Teradyne, Inc.
TERADYNE, INC (Form: 10-K, Received: 03/01/2017 12:15:09)
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

ANNUAL REPORT

PURSUANT TO SECTIONS 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

(MARK ONE)

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

For the fiscal year ended December 31, 2016

OR

 

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

Commission file number 001-06462

TERADYNE, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

MASSACHUSETTS   04-2272148

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification Number)

 

600 RIVERPARK DRIVE

NORTH READING, MASSACHUSETTS

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

Registrant’s telephone number, including area code: (978) 370-2700

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Name of Each Exchange on Which Registered

Common Stock, par value $0.125 per share   New York Stock Exchange

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ☒    No  ☐

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.    Yes  ☐    No  ☒

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

Indicate by check mark whether the registrant has submitted electronically 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  ☒    No  ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405) is not contained herein, and will not be contained to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or in any amendment to this Form 10-K.  ☐

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

Large accelerated filer ☒    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  ☒

The aggregate market value of the voting stock held by non-affiliates of the registrant as of July 1, 2016 was approximately $3.9 billion based upon the closing price of the registrant’s Common Stock on the New York Stock Exchange on that date.

The number of shares outstanding of the registrant’s only class of Common Stock as of February 24, 2017 was 200,302,178 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s proxy statement in connection with its 2017 annual meeting of shareholders are incorporated by reference into Part III of this Form 10-K.

 

 

 


Table of Contents

TERADYNE, INC.

INDEX

 

          Page No.  
PART I.  

Item 1.

   Business      1  

Item 1A.

   Risk Factors      9  

Item 1B.

   Unresolved Staff Comments      19  

Item 2.

   Properties      19  

Item 3.

   Legal Proceedings      19  

Item 4.

   Mine Safety Disclosure      19  
PART II.  

Item 5.

   Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities      20  

Item 6.

   Selected Financial Data      21  

Item 7.

   Management’s Discussion and Analysis of Financial Condition and Results of Operation      22  

Item 7A.

   Quantitative and Qualitative Disclosures about Market Risk      42  

Item 8.

   Financial Statements and Supplementary Data      44  

Item 9.

   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure      104  

Item 9A.

   Controls and Procedures      104  

Item 9B.

   Other Information      104  
PART III.  

Item 10.

   Directors, Executive Officers and Corporate Governance      105  

Item 11.

   Executive Compensation      105  

Item 12.

   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters      105  

Item 13.

   Certain Relationships and Related Transactions, and Director Independence      105  

Item 14.

   Principal Accountant Fees and Services      105  
PART IV.  

Item 15.

   Exhibits and Financial Statement Schedule      106  

Item 16.

   Form 10-K Summary      107  
   Signatures      113  


Table of Contents

TERADYNE, INC.

FORM 10-K

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act and Section 21E of the Securities Exchange Act. When used herein, the words “will,” “would,” “believe,” “anticipate,” “plan,” “expect,” “estimate,” “project,” “intend,” “may,” “see,” “target” and other words and terms of similar meaning are intended to identify forward-looking statements although not all forward looking statements contain these identifying words. Forward looking statements involve risks and uncertainties, including, but not limited to, those discussed in the section entitled “Risk Factors” of this annual report on Form 10-K and elsewhere, and in other reports we file with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on these forward-looking statements which reflect management’s analysis only as of the date hereof and are subject to risks and uncertainties that could cause actual results to differ materially from those stated or implied. Teradyne assumes no obligation to update these forward-looking statements for any reason, except as may be required by law.

PART I

 

Item 1: Business

Teradyne, Inc. (“Teradyne”) was founded in 1960 and is a leading global supplier of automation equipment for test and industrial applications.

We design, develop, manufacture and sell automatic test systems used to test semiconductors, wireless products, data storage and complex electronics systems in the consumer electronics, wireless, automotive, industrial, computing, communications, and aerospace and defense industries. Our industrial automation products include collaborative robots used by global manufacturing and light industrial customers to improve quality, increase manufacturing efficiency and decrease manufacturing costs. Our automatic test equipment and industrial automation products and services include:

 

   

semiconductor test (“Semiconductor Test”) systems;

 

   

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

 

   

industrial automation (“Industrial Automation”) products; and

 

   

wireless test (“Wireless Test”) systems.

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

In 2015, we acquired Universal Robots A/S (“Universal Robots”), the leading supplier of collaborative robots which are low-cost, easy-to-deploy and simple-to-program robots that work side by side with production workers to improve quality, increase manufacturing efficiency and decrease manufacturing costs. Universal Robots is a separate operating and reportable segment, Industrial Automation. The acquisition of Universal

 

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Robots provides a growth engine to our business and complements our existing System Test and Wireless Test segments. The total purchase price for Universal Robots was approximately $315 million, which included cash paid of approximately $284 million and $32 million in fair value of contingent consideration payable upon achievement of revenue and earnings targets through 2018. Contingent consideration paid for 2015 was $15 million. The remaining maximum contingent consideration that could be paid is $50 million.

In 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. The total purchase price for AIT was approximately $21 million, which included cash paid of approximately $19 million and $2 million in fair value of contingent consideration payable upon achievement of revenue and gross margin targets in 2015 and 2016. The total amount of contingent consideration paid was $1.1 million.

In 2013, we acquired ZTEC Instruments Inc. (“ZTEC”), a supplier of modular wireless test instruments. The acquisition of ZTEC expands our Wireless Test segment into the design verification test of wireless components and chipsets. The total purchase price for ZTEC was approximately $17 million, which included cash paid of approximately $15 million and $2 million in fair value of contingent consideration payable upon achievement of certain customer order and revenue targets through 2015. None of the contingent consideration was paid.

Investor Information

We are a Massachusetts corporation incorporated on September 23, 1960. We are subject to the informational requirements of the Securities Exchange Act of 1934 (“Exchange Act”). We file periodic reports, proxy statements and other information with the Securities and Exchange Commission (“SEC”). Such reports, proxy statements and other information may be obtained by visiting the Public Reference Room of the SEC at 100 F Street, N.E., Washington, DC 20549 or by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an internet site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file documents electronically.

You can access financial and other information, including the charters of our Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee, our Corporate Governance Guidelines and Code of Conduct, by clicking the Investors link on our web site at www.teradyne.com. We make available, free of charge, copies of our filings with the SEC, including our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act through our web site as soon as reasonably practicable after filing such material electronically or otherwise furnishing it to the SEC.

Products

Semiconductor Test

We design, manufacture, sell and support Semiconductor Test products and services on a worldwide basis. The test systems we provide are used both for wafer level and device package testing. These chips are used in automotive, industrial, communications, consumer, and computer and electronic game applications, among others. Semiconductor devices span a broad range of functionality, from very simple low-cost devices such as appliance microcontrollers, operational amplifiers or voltage regulators to complex digital signal processors and microprocessors as well as memory devices. Semiconductor Test products and services are sold to IDMs that integrate the fabrication of silicon wafers into their business, “Fabless” companies that outsource the manufacturing of silicon wafers, “Foundries” that cater to the processing and manufacturing of silicon wafers, and OSATs that provide test and assembly services for the final packaged devices to both Fabless companies and IDMs. Fabless companies perform the design of integrated circuits without manufacturing capabilities, and use

 

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Foundries for wafer manufacturing and OSATs for test and assembly. These customers obtain the overall benefit of comprehensively testing devices and reducing the total costs associated with testing by using our Semiconductor Test systems to:

 

   

improve and control product quality;

 

   

measure and improve product performance;

 

   

reduce time to market; and

 

   

increase production yields.

Our FLEX Test Platform architecture advances our core technologies to produce test equipment that is designed for high efficiency multi-site testing. Multi-site testing involves the simultaneous testing of many devices in parallel. Leading semiconductor manufacturers are using multi-site testing to significantly improve their “Cost of Test” economics. The FLEX Test Platform architecture addresses customer requirements through the following key capabilities:

 

   

A high efficiency multi-site architecture that reduces tester overhead such as instrument setup, synchronization and data movement, and signal processing;

 

   

The IG-XL™ software operating system which provides fast program development, including instant conversion from single to multi-site test; and

 

   

Broad technology coverage by instruments designed to cover the range of test parameters, coupled with a universal slot test head design that allows easy test system reconfiguration to address changing test needs.

FLEX Test Platform purchases are being made by IDMs, OSATs, Foundries and Fabless customers. The FLEX Test Platform has become a widely used test solution at OSATs by providing versatile testers that can handle the widest range of devices, allowing OSATs to leverage their capital investments. The broad consumer, automotive and broadband markets have historically driven most of the device volume growth in the semiconductor industry. These markets include smart phones, cell phones, tablets, set top boxes, HDTVs, game controllers, computer graphics, and automotive controllers to name a few. These end use markets continue to be drivers for the FLEX Test Platform family of products because they require a wide range of technologies and instrument coverage. The UltraFLEX-M tester extends the FLEX Test Platform into the High Speed DRAM testing market. The FLEX Test Platform has an installed base of more than 5,500 systems.

Our J750™ test system shares the IG-XL software environment with the family of FLEX Test Platform systems. The J750 is designed to address the highest volume semiconductor devices, such as microcontrollers, that are central to the functionality of almost every consumer electronics product, from small appliances to automobiles. J750 test systems combine compact packaging, high throughput and ease of production test. We extended the J750 platform technology to create the IP750 Image Sensor™ test system. The IP750 is focused on testing image sensor devices used in smart phones and other imaging products. We have continued to invest in the J750 platform with new instrument releases that bring new capabilities to existing market segments and expand the J750 platform to new devices that include high end microcontrollers and the latest generation of cameras. In 2013, we introduced the J750 Ex-HD which includes system enhancements and new high density instruments that enable the J750 test platform to provide higher test cell productivity. The J750 platform has an installed base of over 5,200 systems.

Our Magnum platform addresses the requirements of mass production test of memory devices such as flash memory and DRAM. Flash and DRAM memory are widely used core building blocks in modern electronic products finding wide application in consumer, industrial, and computing equipment. Magnum V, the newest member of the family, is a next generation memory test solution designed for parallel memory test in the flash, DRAM and multi-chip package markets. The Magnum platform has an installed base of over 2,100 systems.

