 

  e) if any trade or commercial arrangements between a Group Company and the Buyer or any Affiliate of the Buyer (which is not already covered by clause 6.8.1(ii)(a)) has not been made on arms’ length conditions, such trade or commercial arrangements shall be deemed to have been made on arms’ length conditions and the Revenues shall be calculated accordingly.

 

6.8.2 If the Sellers have indemnified the Buyer or a Group Company for any Breach or any indemnification pursuant to clause 14, then for the purpose of determining the EBITDA or Revenues, any such indemnification payment shall (on a USD for USD basis or other relevant currency, as the case may be) be treated as EBITDA or Revenues, as the case may be, if and to the extent the underlying Breach or cause for indemnification resulted in a reduction of EBITDA or Revenues of any Group Company.

 

6.8.3 For purpose of determining any payment related to the EBITDA Earn Out, the Forecast Revenue Earn Out and the Outperformance Revenue Earn Out, respectively, if there are any discrepancies between the Accounting Policies and the provisions set out in this clause 6, the provisions in this clause 6 shall prevail.

 

6.8.4 During the period from the Closing Date until the earlier of (i) realization of Revenues equal to the Outperformance Revenue Target and (ii) the lapse of the Outperformance Revenue Period, the Buyer undertakes and shall cause the Group to:

 

  a) conduct the business of the Group as a stand-alone and separate business unit in the ordinary course consistent with past practice with a view, in good faith, to maximize the Revenues and EBITDA of the Group consistent with Schedule 6.8 ,

 

  b) use its commercially reasonable efforts to provide the resources and make the investments necessary to operate the business of the Group consistent with Schedule 6.8 ,

 

  c) not materially change the pricing or margin strategy of the Group as contemplated in Schedule 6.8 ,

 

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  d) use its commercially reasonable efforts to carry out the additional staff hiring as contemplated in Schedule 6.8 ,

 

  e) not change the legal structure of the Group in a manner that will have any adverse effect on the calculation of EBITDA or Revenues for purposes of the Earn Outs, it being understood that the shares of Universal Robots USA, Inc. may in any event be transferred to the Guarantor or an Affiliate of the Guarantor established in the U.S.,

 

  f) generally maintain the Group’s operations as a distinct business and not integrate its business with other entities (or outsource production) in a manner that would or would reasonably be expected to negatively impact the Group’s ability to achieve the EBITDA or Revenues required for the full Earn Out Payments, and

 

  g) not intentionally take any action, the purpose of which is to deprive the Sellers of or materially reduce any of the Earn Out Payments,

unless, in each case above, except for paragraph g), any such measure is a reasonable response to any changes or developments in (A) the economic or competitive environment of the Group as a whole, (B) market conditions for the Group as a whole or (C) the financial, business or operating condition of the Group as a whole.

 

6.8.5 The Buyer shall procure that the Group is managed and operated in a commercially reasonable manner and, subject to the exceptions at the end of clause 6.8.4, consistent in all material respects with Schedule 6.8 , as it may be amended from time to time in accordance with this Agreement. The Buyer may submit a request in writing to the Sellers’ Representative to consent to any measure, action or omission, including a modification to Schedule 6.8 that, without such consent, would otherwise constitute a violation of the provisions of clause 6.8.4. If the Sellers’ Representative gives its consent, no such violation shall be deemed to have occurred. The Sellers’ Representative shall in good faith provide its consent unless the Sellers’ Representative reasonably and in good faith believes that the proposed modification, measure, action or omission shall impact or potentially may impact the Group’s ability to achieve the EBITDA or Revenues required to achieve one or more of the Earn Outs.

 

6.8.6 As long as EKI continues to work for any Group Company, EKI shall cooperate with the Buyer to procure that the Group is managed and operated in a commercially reasonable manner and, subject to the exceptions at the end of clause 6.8.4, consistent in all material respects with Schedule 6.8 , as it may be amended from time to time in accordance with this Agreement. If, in response to the Group performing during the Outperformance Earn Out Period inconsistent with Schedule 6.8 , the Buyer takes actions consistent with Schedule 6.8 , such actions shall not constitute non-compliance with clause 6.8.4.