 

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Our ETS platform is used by semiconductor manufacturers and assembly and test subcontractors, primarily in the analog/mixed signal markets that cover more cost sensitive applications. Our proprietary SmartPin™ technology enables high efficiency multi-site testing, on an individual test system, permitting greater test throughput. Semiconductors tested by ETS platform systems are incorporated into a wide range of products in historically high-growth markets, including mobile devices, video/multimedia products, automotive electronics, computer peripherals, and notebook and desktop computers. In 2013, we introduced the ETS-88, a high performance multi-site production test system designed to test a wide variety of high volume commodity and precision devices. In 2015, we introduced the ETS-800, a high performance multi-site production test system to test high complexity power devices in automotive, industrial and consumer applications. The ETS platform has an installed base of over 4,100 systems.

System Test

Our System Test segment is comprised of three business units: Defense/Aerospace, Storage Test and Production Board Test.

Defense/Aerospace

We are a leading provider of high performance test systems, subsystems, instruments and service for the defense and aerospace markets. Our test products are used to ensure the readiness of military and commercial aerospace electronics systems. New programs, such as tactical aircraft and missile systems, as well as upgrade programs, continue to fuel the demand for high performance test systems in this market. Our test products are well-suited to the demands of defense/aerospace electronics manufacturers and repair depots worldwide. Our leadership in this market is underscored by our success with major Department of Defense programs across all U.S. military service branches and many allied defense services worldwide. Our acquisition of AIT in 2014 complements our line of bus test instrumentation for commercial and defense avionics systems. AIT is a supplier of equipment for testing state-of-the-art data communication buses.

Storage Test

The Storage Test business unit addresses the high throughput, automated manufacturing test requirements of hard disk drive (“HDD”) and solid state disk (“SSD”) manufacturers. Our products address the client and enterprise storage markets. The client market is driven by the needs of desktop, laptop, and external HDD and SSD storage products. The enterprise market is driven by the needs of data centers and cloud storage. Our products lead in addressing customer requirements related to factory density, throughput, thermal performance and vibration isolation.

Production Board Test

Our test systems are used by electronics manufacturers worldwide to perform In-Circuit-Test (“ICT”) and device programming of printed circuit board assemblies. Fast, accurate and cost-effective test capabilities are hallmark features of our Test Station and Spectrum ICT product families. We offer the Test Station in off-line and automated in-line configurations. The automated in-line configurations address the growing requirements for automating production lines for high volume applications, such as automotive electronics.

Industrial Automation

Universal Robots, which we acquired in June 2015, is the leading supplier of collaborative robots, which are low-cost, easy-to-deploy and simple-to-program robots that work side by side with production workers to improve quality, increase manufacturing efficiency and decrease manufacturing costs. Collaborative robots are designed to mimic the motion of a human arm and can be fitted with task specific grippers or fixtures to support a wide range of applications. Universal Robots offers three collaborative robot models, the UR3, UR5, and

 

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UR10, each with different weight carrying capacity and arm reach. All models are easily integrated into existing production environments. Universal Robots’ products are differentiated by their:

 

   

easy programming using a graphical interface which allows users to program the collaborative robot in a few hours;

 

   

flexibility and ease of use in allowing customers to change the task the collaborative robot is performing as their production demands dictate;

 

   

safe operations as collaborative robots can assist workers in side by side production environments requiring no special safety enclosures or shielding to protect workers; and

 

   

short payback period, on average less than 12 months.

Cumulatively, Universal Robots has sold over 12,000 collaborative robots in diverse production environments and applications.

Wireless Test

Our acquisition of LitePoint in 2011 and ZTEC in 2013 expanded our product offerings in the wireless test market. Under the LitePoint brand name, these products provide test solutions utilized in the development and manufacturing of wireless devices. The world’s leading makers of smart phones, tablets, notebooks, laptops, peripherals, and Internet-of-Things (IoT) devices rely on LitePoint technology to ensure their products get into consumer hands with high quality and high efficiency.

LitePoint hardware and software wireless test solutions are used in test insertions that span design verification to high volume manufacturing and are deployed across the entire production eco-system from the wireless chipset suppliers to the consumer brands. Wireless devices are often tested at multiple points along the manufacturing process that include insertions at component, system-in-package (“SiP”), module, PCB, SMT and finished product stages.

Design verification is an important step in the development process for evaluating product performance prior to starting production. As end market unit volumes have increased, the quantity of units and the amount of data that must be analyzed for a successful product launch continues to grow. LitePoint products provide easy to use, domain specific tools for rapid analysis of product performance. This helps to speed time to market.

In high volume manufacturing, before products are packaged and shipped, wireless test enables the calibration of each individual product’s wireless performance to improve range, data throughput and battery life. Testing also verifies product specifications for product quality control. As markets become increasingly competitive, product performance and quality provide brand differentiation.

Wireless standards can be thought of in two categories, connectivity and cellular. Connectivity covers many standards such as Wi-Fi, Bluetooth, and GPS. LitePoint’s IQxel products cover emerging Wi-Fi standards such as 802.11ax and 802.11ad as well as the existing standards 802.11a/b/g/n and 11ac, and includes a variety of other standards such as Bluetooth Classic, Bluetooth 5.0 and Bluetooth low energy, Zigbee, Z-Wave, NFC, LoRa, GPS, GLONASS and others.

The IQxel product family’s high-performance wireless and multi-device testing economics is aligned with the needs of networking equipment, Internet gateways, IoT products and embedded modules used in smartphones, tablets, and PCs. Another connectivity product, the IQnfc, addresses the growing use of NFC technology for payments with mobile devices.

Cellular standards include 2G, 3G, 4G and emerging 5G mobile phone technologies. LitePoint’s IQxstream is a multi-device optimized solution for high-speed testing of GSM, EDGE, CDMA2000, TD-SCDMA, WCDMA, HSPA+, LTE-FDD, TD_LTE, and LTE-A technologies. It is used for calibration and verification of smartphones, tablets, small cell wireless gateways and embedded cellular modules.

 

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An important component in all wireless systems is the analog RF front end. The performance of these components is continually pushed higher as device makers add more bands, channels, antennas and higher data rates. We offer the LitePoint zSeries of modular wireless test instruments for design verification test and production testing of these wireless components. The lab-in-a-box zSeries solution provides simple and fast design verification of RF power amplifier and smart device RF front end modules. It is capable of rapid analysis of the latest digital pre-distortion and envelope tracking technologies for both LTE and Wi-Fi standards. A ruggedized version of the product is designed for high volume testing of these same devices.

To complement the test systems, LitePoint offers turnkey test software for over 350 of the most popular wireless chipsets. These optimized solutions provide rapid development of high volume manufacturing solutions with a minimum of engineering effort by customers.

Summary of Revenues by Reportable Segment

Our four reportable segments accounted for the following percentages of consolidated revenues for each of the last three years:

 

     2016     2015     2014  

Semiconductor Test

     78     73     79

System Test

     11       13       10  

Industrial Automation

     6       3       —    

Wireless Test

     5       11       11  
  

 

 

   

 

 

   

 

 

 
     100     100     100
  

 

 

   

 

 

   

 

 

 

Sales and Distribution

In 2016, revenues from Taiwan Semiconductor Manufacturing Company Ltd. and JA Mitsui Leasing, Ltd. accounted for 12% and 12%, respectively, of our consolidated revenues. Taiwan Semiconductor Manufacturing Company Ltd. and JA Mitsui Leasing, Ltd. are customers of our Semiconductor Test segment. In 2015, revenues from JA Mitsui Leasing, Ltd. accounted for 13% of our consolidated revenues. In 2014, no single customer accounted for more than 10% of our consolidated revenues. In each of the years, 2016, 2015 and 2014, our five largest customers in aggregate accounted for 36%, 34% and 30% of our consolidated revenues, respectively.

OSAT customers, such as Taiwan Semiconductor Manufacturing Company LTD., often purchase our test systems based upon recommendations from OEMs, IDMs and Fabless companies. In all cases when an OSAT customer purchases a test system from us, we consider the OSAT as the customer since credit risk, title and risk of loss, among other things, are between Teradyne and the OSAT. We estimate product demand driven by a single OEM customer, combining direct sales to that customer with sales to the customer’s OSATs (which include Taiwan Semiconductor Manufacturing Company Ltd. and its leasing company, JA Mitsui Leasing, Ltd), accounted for approximately 25%, 23%, and 22% of our consolidated revenues in 2016, 2015, and 2014, respectively. The loss of, or significant decrease in demand from, this OEM customer, or any of our five largest direct customers, could have a material adverse effect on our business, results of operations and financial condition.

We have sales and service offices located throughout North America, Asia and Europe. We sell in these areas predominantly through a direct sales force, except for Industrial Automation segment products which are sold through distributors. Our manufacturing activities are primarily conducted through subcontractors and outsourced contract manufacturers with significant operations in China and Malaysia.

Sales to customers outside the United States were 87% of our consolidated revenues in 2016, 2015 and 2014. Sales are attributed to geographic areas based on the location of the customer site.

 

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Sales to customers by country outside of the United States that accounted for 10% or more of our consolidated revenues in any of the previous three years were as follows:

 

     2016     2015     2014  

Taiwan

     37     27     30

China

     10       16       18  

See also “Item 1A: Risk Factors” and Note R: “Operating Segment, Geographic and Significant Customer Information” in Notes to Consolidated Financial Statements.

Competition

We face significant competition throughout the world in each of our reportable segments. Competitors in the Semiconductor Test segment include, among others, Advantest Corporation and Xcerra Corporation.

Competitors in the System Test segment include, among others, Keysight Technologies, Inc., Astronics, Test Research, Inc. and SPEA S.p.A.

Competitors in our Wireless Test segment include, among others, Rohde & Schwarz GmbH & Co. KG, Anritsu Company, Keysight Technologies, Inc. and National Instruments Corporation.

Competitors in our Industrial Automation segment include manufacturers of traditional industrial robots such as KUKA Robotics Corporation, ABB, FANUC and Yaskawa Electric Corporation as well as emerging companies developing collaborative robots.