 

6.8.7

If the Buyer or any Group Company carries out any actions or omissions that constitute a non-compliance with the provisions of clause 6.8.4 and the action or omission has or could reasonably be expected to have a material impact on the Group’s ability to achieve the EBITDA or Revenues required to achieve one or more of the Earn Outs, then the Sellers’ Representative shall without undue delay upon actual knowledge (for the avoidance of doubt meaning

 

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  actual knowledge of both ANBE and VF) of the action or omission provide the Buyer with written Notice of such non-compliance. Buyer shall have 10 Business Days to correct or dispute such Notice of non-compliance. If the Buyer disputes the asserted non-compliance or the Sellers’ Representative does not accept the Buyer’s correction to the asserted non-compliance, then the Sellers’ Representative and a designated Buyer’s representative shall (i) discuss the dispute and, (ii) if the Buyer should ultimately agree that there was a non-compliance with the provisions of clause 6.8.4, discuss for purposes of calculating the relevant Earn Out in good faith any adjustments to the EBITDA or Revenues, as the case may be, generated by the Group Companies as if such non-compliance had not taken place. If the Buyer and the Sellers’ Representative are unable to reach agreement about whether there was a non-compliance with the provisions of clause 6.8.4 and/or the respective adjustment of the EBITDA or Revenues generated by the Group Companies due to such non-compliance, each of them may initiate a claim under clause 20. The subject matter of such arbitration shall be to ascertain: (i) if a non-compliance of the provisions of clause 6.8.4 has occurred, and if the arbitrators determine non-compliance has occurred;, (ii) if the non-compliance has had a material impact on the Group’s ability to achieve one or more of the Earn Outs; and if the arbitrators determine such non-compliance has had such a material impact; (iii) the amount of the Earn Outs to be accelerated (“Accelerated Earn Out Payments”), provided that such Accelerated Earn-Out Payments shall in no event exceed the Earn Out Payments Cap Amount, as set forth below:

 

  a) if the non-compliance occurred during the EBITDA Earn Out Period, an amount of USD 7.5 million under the EBITDA Earn Out and USD 12.5 million under the Forecast Revenue Earn Out shall become immediately accelerated and payable to the Sellers and in addition thereto if it is the arbitrators’ assessment that in the absence of such non-compliance and based on the Group’s accumulated EBITDA since 1 January 2015 and accumulated Revenues performance since 1 July 2015 it is more likely than not that the Sellers would have achieved Earn Out Payments in excess of the USD 20 million under the EBITDA Earn Out, the Forecast Revenue Earn Out and/or the Outperformance Revenue Earn Out, then such excess Earn Out Payments as determined by the arbitrators shall also become accelerated and payable to the Sellers,

 

  b) if the non-compliance occurred during the Forecast Revenue Earn Out Period but after lapse of the EBITDA Earn Out Period, an amount of USD 12.5 million under the Forecast Revenue Earn Out shall become immediately accelerated and payable to the Sellers and in addition thereto if it is the arbitrators’ assessment that in the absence of such non-compliance and based on the Group’s accumulated Revenues performance since 1 July 2015 it is more likely than not that the Sellers would have achieved an Earn Out Payment in excess of USD 12.5 million under the Forecast Revenue Earn Out and/or the Outperformance Revenue Earn Out, then such excess Earn Out Payments as determined by the arbitrators shall also become accelerated and payable to the Sellers,

 

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  c) if the non-compliance occurred during the Outperformance Revenue Earn Out Period but after lapse of the Forecast Revenue Period and if it is the arbitrators’ assessment that in the absence of such non-compliance and based on the Group’s accumulated Revenues performance since 1 July 2015 it is more likely than not that the Sellers would have achieved an Earn Out Payment under the Outperformance Revenue Earn Out, then all or a part of the Outperformance Revenue Earn Out as determined by the arbitrators shall become accelerated and payable to the Sellers.

 

6.8.8 After the lapse of each of the EBITDA Earn Out Period, Forecast Revenue Earn Out Period or Outperformance Revenue Period, respectively, and notwithstanding any Accelerated Earn Out Payments pursuant to clause 6.8.7, to the extent that the Group has achieved EBITDA and/or Revenues under the applicable Earn Out, the Buyer shall make any required Earn Out Payment as provided in this Agreement, however, deducting any Accelerated Earn Out Payments already determined and paid pursuant to clause 6.8.7. Any rights set forth in clause 6.8.7 and 6.8.8 shall be the only remedies of the Sellers in case of any non-compliance of the Buyer with the provisions of clause 6.8.4.

 

6.9 Acceleration of Earn Out Payments

If the Buyer completes a sale or transfer of the Company or the Group to a third Person during the EBITDA Earn Out Period, the Forecast Revenue Earn Out Period or the Outperformance Revenue Earn Out Period, including any sale or transfer of the Group’s material assets, then (a) the maximum Earn Out Payments achievable under any of the EBITDA Earn Out (if the sale or transfer occurs within the EBITDA Earn Out Period) and the Forecast Revenue Earn Out (if the sale or transfer occurs within the the EBITDA Earn Out Period or the Forecast Earn Out Period) shall be accelerated, less the aggregate amount of any payment previously made under the applicable Earn Out, and become due and payable to the Sellers’ Bank Account no later than 10 Business Days after the Sellers’ Representative’s Notice to the Buyer to this effect and (b) specifically with regard to the Outperformance Revenue Earn Out, the Buyer undertakes to procure that such third Person purchaser shall assume any and all obligations of the Buyer under this Agreement with respect to the Outperformance Revenue Earn Out. This clause 6.9 shall be the sole remedy of the Sellers with respect to a sale or transfer of the Company or the Group during the Outperformance Revenue Earn Out Period.

 

6.10 Capitalized Value of Earn Out Payments

In respect of section 12 B of the Danish Tax Assessment Act ( Ligningsloven ) the Parties have agreed that the capitalized value of the Earn Out Payments amounts to USD 35,000,000.

 

7 CONTINGENT BONUS OBLIGATIONS

 

7.1

Subject to certain conditions as set out in their respective bonus agreements as Disclosed in an email from Sellers’ counsel to Buyer’s counsel sent on 12 May 2015 and as illustrated in the bonus calculations also sent by email from Sellers’ counsel to Buyer’s counsel on 12 May 2015, each of Klaus Vestergaard, Lisbet Thyge Frandsen, Helle Priess, Tim Rowley and Liselotte Frellsen may be entitled to receive certain bonus payments from the Company. The Parties have agreed that the bonus payments becoming payable upon Closing shall be

 

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  treated as Debt and deducted from the Closing Purchase Price, whereas any bonus payments which may materialize and become payable by the Company due to (i) satisfaction of the EBITDA Earn Out or any part thereof (“Contingent EBITDA Earn Out Bonuses”), (ii) satisfaction of the Forecast Revenue Earn Out or any part thereof (“Contingent Forecast Revenue Earn Out Bonuses”), (iii) satisfaction of the Outperformance Revenue Earn Out or any part thereof (“Contingent Outperformance Revenue Earn Out Bonuses”), or (iv) release of any outstanding amount of the Escrow Amount after the escrow period has lapsed (“Contingent Escrow Account Bonuses”), such bonus payments shall be set-off by the Buyer on a USD for USD basis in the (a) Earn Out Payment related to EBITDA Earn Out (with respect to any Contingent EBITDA Earn Out Bonuses), (b) the Earn Out Payment related to Forecast Revenue Earn Out (with respect to any Contingent Forecast Revenue Earn Out Bonus), (c) the Earn Out Payment related to Outperformance Revenue Earn Out (with respect to any Contingent Outperformance Revenue Earn Out Bonus) and (d) the amount, if any, to be released from the Escrow Account after lapse of the Escrow Agreement (with respect to any Contingent Escrow Account Bonuses).

 

8 OPERATIONS UNTIL CLOSING

 

8.1 From the Signing Date until Closing, except as required by the transactions contemplated by this Agreement, Schedule 6.8 , or with the Buyer’s prior written consent (not to be unreasonably withheld, conditioned or delayed), the Sellers will procure that the Group continues to operate in the ordinary course of business in accordance with past practice and that each Group Company:

 

  (a) does not change its Corporate Documents, unless such change is required by applicable Law;

 

  (b) does not issue any of its equity securities or other securities of any nature convertible into its equity securities;

 

  (c) does not create, grant or issue any right to subscribe for or acquire any of its equity securities;

 

  (d) does not grant any mortgage, charge or other security over any of its assets or give or agree to give any material guarantee or indemnity, except for guarantees and indemnities given in the ordinary course of business;

 

  (e) does not acquire by merger or consolidation with, purchase equity interests of or purchase substantially all of the assets of, or otherwise acquire, any business, or make any investment in, any Person or merge or consolidate with any Person;

 

  (f) maintains the Group’s insurance policies on the existing terms and conditions;

 

  (g) does not make any material change to the Accounting Policies;

 

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  (h) does not amend in any material way, or terminate, any contract which is material to the Group as a whole and, in particular, none of the Material Agreements (as defined in Schedule 15.1 );

 

  (i) does not enter into any agreements relating to the borrowing of money;

 

  (j) does not make any loans, advances or capital contributions to, or investments in, any other Person other than loans, advances or capital contributions, or investments by the Company or any of the Subsidiaries to any Subsidiary;

 

  (k) does not make inventory purchases outside the ordinary course;

 

  (l) does not make any capital expenditures in excess of USD 25,000 in the aggregate that are payable after the Closing Date;

 