Some of our competitors have substantially greater financial and other resources to pursue engineering, manufacturing, marketing and distribution of their products. We also face competition from emerging Asian equipment companies and from internal suppliers at several of our customers. Some of our competitors have introduced or announced new products with certain performance characteristics which may be considered equal or superior to those we currently offer. We expect our competitors to continue to improve the performance of their current products and to introduce new products or new technologies that provide improved cost of ownership and performance characteristics. See also “Item 1A: Risk Factors.”

Backlog

At December 31, 2016 and 2015, our backlog of unfilled orders in our four reportable segments was as follows:

 

     2016      2015  
     (in millions)  

Semiconductor Test

   $ 575.7      $ 472.9  

System Test

     117.8        108.8  

Wireless Test

     32.4        33.4  

Industrial Automation

     3.8        0.6  
  

 

 

    

 

 

 
   $ 729.7      $ 615.7  
  

 

 

    

 

 

 

Of the backlog at December 31, 2016, approximately 99% of the Semiconductor Test backlog, 97% of the System Test backlog, 50% of Wireless Test backlog and 100% of the Industrial Automation backlog, is expected to be delivered in 2017.

Customers may delay delivery of products or cancel orders suddenly and without advanced notice, subject to possible cancellation penalties. Due to possible customer changes in delivery schedules and cancellation of orders, our backlog at any particular date is not necessarily indicative of the actual sales for any succeeding period. Delays in delivery schedules or cancellations of backlog during any particular period could have a material adverse effect on our business, financial condition or results of operations.

 

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Raw Materials

Our products contain electronic and mechanical components that are provided by a wide range of suppliers. Some of these components are standard products, while others are manufactured to our specifications. We can experience occasional delays in obtaining timely delivery of certain items. While the majority of our components are available from multiple suppliers, certain items are obtained from sole sources. We may experience a temporary adverse impact if any of our sole source suppliers delay or cease to deliver products.

Intellectual Property and Licenses

The development of our products, both hardware and software, is based in significant part on proprietary information, our brands and technology. We protect our rights in proprietary information, brands and technology through various methods, such as:

 

   

patents;

 

   

copyrights;

 

   

trademarks;

 

   

trade secrets;

 

   

standards of business conduct and related business practices; and

 

   

technology license agreements, software license agreements, non-disclosure agreements, employment agreements, and other agreements.

However, these protections might not be effective in all circumstances. Competitors might independently develop similar technology or exploit our proprietary information and our brands in countries where we lack enforceable intellectual property rights or where enforcement of such rights through the legal system provides an insufficient deterrent. Also, intellectual property protections can lapse or be invalidated through appropriate legal processes. We do not believe that any single piece of intellectual property or proprietary rights is essential to our business.

Employees

As of December 31, 2016, we employed approximately 4,300 people. Since the inception of our business, we have experienced no work stoppages or other labor disturbances.

Engineering and Development Activities

The highly technical nature of our products requires a large and continuing engineering and development effort. For the years ended December 31, 2016, 2015 and 2014, our engineering and development expenditures were $291.0 million, $292.3 million, and $291.6 million, respectively. These expenditures accounted for approximately 16.6%, 17.8%, and 17.7%, of our consolidated revenues in 2016, 2015, and 2014, respectively.

Environmental Affairs

We are subject to various federal, state, and local government laws and regulations relating to the protection of employee health and safety and the environment. We accrue for all known environmental liabilities when it becomes probable that we will incur cleanup costs and those costs can reasonably be estimated. Estimated environmental costs are not expected to materially affect the financial position or results of our operations in future periods. However, estimates of future costs are subject to change due to protracted cleanup periods and changing environmental remediation laws and regulations.

 

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OUR EXECUTIVE OFFICERS

Pursuant to General Instruction G(3) of Form 10-K, the following table is included in Part I of this Annual Report on Form 10-K in lieu of being included in the Proxy Statement for the Annual Meeting of Shareholders. The table sets forth the names of all of our executive officers and certain other information relating to their positions held with Teradyne and other business experience. Our executive officers do not have a specific term of office but rather serve at the discretion of the Board of Directors.

 

Executive Officer

   Age     

Position

  

Business Experience For The Past 5 Years

Mark E. Jagiela

     56      Chief Executive Officer and President    Chief Executive Officer since February 2014; President of Teradyne since January 2013; President of Semiconductor Test from 2003 to February 2016; Vice President of Teradyne from 2001 to 2013.

Gregory R. Beecher

     59      Vice President, Chief Financial Officer and Treasurer    Vice President and Chief Financial Officer of Teradyne since 2001; Treasurer of Teradyne from 2003 to 2005 and since 2006.

Charles J. Gray

     55      Vice President, General Counsel and Secretary    Vice President, General Counsel and Secretary of Teradyne since April 2009.

Bradford B. Robbins

     58      President of Wireless Test    President of Wireless Test since August 2014; Chief Operating Officer of LitePoint Corporation from 2012 to 2014; Vice President of Teradyne since 2001.

Gregory S. Smith

     53      President of Semiconductor Test    President of Semiconductor Test since February 2016; Vice President, SOC Business Group and Marketing Manager for Semiconductor Test Group from January 2014 to February 2016; Business Unit Manager, Complex SOC Business Unit from 2009 to January 2014.

Walter G. Vahey

     52      President of System Test    President of System Test since July 2012; Vice President of Teradyne since 2008; General Manager of Storage Test since 2008; General Manager of Production Board Test since April 2013; General Manager of Defense/Aerospace from 2004 to July 2012.

 

Item 1A: Risk Factors

Risks Associated with Our Business

The risks described below are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

Our business is impacted by global and industry-specific economic cycles, which are difficult to predict, and actions we have taken or may take to offset these cycles may not be sufficient.

Capital equipment providers in the electronics and semiconductor industries, such as Teradyne, have, in the past, been negatively impacted by both sudden slowdowns in the global economies and recurring cyclicality within those industries. These cycles have resulted in periods of over-supply; a trend we believe will continue to

 

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occur for newer generations of electronic products. Our business and results of operations depend, in significant part, upon capital expenditures of manufacturers of semiconductors and other electronics, which in turn depend upon the current and anticipated market demand for those products. Disruption or deterioration in economic conditions may reduce customer purchases of our products, thereby reducing our revenues and earnings. In addition, such adverse changes in economic conditions, and resulting slowdowns in the market for our products, may, among other things, result in increased price competition for our products, increased risk of excess and obsolete inventories, increased risk in the collectability of our accounts receivable from our customers, potential reserves for doubtful accounts and write-offs of accounts receivable, increased risk of restructuring charges, and higher operating costs as a percentage of revenues, which, in each case and together, adversely affect our operating results. We are unable to predict the likely duration, frequency and severity of disruptions in financial markets, credit availability, and adverse economic conditions throughout the world, and we cannot ensure that the level of revenues or new orders for a fiscal quarter will be sustained in subsequent quarters. We have taken actions to address the effects of general economic variability and recurring industry cyclicality, including implementing cost control and reduction measures. We cannot predict whether these measures will be sufficient to offset global or market-specific disruptions that might affect our test businesses and we may need to take additional or different measures in the future.

We are subject to intense competition.

We face significant competition throughout the world in each of our reportable segments. Some of our competitors have substantial financial and other resources to pursue engineering, manufacturing, marketing and distribution of their products. We also face competition from emerging Asian equipment companies and internal development at several of our customers. Some of our competitors have introduced or announced new products with certain performance characteristics that may be considered equal or superior to those we currently offer. We expect our competitors to continue to improve the performance of their current products and to introduce new products or new technologies that provide improved cost of ownership and performance characteristics. New product introductions by competitors could cause a decline in revenues or loss of market acceptance of our products.

The market for our products is concentrated, and our business depends, in part, on obtaining orders from a few significant customers.

The market for our products is concentrated with a limited number of significant customers accounting for a substantial portion of the purchases of test equipment. In each of the years 2016, 2015 and 2014, our five largest customers in aggregate accounted for 36%, 34% and 30% of consolidated revenues, respectively. We estimate product demand driven by a single OEM customer, combining direct sales to that customer with sales to the customer’s OSATs (which include Taiwan Semiconductor Manufacturing Company Ltd. and its leasing company, JA Mitsui Leasing, Ltd), accounted for approximately 25%, 23%, and 22% of our consolidated revenues in 2016, 2015, and 2014, respectively. In any one reporting period, a single customer or several customers may contribute even a larger percentage of our consolidated revenues. In addition, our ability to increase sales will depend, in part, on our ability to obtain orders from current or new significant customers. The opportunities to obtain orders from these customers may be limited, which may impair our ability to grow revenues. We expect that sales of our products will continue to be concentrated with a limited number of significant customers for the foreseeable future. The loss of a significant customer or any reduction in orders by these customers, including reductions due to market or competitive conditions, such as we experienced in our Wireless Test segment, would likely have a material adverse effect on our business, financial condition or results of operations.

 

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Our operating results are likely to fluctuate significantly.

Our operating results are affected by a wide variety of factors that could materially adversely affect revenues or profitability. The following factors could impact future operations:

 

   

a worldwide economic slowdown or disruption in the global financial markets;

 

   

competitive pressures on selling prices;

 

   

our ability to introduce, and the market acceptance of, new products;

 

   

changes in product revenues mix resulting from changes in customer demand;

 

   

the level of orders received which can be shipped in a quarter because of the tendency of customers to wait until late in a quarter to commit to purchase due to capital expenditure approvals and constraints occurring at the end of a quarter, or the hope of obtaining more favorable pricing from a competitor seeking the business;

 

   

engineering and development investments relating to new product introductions, and the expansion of manufacturing, outsourcing and engineering operations in Asia;

 

   

provisions for excess and obsolete inventory relating to the lack of demand for and the discontinuance of products;

 

   

impairment charges for certain long-lived and intangible assets, and goodwill;

 

   

an increase in the leasing of our products to customers;

 

   

our ability to expand our global distribution channel for our collaborative robots;

 

   

parallel or multi-site testing could lead to a decrease in the ultimate size of the market for our products; and

 

   

the ability of our suppliers and subcontractors to meet product quality or delivery requirements needed to satisfy customer orders for our products, especially if product demand increases.

As a result of the foregoing and other factors, we have experienced and may continue to experience material fluctuations in future operating results on a quarterly or annual basis which could materially and adversely affect our business, financial condition, operating results or stock price.

We are subject to risks of operating internationally.

A significant portion of our total revenues is derived from customers outside the United States. Our international sales and operations are subject to significant risks and difficulties, including:

 

   

unexpected changes in legal and regulatory requirements affecting international markets;

 

   

changes in tariffs and exchange rates;

 

   

social, political and economic instability, acts of terrorism and international conflicts;

 

   

difficulties in protecting intellectual property;

 

   

difficulties in accounts receivable collection;

 

   

cultural differences in the conduct of business;

 

   

difficulties in staffing and managing international operations;

 

   

compliance with customs regulations; and

 

   

compliance with international tax laws and regulations.

 

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In addition, an increasing portion of our products and the products we purchase from our suppliers are sourced or manufactured in foreign locations, including China and Malaysia, and a large portion of the devices our products test are fabricated and tested by foundries and subcontractors in Taiwan, China, Singapore and other parts of Asia. As a result, we are subject to a number of economic and other risks, particularly during times of political or financial instability in these regions. Disruption of manufacturing or supply sources in these international locations could materially adversely impact our ability to fill customer orders and potentially result in lost business.

If we fail to develop new technologies to adapt to our customers’ needs and if our customers fail to accept our new products, our revenues will be adversely affected.

We believe that our technological position depends primarily on the technical competence and creative ability of our engineers. In a rapidly evolving market, such as ours, the development or acquisition of new technologies, commercialization of those technologies into products and market acceptance and customer demand for those products are critical to our success. Successful product development or acquisition, introduction and acceptance depend upon a number of factors, including:

 

   

new product selection;

 

   

ability to meet customer requirements;

 

   

development of competitive products by competitors;

 

   

timely and efficient completion of product design;

 

   

timely and efficient implementation of manufacturing and manufacturing processes;

 

   

timely remediation of product performance issues, if any, identified during testing;

 

   

assembly processes and product performance at customer locations;

 

   

differentiation of our products from our competitors’ products;

 

   

management of customer expectations concerning product capabilities and product life cycles;

 

   

transition of customers to new product platforms;

 

   

ability to attract and retain technical talent; and

 

   

innovation that does not infringe on the intellectual property rights of third parties.

We may be subject to product recalls and warranty and product liability claims.

We invest significant resources in the design, manufacture and testing of our products. However, we may discover design or manufacturing defects in our products after they have been shipped and, as a result, we may incur development and remediation costs and be required to settle warranty and product liability claims. In addition, if any of our products contain defects or have reliability, quality or safety issues, we may need to conduct a product recall which could result in significant repair or replacement costs and substantial delays in product shipments and may damage our reputation which could make it more difficult to sell our products. Any of these results could have a material adverse effect on our business, results of operations or financial condition.

If our suppliers do not meet product or delivery requirements, we could have reduced revenues and earnings.

Certain components, including semiconductor chips, may be in short supply from time to time because of high industry demand or the inability of some vendors to consistently meet our quality or delivery requirements. If any of our suppliers were to cancel contracts or commitments or fail to meet the quality or delivery requirements needed to satisfy customer orders for our products, we could lose time-sensitive customer orders, have significantly decreased revenues and earnings and be subject to contractual penalties, which would have a

 

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material adverse effect on our business, results of operations and financial condition. In addition, we rely on contract manufacturers for certain subsystems used in our products, and our ability to meet customer orders for those products depends upon the timeliness and quality of the work performed by these subcontractors, over whom we do not exercise any control.

To a certain extent, we are dependent upon the ability of our suppliers and contractors to help meet increased product or delivery requirements. It may be difficult for certain suppliers to meet delivery requirements in a period of rapid growth, therefore impacting our ability to meet our customers’ demands.

We rely on the financial strength of our suppliers. There can be no assurance that the loss of suppliers either as a result of financial viability, bankruptcy or otherwise will not have a material adverse effect on our business, results of operations or financial condition.

Our operations may be adversely impacted if our outsourced contract manufacturers or service providers fail to perform.

We depend on Flex Ltd. (“Flex”) to manufacture and test our FLEX and J750 family of products from its facility in China and on other contract manufacturers to manufacture other products. If for any reason these contract manufacturers cannot provide us with these products in a timely fashion, or at all, we may not be able to sell these products to our customers until we enter a similar arrangement with an alternative contract manufacturer. If we experience a problem with our supply of products from Flex or our other contract manufacturers, it may take us significant time to either manufacture the product or find an alternate contract manufacturer, which could result in substantial expense and disruption to our business.

We have also outsourced a number of our general and administrative functions to reputable service providers, many of which are in foreign countries, sometimes impacting communication with them because of language and time differences. Their presence in foreign countries also increases the risk they could be exposed to political risk. Additionally, there may be difficulties encountered in coordinating the outsourced operations with existing functions and operations. If we fail in successfully coordinating and managing the outsourced service providers, it may cause an adverse effect on our operations which could have a material adverse effect on our business, results of operations or financial condition.

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

In June 2015, we acquired Universal Robots. 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 businesses, form strategic alliances or create joint ventures with third parties that we believe will complement or augment our existing businesses. We may not be able to realize the expected synergies and cost savings from the integration with our existing operations of other businesses or technologies that we may acquire. In addition, the integration process for our acquisitions may be complex, costly and time consuming and include unanticipated issues, expenses and liabilities. We may have difficulty in developing, manufacturing and marketing the products of a newly acquired company in a manner that enhances the performance of our combined businesses or product lines and allows us to realize value from expected synergies. Following an acquisition, we may not achieve the revenue or net income levels that justify the acquisition. Acquisitions may also result in one-time charges (such as acquisition-related expenses, write-offs or restructuring charges) or in the future, impairment of goodwill or acquired intangible assets that adversely affect our operating results. Additionally, we may fund acquisitions of new businesses, strategic alliances or joint ventures by utilizing our cash, incurring debt, issuing shares of our common stock, or by other means.

In the second quarter of 2016, we performed an interim goodwill impairment test and recorded a goodwill impairment loss of $254.9 million and $83.3 million intangible asset impairment in our Wireless Test segment as a result of a sharp decline in projected demand attributable to an estimated smaller future wireless test market.

 

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The decrease in projected demand was due to lower forecasted buying from our largest Wireless Test segment customer (who has contributed between 51% and 73% of annual Wireless Test sales since the LitePoint acquisition in 2011 through 2015) as a result of the customer’s numerous operational efficiencies; slower smartphone growth rates; and a slowdown of new wireless technology adoption.

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.

We may incur significant liabilities if we fail to comply with environmental regulations.

We are subject to both domestic and international environmental regulations and statutory strict liability relating to the use, storage, discharge, site cleanup and disposal of hazardous chemicals used in our manufacturing processes. If we fail to comply with present and future regulations, or are required to perform site remediation, we could be subject to future liabilities or cost, including penalties or the suspension of production. Present and future regulations may also:

 

   

restrict our ability to expand facilities;

 

   

restrict our ability to ship certain products;

 

   

require us to modify our operations logistics;

 

   

require us to acquire costly equipment; or

 

   

require us to incur other significant costs and expenses.

Pursuant to present regulations and agreements, we are conducting groundwater and subsurface assessment and monitoring and are implementing remediation and corrective action plans for facilities located in Massachusetts and New Hampshire which are no longer conducting manufacturing operations. As of December 31, 2016, we have not incurred material costs as result of the monitoring and remediation steps taken at the Massachusetts and New Hampshire sites.

On January 27, 2003, the European Union adopted the following directives: (i) the directive on the Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment (the “RoHS Directive”); and (ii) the directive on Waste Electrical and Electronic Equipment (the “WEEE Directive”). The WEEE Directive became effective August 13, 2005 and the RoHS Directive became effective on July 6, 2006. Both the RoHS Directive and the WEEE Directive alter the form and manner in which electronic equipment is imported, sold and handled in the European Union. Other jurisdictions, such as China, have followed the European Union’s lead in enacting legislation with respect to hazardous substances and waste removal. Ensuring compliance with the RoHS Directive, the WEEE Directive and similar legislation in other jurisdictions, and integrating compliance activities with our suppliers and customers could result in additional costs and disruption to operations and logistics and thus, could have a negative impact on our business, operations or financial condition.

We currently are, and in the future may be, subject to litigation or regulatory proceedings that could have an adverse effect on our business.

From time to time, we may be subject to litigation or other administrative, regulatory or governmental proceedings, including tax audits and resulting claims that could require significant management time and resources and cause us to incur expenses and, in the event of an adverse decision, pay damages or incur costs in an amount that could have a material adverse effect on our financial position or results of operations.

 

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Third parties may claim we are infringing their intellectual property and we could suffer significant litigation costs, licensing expenses or be prevented from selling our products.

We have been sued for patent infringement in the past and receive notifications from time to time that we may be in violation of patents held by others. An assertion of patent infringement against us, if successful, could have a material adverse effect on our ability to sell our products or it could force us to seek a license to the intellectual property rights of others or alter such products so that they no longer infringe the intellectual property rights of others. A license could be very expensive to obtain or may not be available at all. Similarly, changing our products or processes to avoid infringing the rights of others may be costly or impractical. Additionally, patent litigation could require a significant use of management resources and involve a lengthy and expensive defense, even if we eventually prevail. If we do not prevail, we might be forced to pay significant damages, obtain licenses, modify our products, or stop making our products; each of which could have a material adverse effect on our financial condition, operating results or cash flows.

If we are unable to protect our intellectual property (“IP”), we may lose a valuable asset or may incur costly litigation to protect our rights.

We protect the technology that is incorporated in our products in several ways, including through patent, copyright, trademark and trade secret protection and by contractual agreement. However, even with these protections, our IP may still be challenged, invalidated or subject to other infringement actions. While we believe that our IP has value in the aggregate, no single element of our IP is in itself essential. If a significant portion of our IP is invalidated or ineffective, our business could be materially adversely affected.

We may incur higher tax rates than we expect and may have exposure to additional international tax liabilities and costs.

We are subject to paying income taxes in the United States and various other countries where we operate. Our effective tax rate is dependent on where our earnings are generated and the tax regulations and the interpretation and judgment of administrative tax or revenue entities in the United States and other countries. We have pursued a global tax strategy which could adversely be affected by the mix of earnings and tax rates in the countries where we operate, changes to tax laws or an adverse tax ruling by administrative entities. We are also subject to tax audits in the countries where we operate. Any material assessment resulting from an audit from an administrative tax or revenue entity could also negatively affect our financial results.