  (m) makes capital and operating expenditures if and when required in the ordinary course consistent with past practice and as contemplated Schedule 6.8 and does not delay any such capital or operating expenditures to a period after the Closing Date;

 

  (n) does not take any other actions the purpose of which is to increase the Cash of the Group Companies as of the Effective Date or to otherwise artificially increase the Closing Purchase Price;

 

  (o) does not make any change in the terms of employment of any director, officer or Key Employee of the Group (as defined in Schedule 15.1 );

 

  (p) other than in accordance with agreements in existence on the date hereof, collective bargaining arrangements in existence on the date hereof or in accordance with prior practice;

 

  (q) complies with and fulfils any obligations pursuant to applicable Laws, collective bargaining agreements etc. to inform and/or negotiate with trade unions, any employee representative bodies and/or its employees, with respect to the transactions contemplated by this Agreement;

 

  (r) does not make or change any material Tax election, change any annual Tax accounting period or consent to any extension or waiver of the limitations period applicable to any Tax claim or assessment;

 

  (s) does not institute any material litigation, arbitration or settle or waive any material claim or right other than (i) in relation to the collection of trade debts, (ii) in the ordinary course of business, or (iii) as instructed by its insurance providers;

 

  (t) complies with the share purchase agreement between IFU and the Company regarding the acquisition of IFU’s shares in Universal Robots (Shanghai) Co. Ltd. and takes all actions necessary in order to give effect to the share transfers contemplated thereunder, in particular in order to obtain all public approvals required in connection with such share transfer; and

 

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  (u) does not agree or commit to do or, as the case may be, not to do any of the foregoing.

 

9 COOPERATION AND FURTHER COVENANTS

 

9.1 General Cooperation

 

9.1.1 Subject to the terms and conditions of this Agreement, the Buyer and the Sellers and their respective Affiliates shall use their best efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary or desirable under applicable Law to consummate the transactions contemplated by this Agreement. The Sellers and the Buyer agree to execute and deliver, and to cause their respective Affiliates to execute and deliver, such other documents, certificates, agreements and other writings and to take such other actions as may be necessary or desirable in order to consummate or implement expeditiously the transactions contemplated by this Agreement and to vest in Buyer ownership of the Shares.

 

9.1.2 To the extent legally permissible under applicable Law, after the Signing Date, the Parties shall coordinate with each other and use commercially reasonable efforts to negotiate master supply agreements or amendments, which include customary supplier protections, with certain sole source suppliers to the Group.

 

9.2 Press Releases

 

9.2.1 Subject to clause 19, between the Signing Date and the Closing Date, the Sellers shall not, and shall procure that the Group Companies will not, issue any press releases regarding the products or the business of the Group Companies without the Buyer’s prior written consent, which shall not be unreasonably withheld. Any such press releases shall be deemed approved if the Buyer does not explicitly object to such press release within 3 Business Days after having received an English language draft of such press release.

 

9.3 German Merger Control Filing

 

9.3.1 In furtherance and not in limitation of the foregoing, promptly after the Signing Date and in any event no later than 3 Business Days after the Signing Date, the Buyer shall file the notification required to be filed by it to the German Federal Cartel Office in relation to the transactions contemplated by this Agreement and expedite all other submissions and rendering of information requested or required by the German Federal Cartel Office in furtherance thereof.

 

9.3.2 Without prejudice to clause 9.3.3, the Buyer shall take all action reasonably requested by the Sellers and the Sellers shall take (and the Sellers shall procure that the Group Companies will take) all actions reasonably requested by the Buyer to assist the Parties in satisfying the condition described in clause 10.1. To this end the Buyer and the Sellers and their respective legal advisors shall work together and—to the extent legally permissible—share all information relevant for the notification procedure to the German Federal Cartel Office, including draft notifications prior to submission to the authority, and for this purpose the Buyer shall only be obligated to share commercially sensitive information regarding its operations with the Sellers’ counsel (on a counsel to counsel basis).

 

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9.3.3 If any objections are asserted with respect to the transactions contemplated under this Agreement by the German Federal Cartel Office, each of the Sellers and the Buyer shall, and shall cause its controlled Affiliates to, use its best reasonable efforts to promptly resolve such objections. Such efforts shall include entering into any settlement, undertaking, consent decree, stipulation or agreement or agreeing to any order regarding antitrust or competition matters in connection with any objections of the German Federal Cartel Office to the transactions contemplated hereby; unless such settlement, undertaking, consent decree, stipulation or agreement results in any unreasonable economic burden for any Group Company, the Buyer or any of the Buyer’s Affiliates.