As a multinational corporation, we are subject to income taxes as well as non-income based taxes, in both the United States and various foreign jurisdictions. In certain foreign jurisdictions, we qualify for tax incentives and tax holidays based on our ability to meet, on a continuing basis, various tests relating to our employment levels, research and development expenditures and other qualification requirements in a particular foreign jurisdiction. While we intend to operate in such a manner to maintain and maximize our tax incentives, no assurance can be given that we have so qualified or that we will so qualify for any particular year or jurisdiction. If we fail to qualify and to remain qualified for certain foreign tax incentives and tax holidays, we may be subject to further taxation or an increase in our effective tax rate which would adversely impact our financial results. In December 2015, Teradyne entered into an agreement with the Singapore Economic Development Board which extended our Singapore tax holiday under substantially similar terms to the agreement which expired on December 31, 2015. The new tax holiday is scheduled to expire on December 31, 2020. The tax savings attributable to the Singapore tax holiday for the years ended December 31, 2016, 2015 and 2014 were $17.0 million or $0.08 per diluted share, $11.5 million or $0.05 per diluted share and $13.2 million or $0.06 per diluted share, respectively.

In addition, we may incur additional costs, including headcount expenses, in order to maintain or obtain a foreign tax incentive in a particular foreign jurisdiction.

 

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We have significant guarantees, indemnification and customer confidentiality obligations.

From time to time, we make guarantees to customers regarding the delivery, price and performance of our products and guarantee certain indebtedness, performance obligations or lease commitments of our subsidiary and affiliate companies. We also have agreed to provide indemnification to our officers, directors, employees and agents, to the extent permitted by law, arising from certain events or occurrences while the officer, director, employee or agent, is or was serving at our request in such capacity. Additionally, we have confidentiality obligations to certain customers and if breached would require the payment of significant penalties. If we become liable under any of these obligations, it could materially and adversely affect our business, financial condition or operating results. For additional information see Note K: “Commitments and Contingencies—Guarantees and Indemnification Obligations” in Notes to Consolidated Financial Statements.

We may discontinue or reduce our quarterly cash dividend or share repurchase program.

In January 2014, our Board of Directors initiated a quarterly cash dividend of $0.06 per share. In January 2017, our Board of Directors increased our quarterly cash dividend to $0.07 per share. In December 2016, our Board of Directors approved a new $500 million share repurchase authorization that commenced on January 1, 2017. We intend to repurchase at least $200 million in 2017. Our January 2015 stock repurchase program was terminated on December 31, 2016. In 2016 and 2015, we repurchased $146 million and $300 million of common stock, respectively. Holders of our common stock are only entitled to receive dividends when and if they are declared by our Board of Directors. Future cash dividends and share repurchases are subject to the discretion of our Board of Directors and will depend, among other things, upon our earnings, capital requirements and financial condition. While we have declared a quarterly cash dividend on our common stock and authorized a share repurchase program, we are not required to do either and may reduce or eliminate our cash dividend or share repurchase program in the future. The reduction or elimination of our cash dividend or our share repurchase program could adversely affect the market price of our common stock.

We have incurred indebtedness and may incur additional indebtedness.

On December 12, 2016, we completed a private offering of $460.0 million aggregate principal amount of 1.25% convertible senior unsecured notes (the “Notes”) due December 15, 2023 and received net proceeds, after issuance costs, of approximately $450.8 million, $33.0 million of which was used to pay the net cost, after being partially offset by proceeds from the sale of the warrants, of the convertible note hedge transactions and $50.1 million of which was used to repurchase 2 million shares of our common stock. Holders of the Notes may require us to repurchase the Notes upon the occurrence of certain fundamental changes involving us or the holders may elect to convert into shares of our common stock.

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

The issuance of the Notes and any additional indebtedness, among other things, could:

 

   

make it difficult to make payments on this indebtedness and our other obligations;

 

   

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

 

   

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

 

   

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

 

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Our convertible note hedge and warrant transactions could impact the value of our stock.

Concurrent with the offering of the Notes, we entered into convertible note hedge transactions (the “Note Hedge Transactions”) with the initial purchasers or their affiliates (the “Option Counterparties”). The Note Hedge Transactions cover, subject to customary anti-dilution adjustments, the number of shares of our common stock that underlie the Notes, with a strike price equal to the initial conversion price of the Notes of $31.84. The Note Hedge Transactions cover, subject to customary antidilution adjustments, approximately 14.4 million shares of our common stock.

Separately and concurrent with the pricing of the Notes, we entered into warrant transactions with the Option Counterparties (the “Warrant Transactions”) in which we sold net-share-settled (or, at our election subject to certain conditions, cash-settled) warrants to the Option Counterparties. The Warrant Transactions cover, subject to customary antidilution adjustments, approximately 14.4 million shares of our common stock. The strike price of the warrants will initially be $39.95 per share (subject to adjustment), which was approximately 60% above the closing sale price of our common stock on December 6, 2016. The Warrant Transactions could have a dilutive effect to our common stock to the extent that the market price per share of our common stock, as measured under the terms of the Warrant Transactions, exceeds the applicable strike price of the warrants.

The Note Hedge Transactions are expected to reduce the potential dilution to our common stock upon any conversion of the Notes. However, the Warrant Transactions could separately have a dilutive effect to the extent that the market value per share of our common stock exceeds the applicable strike price of the warrants. The net cost of the Note Hedge Transactions, after being partially offset by the proceeds from the sale of the warrants, was approximately $33.0 million.

In connection with establishing their initial hedge of these convertible note hedge and warrant transactions, the Option Counterparties have entered into various derivative transactions with respect to our common stock and/or purchase shares of our common stock or other securities, including the Notes, concurrent with, or shortly after, the pricing of the Notes. In addition, the Option Counterparties may modify their hedge positions by entering into or unwinding various derivative transactions with respect to our common stock or by selling our common stock or other securities, including the Notes, in secondary market transactions (and may do so during any observation period related to the conversion of the Notes). These activities could adversely impact the value of our common stock and the Notes.

We may not be able to pay our debt and other obligations.

If our cash flow is inadequate to meet our obligations, we could face substantial liquidity problems. If we are unable to generate sufficient cash flow or otherwise obtain funds necessary to make required payments on the Notes or certain of our other obligations, we would be in default under the terms thereof, which would permit the holders of those obligations to accelerate their maturity and also could cause defaults under future indebtedness we may incur. Any such default could have a material adverse effect on our business, prospects, financial position and operating results. In addition, we cannot be certain that we would be able to repay amounts due on the Notes if those obligations were to be accelerated following the occurrence of any other event of default as defined in the instruments creating those obligations, or if the holders of the Notes require us to repurchase the Notes upon the occurrence of a fundamental change involving us. Moreover, we cannot be certain that we will have sufficient funds or will be able to arrange for financing to pay the principal amount due on the Notes at maturity.

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

The agreement governing our senior secured revolving credit facility limits our ability, among other things, to: incur additional secured indebtedness; sell, transfer, license or dispose of assets; consolidate or merge; enter into transactions with our affiliates; and incur liens. In addition, our senior secured revolving credit facility contains financial and other restrictive covenants that limit our ability to engage in activities that may be in our

 

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long term best interest, such as, subject to permitted exceptions, making capital expenditures in excess of certain thresholds, making investments, loans and other advances, and prepaying any additional indebtedness while our indebtedness under our senior secured revolving credit facility is outstanding. Our failure to comply with financial and other restrictive covenants could result in an event of default, which if not cured or waived, could result in the lenders requiring immediate payment of all outstanding borrowings or foreclosing on collateral pledged to them to secure the indebtedness.

Our business may suffer if we are unable to attract and retain key employees.

Competition for employees with skills we require is intense in the high technology industry. Our success will depend on our ability to attract and retain key technical employees. The loss of one or more key or other employees, a decrease in our ability to attract additional qualified employees, or the delay in hiring key personnel could each have a material adverse effect on our business, results of operations or financial condition.

Our operations, and the operations of our customers and suppliers, are subject to risks of natural catastrophic events, widespread health epidemics, acts of war, terrorist attacks and the threat of domestic and international terrorist attacks, any one of which could result in cancellation of orders, delays in deliveries or other business activities, or loss of customers and could negatively affect our business and results of operations.

Our business is international in nature, with our sales, service and administrative personnel and our customers and suppliers located in numerous countries throughout the world. Our operations, and those of our customers and suppliers, are subject to disruption for a variety of reasons, including work stoppages, acts of war, terrorism, health epidemics, fires, earthquakes, hurricanes, volcanic eruptions, energy shortages, telecommunication failures, tsunamis, flooding or other natural disasters. Such disruption could materially increase our costs and expenses as well as cause delays in, among other things, shipments of products to our customers, our ability to perform services requested by our customers, or the installation and acceptance of our products at customer sites. Any of these conditions could have a material adverse effect on our business, financial condition or results of operations.

In 2016, an earthquake in Japan damaged our building beyond repair and impacted our operations located in Kumamoto, Japan. We have temporarily transferred the manufacturing operations to other facilities so we do not expect the damage to have a significant impact on our ability to manufacture our products or sell products to our customers. However, the situation in Kumamoto remains uncertain so the events could have a short-term impact to our business in Japan. In addition, we may incur significant uninsured costs in order to rebuild our operations which could have an adverse effect on our financial condition and results of operations.

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

We rely on various information technology networks and systems, some of which are managed by third parties, to process, transmit and store electronic information, including confidential data, and to carry out and support a variety of business activities, including manufacturing, research and development, supply chain management, sales and accounting. A failure in or a breach of our operational or security systems or infrastructure, or those of our suppliers and other service providers, including as a result of cyber attacks, could disrupt our business, result in the disclosure or misuse of proprietary or confidential information, damage our reputation, cause losses and increase our costs.

We may face risks associated with shareholder activism.

Publicly traded companies have increasingly become subject to campaigns by shareholders advocating corporate actions such as financial restructuring, increased borrowing, special dividends, stock repurchases or divestitures. We may become subject in the future to such shareholder activity and demands. Such activities could interfere with our ability to execute our business plans, be costly and time-consuming, disrupt our operations, divert the attention of management or result in our initiating borrowing or increasing our share repurchase plan or dividend, any of which could have an adverse effect on our business or stock price.

 

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Provisions of our charter and by-laws and Massachusetts law make a takeover of Teradyne more difficult.

There are provisions in our basic corporate documents and under Massachusetts law that could discourage, delay or prevent a change in control, even if a change in control may be regarded as beneficial to some or all of our stockholders.

 

Item 1B: Unresolv ed Staff Comments

None.

 

Item 2: Pr operties

The following table provides information as to our principal facilities:

 

Location

 

Operating Segment

  Major
Activity(1)
    Approximate
Square Feet  of
Floor Space
 

Properties owned:

     

North Reading, Massachusetts

  Semiconductor Test & System Test     1-2-3-4-5       422,000  

Agoura Hills, California

  Semiconductor Test     3-4       120,000  

Kumamoto, Japan

  Semiconductor Test     2-3-4-5       79,000  
     

 

 

 
    621,000  

Properties leased:

     

Cebu, Philippines

  Semiconductor Test     1-2-5       183,000  

San Jose, California

  Semiconductor Test     2-3-4-5       128,000  

Odense, Denmark

  Industrial Automation     2-3-4-5       130,000  

Buffalo Grove, Illinois

  Semiconductor Test     2-3-4-5       95,000  

Sunnyvale, California

  Wireless Test & Semiconductor Test     2-3-4-5       91,000  

Shanghai, China

 

Semiconductor Test, System Test, Wireless

Test & Industrial Automation

    3-4-5       75,000  

Heredia, Costa Rica

  Semiconductor Test     1-5       63,000  

Hsinchu, Taiwan

  Semiconductor Test & System Test     4       43,000  

Singapore, Singapore

  Semiconductor Test & Industrial Automation     1-3-4       32,000  

Seoul, Korea

  Semiconductor Test     4       30,000  
     

 

 

 
        870,000  

 

(1) Major activities have been separated into the following categories: 1. Corporate Administration, 2. Manufacturing, 3. Engineering, 4. Sales and Marketing, 5. Storage and Distribution.

 

Item 3: Legal Proceedings

We are subject to legal proceedings, claims and investigations that arise in the ordinary course of business such as, but not limited to, patent, employment, commercial and environmental matters. We believe that we have meritorious defenses against all pending claims and intend to vigorously contest them. While it is not possible to predict or determine the outcomes of any pending claims or to provide possible ranges of losses that may arise, we believe the potential losses associated with all of these actions are unlikely to have a material adverse effect on our results of operations, financial condition or cash flows.

 

Item 4: Mine Saf ety Disclosure

Not Applicable.

 

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PART II

 

Item 5: Market for Registrant s Common Equity, Related Shar eholder Matters and Issuer Purchases of Equity Securities

The following table shows the market range for our common stock based on reported sales price on the New York Stock Exchange and the dividends declared per share during such periods:

 

Period

   High      Low      Dividends  

2015

        

First quarter

   $ 20.15      $ 17.60      $ 0.06  

Second quarter

     21.33        18.03        0.06  

Third quarter

     20.00        16.06        0.06  

Fourth quarter

     21.58        18.09        0.06  

2016

        

First quarter

   $ 21.83      $ 17.34      $ 0.06  

Second quarter

     21.84        18.07        0.06  

Third quarter

     21.66        18.87        0.06  

Fourth quarter

     26.59        20.22        0.06  

The number of record holders of our common stock at February 24, 2017 was 1,737.

In January 2016, May 2016, August 2016 and November 2016, our Board of Directors declared a quarterly cash dividend of $0.06 per share.

In January 2015, May 2015, August 2015 and November 2015, our Board of Directors declared a quarterly cash dividend of $0.06 per share.

In January 2015, our Board of Directors cancelled the November 2010 stock repurchase program and authorized a new stock repurchase program for up to $500 million of common stock. The cumulative repurchases as of December 31, 2016 totaled 22.5 million shares of common stock for $446 million at an average price per share of $19.87.

In December 2016, our Board of Directors approved a new $500 million share repurchase authorization which commenced on January 1, 2017. We intend to repurchase at least $200 million in 2017. Our January 2015 stock repurchase program was terminated on December 31, 2016.

In January 2017, our Board of Directors approved an increase to our quarterly cash dividend to $0.07 per share.

See “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations,” for information on our equity compensation plans and our performance graph.

The following table includes information with respect to repurchases we made of our common stock during the quarter ended December 31, 2016 (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
 

October 3, 2016 – October 30, 2016

    422     $ 21.44       420     $ 105,961  

October 31, 2016 – November 27, 2016

    99       22.75       95     $ 103,803  

November 28, 2016 – December 31, 2016

    2,007       24.97       2,006     $ 53,721  
 

 

 

     

 

 

   
    2,528 (1)      24.29 (1)      2,521    
 

 

 

     

 

 

   

 

(1) Includes approximately seven thousand shares at an average price of $22.68 withheld from employees for the payment of taxes.

 

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

 

Item 6: Selected Financial Data

 

     Years Ended December 31,  
     2016     2015      2014      2013      2012  
     (dollars in thousands, except per share amounts)  

Consolidated Statements of Operations Data (1)(2)(3)(4)(5):

             

Revenues

   $ 1,753,250     $ 1,639,578      $ 1,647,824      $ 1,427,933      $ 1,656,750  
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Net (loss) income

   $ (43,421   $ 206,477      $ 81,272      $ 164,947      $ 217,049  
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Net (loss) income per common share—basic

   $ (0.21   $ 0.98      $ 0.40      $ 0.86      $ 1.16  
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Net (loss) income per common share—diluted

   $ (0.21   $ 0.97      $ 0.37      $ 0.70      $ 0.94  
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Cash dividend declared per common share

   $ 0.24     $ 0.24      $ 0.18      $ —        $ —    
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Consolidated Balance Sheets Data:

             

Total assets

   $ 2,762,493     $ 2,548,674      $ 2,538,520      $ 2,629,824      $ 2,429,345  
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Short-term debt obligations

   $ —       $ —        $ —        $ 186,663      $ 2,328  
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Long-term debt obligations

   $ 352,669     $ —        $ —        $ —        $ 171,059  
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) The Consolidated Statement of Operations Data for the year ended December 31, 2016 includes a $254.9 million goodwill impairment charge and an $83.3 million acquired intangible assets impairment charge related to the Wireless Test segment, and $3.2 million of pension actuarial gains.
(2) The Consolidated Statement of Operations Data for the year ended December 31, 2015 includes $17.7 million of pension actuarial losses, a $5.4 million gain from the sale of an equity investment and the results of operations of Universal Robots from June 12, 2015.
(3) The Consolidated Statement of Operations Data for the year ended December 31, 2014 includes a $98.9 million goodwill impairment charge related to the Wireless Test segment and $46.6 million of pension actuarial losses.
(4) The Consolidated Statement of Operations Data for the year ended December 31, 2013 includes a $34.2 million gain from the sale of an equity investment and $10.3 million of pension actuarial gains.
(5) The Consolidated Statement of Operations Data for the year ended December 31, 2012 includes $23.3 million of pension actuarial losses.

 

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Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

We are a leading global supplier of automation equipment for test and industrial applications. We design, develop, manufacture and sell automatic test systems used to test semiconductors, wireless products, data storage and complex electronics systems in the consumer electronics, wireless, automotive, industrial, computing, communications, and aerospace and defense industries. Our industrial automation products include collaborative robots used by global manufacturing and light industrial customers to improve quality, increase manufacturing efficiency and decrease manufacturing costs. Our automatic test equipment and industrial automation products and services include:

 

   

semiconductor test (“Semiconductor Test”) systems;

 

   

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

 

   

industrial automation (“Industrial Automation”) products; and

 

   

wireless test (“Wireless Test”) systems.

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

In 2015, we acquired Universal Robots A/S (“Universal Robots”), the leading supplier of collaborative robots which are low-cost, easy-to-deploy and simple-to-program robots that work side by side with production workers to improve quality, increase manufacturing efficiency and decrease manufacturing costs. 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. The total purchase price for Universal Robots was approximately $315 million, which included cash paid of approximately $284 million and $32 million in fair value of contingent consideration payable upon achievement of revenue and earnings targets through 2018. Contingent consideration paid for 2015 was $15 million. The maximum payment for each of the two remaining Universal Robots earn-outs is $25.0 million.

In 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. The total purchase price for AIT was approximately $21 million, which included cash paid of approximately $19 million and $2 million in fair value of contingent consideration payable upon achievement of revenue and gross margin targets in 2015 and 2016. The total amount of contingent consideration paid was $1.1 million.

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.

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.

 

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In recent years, this cyclical demand has become an even/odd year trend where demand has increased in even years and decreased in odd years due principally to demand swings in the mobility market of our Semiconductor Test business. We expect the even/odd year demand trend in the mobility market to most likely lessen in the future due to slower smart phone unit growth, along with rising device complexity and the reduced impact of parallel test in our Semiconductor Test business.

On April 16, 2016, an earthquake in Kumamoto, Japan damaged our main building at that location. The building, which was used for engineering, production, and support operations, was damaged beyond repair. With respect to the location, we have $10 million of earthquake insurance with a deductible of approximately $2.5 million. As a result, we impaired the building and recorded a charge of $4.2 million and a charge of $1.2 million for other earthquake related expenses. The $5.4 million of total charges were offset by $5.4 million of property insurance recovery. We have temporarily transferred some operations to other facilities in Japan and elsewhere while our Kumamoto operations are restored.

In the second quarter of 2016, the Wireless Test reporting unit (which is our Wireless Test operating and reportable segment) reduced headcount by 11% as a result of a sharp decline in projected demand attributable to an estimated smaller future wireless test market. The decrease in projected demand was due to lower forecasted buying from our largest Wireless Test segment customer (who has contributed between 51% and 73% of annual Wireless Test sales since the LitePoint acquisition in 2011 through 2015) as a result of the customer’s numerous operational efficiencies; slower smartphone growth rates; and a slowdown of new wireless technology adoption. We considered the headcount reduction and sharp decline in projected demand to be a triggering event for an interim goodwill impairment test. Following the interim goodwill impairment test, we recorded a goodwill impairment charge of $254.9 million, with approximately $8.0 million of goodwill remaining, and $83.3 million for the impairment of acquired intangible assets with approximately $5.0 million of intangible assets remaining. In the third quarter of 2016, the Wireless Test reporting unit reduced headcount by an additional 14%.