 

9.4 Access to Information

 

9.4.1 From the date hereof until the Closing Date, the Sellers will, to the extent consistent with applicable Law, (i) give, and will cause each Group Company to give, Buyer, its counsel, financial advisors, auditors and other authorized representatives reasonable access to the offices, properties, books and records of the Group, and (ii) furnish, and will cause the Group to furnish, to Buyer, its counsel, financial advisors, auditors and other authorized representatives such financial and operating data and other information relating to the Group as such Persons may reasonably request, in each case to the extent reasonable required in connection with the transactions contemplated hereby and their implementation post Closing. Any access pursuant to this clause shall be conducted in such manner as not to interfere unreasonably with the conduct of the business of Sellers or a Group Company. The Buyer shall bear all of the out-of-pocket costs and expenses (including attorneys’ fees, but excluding reimbursement for general overhead, salaries and employee benefits) reasonably incurred in connection with the foregoing. Notwithstanding the foregoing, the Buyer shall not have access to personnel records of the Group relating to individual performance or evaluation records, medical histories or other information which in Sellers’ good faith opinion is sensitive or the disclosure of which could subject a Group Company to risk of liability.

 

9.4.2 On and after the Closing Date, the Buyer will afford promptly to the Sellers and their professional advisors reasonable access to the Group Companies’ books of account, financial and other records (including auditor’s work papers), employees and auditors to the extent necessary for the Sellers in connection with any third Person (i.e., not the Buyer or any of Buyer’s Affiliates) audit, investigation, dispute or litigation relating to a Group Company; provided that any such access by the Sellers shall not unreasonably interfere with the conduct of the business of the Group. The Sellers shall bear all of the out-of-pocket costs and expenses (including attorneys’ fees, but excluding reimbursement for general overhead, salaries and employee benefits) reasonably incurred in connection with the foregoing.

 

9.5 Waiver of Claims

 

9.5.1 Each Seller (including on behalf of its Affiliates and closely related Persons) hereby irrevocably waives any claims it or they may have against any Group Company as of the Closing Date, except for ordinary outstanding claims for board of directors’ fees, salary, bonus and similar payments arising out of the employment agreements and consultancy agreements, if applicable. Notwithstanding the preceding sentence, any waiver by VF shall not be considered a waiver of any rights pursuant to the surety ( Vækstkaution ) provided by VF for the benefit of the Company.

 

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9.6 Share Transfers India

 

9.6.1 Following the Closing Date, EKI and the Buyer shall take all actions and make all declarations required in order to promptly sell and transfer the shares of EKI in Universal Robots (India) Private Limited to the Buyer. The consideration for the sale and transfer of such shares shall equal their nominal value. The Buyer shall bear any and all costs to complete the aforementioned share transfer and the Buyer shall indemnify and hold harmless EKI against any and all claims of whatever nature arising out of or related to the holding of the shares in Universal Robots (India) Private Limited after the Closing Date and until the share transfer has been completed.

 

10 CLOSING CONDITIONS

 

10.1 Subject to clauses 10.2 and 11, the obligations of each Party to complete the Closing are subject only to the fulfilment of the condition that the German Federal Cartel Office has approved the transactions contemplated by this Agreement or that, after the Buyer made the filing pursuant to clause 9.3, a relevant waiting period expired so that the transactions contemplated by this Agreement are deemed to have been approved (the “Merger Condition”).

 

10.2 In addition to the Merger Condition, the obligation of the Buyer to complete the Closing is subject to the condition that no Material Adverse Change shall have occurred after the Signing Date. The Buyer may waive this condition in its sole discretion.

 

11 TERMINATION

 

11.1 Subject to clause 11.2 below, the Agreement may be terminated prior to Closing only:

 

  (a) by either the Sellers’ Representative on behalf of all Sellers or by the Buyer on its own behalf and on behalf of the Guarantor, if the Merger Condition has not been satisfied within 3 months after the Signing Date (the “Cut-Off Date”);

 

  (b) by the Parties’ written agreement; and

 

  (c) by either the Sellers’ Representative on behalf of all Sellers or by the Buyer on its own behalf and on behalf of the Guarantor by the non-breaching Party in the circumstances set out in clause 12.7.

provided that neither the Sellers’ Representative nor the Buyer shall be entitled to terminate this Agreement if the failure to consummate the Closing prior to the Cut-Off Date resulted primarily from the failure to perform in any material respect any of its representations, warranties, covenants or other agreements contained in this Agreement by any of the Sellers, in case of a termination by the Sellers’ Representatives, or by the Buyer or the Guarantor, in case of a termination by the Buyer.