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.

Critical Accounting Policies and Estimates

We have identified the policies discussed below as critical to understanding our business and our results of operations and financial condition. The impact and any associated risks related to these policies on our business operations is discussed throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations where such policies affect our reported and expected financial results.

Revenue Recognition

We recognize revenues, including revenues from distributors, 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 revenues upon shipment or at delivery destination point, 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

 

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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 revenues to all deliverables based on their relative selling prices. In such circumstances, a hierarchy is used to determine the selling price for allocating revenues 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 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 revenues for the selling price of installation and training. Extended warranties constitute warranty obligations beyond one year and we defer revenues 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 remeasured on a monthly basis into the functional currency using exchange rates in effect at the end of the period. All foreign currency denominated non-monetary assets and liabilities are remeasured into the functional currency using historical exchange rates. Net foreign exchange gains and losses resulting from remeasurement are included in other (income) expense, net. For Industrial Automation, assets and liabilities are translated into U.S. dollars using exchange rates in effect at the end of the period. Revenues and expense amounts are translated using an average of exchange rates in effect during the period. Translation adjustments are recorded within accumulated other comprehensive income (loss).

Retirement and Postretirement Plans

We recognize net actuarial gains and losses and the change in the fair value of the plan assets in our operating results in the year in which they occur or upon any interim remeasurement of the plans. We calculate the expected return on plan assets using the fair value of the plan assets. Actuarial gains and losses are generally measured annually as of December 31 and, accordingly, recorded during the fourth quarter of each year or upon any interim remeasurement of the plans.

Inventories

Inventories are stated at the lower of cost (first-in, first-out basis) or net realizable value. On a quarterly basis, we use consistent methodologies to evaluate all inventories for net realizable value. We record a provision

 

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for both excess and obsolete inventory when such write-downs or write-offs are identified through the quarterly review process. The inventory valuation is based upon assumptions about future demand, product mix, and possible alternative uses.

Equity Incentive and Stock Purchase Plans

Stock-based compensation expense is based on the grant-date fair value estimated in accordance with the provisions of ASC 718, “ Compensation—Stock Compensation. ” As required by ASC 718, we have made an estimate of expected forfeitures and are recognizing compensation costs only for those stock-based compensation awards expected to vest.

Income Taxes

Deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The measurement of deferred tax assets is reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax assets will not be realized. We performed the required assessment of positive and negative evidence regarding the realization of the net deferred tax assets in accordance with ASC 740, “ Accounting for Income Taxes. ” This assessment included the evaluation of scheduled reversals of deferred tax liabilities, estimates of projected future taxable income and tax-planning strategies. Although realization is not assured, based on our assessment, we concluded that it is more likely than not that such assets, net of the existing valuation allowance, will be realized. U.S. income taxes are not provided for on the earnings of non-U.S. subsidiaries which are expected to be reinvested indefinitely in operations outside the U.S. For intra-period tax allocations, we first utilize non-equity related tax attributes, such as net operating losses and credit carryforwards, and then equity-related tax attributes. We use the with-and-without method for calculating excess stock compensation deductions and do not take into account any indirect impacts of excess stock compensation deductions on our research and development tax credits, domestic production activities deduction, and other differences between financial reporting and tax reporting.

Investments

We account for our investments in debt and equity securities in accordance with the provisions of ASC 320-10, Investments—Debt and Equity Securities. ” On a quarterly basis, we review our investments to identify and evaluate those that have an indication of a potential other-than-temporary impairment. Factors considered in determining whether a loss is other-than-temporary include:

 

   

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

 

   

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

 

   

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

Goodwill, Intangible and Long-Lived Assets

We assess goodwill for impairment at least annually in the fourth quarter, as of December 31, on a reporting unit basis, or more frequently, when events and circumstances occur indicating that the recorded goodwill may be impaired. If the book value of a reporting unit exceeds its fair value, the implied fair value of goodwill is compared with the carrying amount of goodwill. If the carrying amount of goodwill exceeds the implied fair value, an impairment charge is recorded in an amount equal to that excess.

In the second quarter of 2016, the Wireless Test reporting unit (which is our Wireless Test operating and reportable segment) reduced headcount by 11% as a result of a sharp decline in projected demand attributable to

 

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an estimated smaller future wireless test market. The decrease in projected demand was due to lower forecasted buying from our largest Wireless Test segment customer (who has contributed between 51% and 73% of annual Wireless Test sales since the LitePoint acquisition in 2011 through 2015) as a result of the customer’s numerous operational efficiencies; slower smartphone growth rates; and a slowdown of new wireless technology adoption. We considered the headcount reduction and sharp decline in projected demand to be a triggering event for an interim goodwill impairment test. Following the interim goodwill impairment test, we recorded a goodwill impairment charge of $254.9 million, with approximately $8.0 million of goodwill remaining. In the third quarter of 2016, the Wireless Test reporting unit reduced headcount by an additional 14%. No goodwill impairment was identified in the fourth quarter of 2016, as part of the annual goodwill impairment test.

No goodwill impairment was identified in 2015. 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.

We assess the impairment of intangible and long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important in the determination of an impairment include significant underperformance relative to historical or projected future operating results, significant changes in the manner that we use the acquired asset and significant negative industry or economic trends.

As a result of the interim goodwill impairment test in the second quarter of 2016 described above, we performed an impairment test of the Wireless Test segment’s intangible and long-lived assets based on the comparison of the estimated undiscounted cash flows to the recorded value of the assets and recorded an $83.3 million acquired intangible assets impairment charge, with approximately $5.0 million of intangible assets remaining. There were no events or circumstances indicating that the carrying value of acquired intangible and long-lived assets may not be recoverable in 2015, as such no impairment test was performed as of December 31, 2015. As a result of the Wireless Test segment goodwill impairment charge in the fourth quarter of 2014 described above, we also performed an impairment test of the Wireless Test segment’s intangible and long-lived assets as of December 31, 2014, with no indication of impairment. When we determine that the carrying value of intangible and long-lived assets may not be recoverable based upon the existence of one or more of the above indicators of impairment, we measure any impairment based on a projected discounted cash flow method using a discount rate commensurate with the associated risks.

 

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Results of Operations

The following table sets forth the percentage of total net revenues included in our consolidated statements of operations:

 

     Years Ended December 31,  
         2016             2015             2014      

Percentage of revenues:

      

Revenues:

      

Products

     82.9     81.8     82.8

Services

     17.1       18.2       17.2  
  

 

 

   

 

 

   

 

 

 

Total revenues

     100.0       100.0       100.0  

Cost of revenues:

      

Cost of products

     37.6       36.1       38.9  

Cost of services

     7.7       8.1       7.8  
  

 

 

   

 

 

   

 

 

 

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

     45.3       44.2       46.7  
  

 

 

   

 

 

   

 

 

 

Gross profit

     54.7       55.8       53.3  

Operating expenses:

      

Engineering and development

     16.6       17.8       17.7  

Selling and administrative

     18.0       18.7       19.4  

Acquired intangible assets amortization

     3.0       4.2       4.3  

Acquired intangible assets impairment

     4.8       —         —    

Goodwill impairment

     14.5       —         6.0  

Restructuring and other

     1.3       0.3       0.1  
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     58.2       41.0       47.5  
  

 

 

   

 

 

   

 

 

 

(Loss) income from operations

     (3.4     14.8       5.9  

Non-operating (income) expenses:

      

Interest income

     (0.5     (0.4     (0.4

Interest expense

     0.2       0.1       0.4  

Other (income) expense, net

     —         (0.3     —    
  

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

     (3.1     15.4       5.8  

Income tax (benefit) provision

     (0.7     2.8       0.9  
  

 

 

   

 

 

   

 

 

 

Net (loss) income

     (2.5 )%      12.6     4.9
  

 

 

   

 

 

   

 

 

 

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:

 

     Three months ended December 31,  
           2016              2015              2014      

Semiconductor Test

     1.9        2.0        1.0  

System Test

     0.9        1.1        1.5  

Industrial Automation

     1.0        0.8        —    

Wireless Test

     0.9        0.9        1.0  

Total Company

     1.7        1.6        1.0  

 

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Revenues

Revenues for our four reportable segments were as follows:

 

     2016      2015      2014      2015-2016
Dollar
Change
    2014-2015
Dollar
Change
 
     (in millions)  

Semiconductor Test

   $ 1,368.2      $ 1,201.5      $ 1,300.8      $ 166.7     $ (99.3

System Test

     189.8        211.6        162.5        (21.8     49.1  

Industrial Automation

     99.0        41.9        —          57.1       41.9  

Wireless Test

     96.2        184.6        184.5        (88.4     0.1  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
   $ 1,753.3      $ 1,639.6      $ 1,647.8      $ 113.7     $ (8.2
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

The increase in Semiconductor Test revenues of $166.7 million, or 14%, from 2015 to 2016 was driven primarily by system-on-a-chip (“SOC”) product volume in the mobile application processor market. The decrease in Semiconductor Test revenues of $99.3 million, or 8%, from 2014 to 2015 was primarily due to a decrease in SOC product volume, driven by smaller microcontroller, power management and radio frequency test markets.

The decrease in System Test revenues of $21.8 million, or 10%, from 2015 to 2016 was primarily due to lower sales in Storage Test of 3.5” hard disk drive testers used for testing drives for cloud storage applications. The increase in System Test revenues of $49.1 million, or 30%, from 2014 to 2015 was primarily due to higher sales in Storage Test of 3.5” hard disk drive testers used for testing drives for cloud storage applications.

The acquisition of Universal Robots, which is our Industrial Automation segment, completed in June 2015, added $99.0 million of revenues in 2016 and $41.9 million of revenues in 2015.

The decrease in Wireless Test revenues of $88.4 million, or 48%, from 2015 to 2016 was driven by lower demand for connectivity and cellular test systems primarily from our largest Wireless Test segment customer. As a result of significant customer concentration in our Wireless Test segment, revenues in that segment are subject to significant fluctuations based on the segment’s largest customer’s order levels. Wireless Test revenues were approximately flat from 2014 to 2015 as an increase in cellular product volume was offset by lower connectivity product volume.

Our four reportable segments accounted for the following percentages of consolidated revenues:

 

     2016     2015     2014  

Semiconductor Test

     78     73     79

System Test

     11       13       10  

Industrial Automation

     6       3       —    

Wireless Test

     5       11       11  
  

 

 

   

 

 

   

 

 

 
     100     100     100
  

 

 

   

 

 

   

 

 

 

 

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

 

     2016     2015     2014  

Taiwan

     37     27     30

United States

     13       13       13  

China

     10       16       18  

Korea

     8       7       9  

Japan

     8       8       4  

Europe

     7       7       7  

Malaysia

     6       5       5  

Singapore

     4       6       7  

Philippines

     3       6       4  

Thailand

     3       4       2  

Rest of the World

     1       1       1  
  

 

 

   

 

 

   

 

 

 
     100     100     100
  

 

 

   

 

 

   

 

 

 

 

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

The breakout of product and service revenues was as follows:

 

     2016      2015      2014      2015-2016
Dollar
Change
     2014-2015
Dollar
Change
 
     (in millions)  

Product revenues

   $ 1,453.2      $ 1,340.6      $ 1,364.0      $ 112.6      $ (23.4

Service revenues

     300.0        299.0        283.8        1.0        15.2  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,753.3      $ 1,639.6      $ 1,647.8      $ 113.7      $ (8.2
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Our product revenues increased $112.6 million, or 8%, in 2016 from 2015 primarily due to higher volume in the mobile application processor market in Semiconductor Test and the addition of Universal Robots in June 2015. This increase was partially offset by decreases in Wireless Test revenues due to lower demand for connectivity and cellular test systems and lower sales in Storage Test of 3.5” hard disk drive testers for cloud storage. Service revenues, which are derived from the servicing of our installed base of products and include equipment maintenance contracts, repairs, extended warranties, parts sales, and applications support increased $1.0 million.

Our product revenues decreased $23.4 million, or 2%, in 2015 from 2014 primarily due to lower SOC product volume, driven by smaller microcontroller, power management and radio frequency test markets. This decrease was partially offset by higher sales in Storage Test of 3.5” hard disk drive testers for cloud storage and the addition of Universal Robots in 2015. Service revenues increased $15.2 million or 5%.

In 2016, two customers each accounted for 12% of our consolidated revenues. In 2015, revenues from one customer accounted for 13% of our consolidated revenues. In 2014, no single customer accounted for more than 10% of our consolidated revenues. In each of the years, 2016, 2015 and 2014, our five largest customers in aggregate accounted for 36%, 34% and 30%, respectively, of our consolidated revenues. We estimate product demand driven by a single OEM customer, combining direct sales to that customer with sales to the customer’s OSATs, accounted for approximately 25%, 23%, and 22% of our consolidated revenues in 2016, 2015, and 2014, respectively.

 

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Gross Profit

 

     2016     2015     2014     2015-2016
Dollar /
Point
Change
    2014-2015
Dollar /
Point
Change
 
     (dollars in millions)  

Gross profit

   $ 959.6     $ 915.6     $ 878.8     $ 44.0     $ 36.8  

Percent of total revenues

     54.7     55.8     53.3     (1.1     2.5  

Gross profit as a percent of total revenues decreased from 2015 to 2016 by 1.1 points, of which a 2.5 point decrease was related to product mix and sales of previously leased testers in Semiconductor Test in 2015, and lower Wireless Test sales, partially offset by a 0.6 points increase due to lower pension expense related to actuarial gains in 2016 compared to actuarial losses in 2015, a 0.5 point increase due to higher product volume and a 0.3 point increase due to lower excess and obsolete inventory provisions.

Gross profit as a percent of total revenues increased from 2014 to 2015 by 2.5 points due to favorable Semiconductor Test product mix and sales of previously leased testers in Semiconductor Test.

The breakout of product and service gross profit was as follows:

 

     2016     2015     2014     2015-2016
Dollar /
Point
Change
    2014-2015
Dollar /
Point
Change
 
     (dollars in millions)  

Product gross profit

   $ 794.2     $ 748.8     $ 723.2     $ 45.4     $ 25.6  

Percent of product revenues

     54.6     55.9     53.0     (1.3     2.9  

Service gross profit

   $ 165.4     $ 166.8     $ 155.6     $ (1.4   $ 11.2  

Percent of service revenues

     55.1     55.8     54.8     (0.7     1.0  

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 product 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 for our Semiconductor Test, System Test and Industrial Automation segments and next four quarters for our Wireless Test segment, is written-down to estimated net realizable value.

During the year ended December 31, 2016, we recorded an inventory provision of $17.5 million included in cost of revenues, primarily due to downward revisions to previously forecasted demand levels. Of the $17.5 million of total excess and obsolete provisions, $9.7 million was in Semiconductor Test, $7.2 million was in Wireless Test and $0.6 million was related to System Test.

During the year ended December 31, 2015, we recorded an inventory provision of $21.3 million included in cost of revenues, due to the following factors:

 

  A charge of $15.3 million due to downward revisions to previously forecasted demand levels, of which $8.2 million was for our 2.5” hard disk drive testers in Storage Test, $4.5 million was in Semiconductor Test and $2.5 million was in Wireless Test; and

 

  A $6.0 million inventory write-down as a result of product transition in Semiconductor Test.

 

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During the year ended December 31, 2014, we recorded an inventory provision of $22.2 million included in cost of revenues, due to the following factors:

 

  A charge of $15.4 million due to downward revisions to previously forecasted demand levels, of which $8.1 million was in Semiconductor Test, $5.2 million was in Wireless Test and $2.1 million was in System Test; and

 

  A $6.8 million inventory write-down as a result of product transition, of which $6.3 million was in Semiconductor Test and $0.5 million in Wireless Test.

During the years ended December 31, 2016, 2015 and 2014, we scrapped $15.2 million, $7.0 million and $20.8 million of inventory, respectively, and sold $10.0 million, $7.9 million and $13.1 million of previously written-down or written-off inventory, respectively. As of December 31, 2016, we had inventory related reserves for amounts which had been written-down or written-off totaling $116.0 million. We have no pre-determined timeline to scrap the remaining inventory.

Engineering and Development

Engineering and development expenses were as follows:

 

     2016     2015     2014     2015-2016
Change
    2014-2015
Change
 
     (dollars in millions)  

Engineering and development

   $ 291.0     $ 292.3     $ 291.6     $ (1.3   $ 0.7  

Percent of total revenues

     16.6     17.8     17.7    

The decrease of $1.3 million in engineering and development expenses from 2015 to 2016 was due primarily to lower pension expense related to $1.2 million actuarial gains in 2016 compared to $4.7 million of actuarial losses in 2015, partially offset by additional costs as a result of the acquisition of Universal Robots in June 2015.

The increase of $0.7 million in engineering and development expenses from 2014 to 2015 was due to $3.9 million of higher variable compensation, $2.6 million of additional costs related to Universal Robots and a $1.8 million increase in spending primarily in Storage Test, partially offset by lower pension expense related to actuarial losses of $4.7 million in 2015 compared to $12.2 million in 2014.

Selling and Administrative

Selling and administrative expenses were as follows:

 

     2016     2015     2014     2015-2016
Change
     2014-2015
Change
 
     (dollars in millions)  

Selling and administrative

   $ 315.7     $ 306.3     $ 319.7     $ 9.4      $ (13.4

Percent of total revenues

     18.0     18.7     19.4     

The increase of $9.4 million in selling and administrative expenses from 2015 to 2016 was due to $22.6 million of additional costs as a result of the acquisition of Universal Robots in June 2015, partially offset by lower pension expense related to $0.9 million of actuarial gains in 2016 as compared to actuarial losses of $4.8 million in 2015, and lower variable compensation.

The decrease of $13.4 million in selling and administrative expenses from 2014 to 2015 was due primarily to lower pension expense related to actuarial losses of $4.8 million in 2015 compared to $21.6 million in 2014, and a one-time $6.6 million stock-based compensation charge in 2014 related to a retirement agreement entered into with our retired chief executive officer, partially offset by higher variable compensation.

 

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Acquired Intangible Assets Amortization

Acquired intangible assets amortization expense was as follows:

 

     2016     2015     2014     2015-2016
Change
    2014-2015
Change
 
     (dollars in millions)  

Acquired intangible assets amortization

   $ 52.6     $ 69.0     $ 70.8     $ (16.4   $ (1.8

Percent of total revenues

     3.0     4.2     4.3    

Acquired intangible assets amortization expense decreased from 2015 to 2016 due to lower amortization expense in the Wireless Test segment due to the impairment of intangible assets in the second quarter of 2016, partially offset by increased amortization expense due to the Universal Robots acquisition in June 2015. Acquired intangible assets amortization expense decreased from 2014 to 2015 due to intangible assets that became fully amortized during the year, partially offset by increased amortization expense due to the Universal Robots acquisition.

Goodwill Impairment

We assess goodwill for impairment at least annually, in the fourth quarter, as of December 31, or on an interim basis between annual tests when events or circumstances indicate that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying value. In the second quarter of 2016, the Wireless Test reporting unit (which is our Wireless Test operating and reportable segment) reduced headcount by 11% as a result of a sharp decline in projected demand attributable to an estimated smaller future wireless test market. The decrease in projected demand was due to lower forecasted buying from our largest Wireless Test segment customer (who has contributed between 51% and 73% of annual Wireless Test sales since the LitePoint acquisition in 2011 through 2015) as a result of the customer’s numerous operational efficiencies; slower smartphone growth rates; and a slowdown of new wireless technology adoption. We considered the headcount reduction and sharp decline in projected demand to be a triggering event for an interim goodwill impairment test. Following the interim goodwill impairment test, we recorded a goodwill impairment charge of $254.9 million in the second quarter of 2016. The fourth quarter 2016 and 2015 goodwill impairment tests did not identify any goodwill impairments. 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.

Acquired Intangible Assets Impairment

We review long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of these assets are no longer appropriate. If undiscounted cash flows for the asset are less than the carrying amount, the asset is written down to its estimated fair value based on a discounted cash flow analysis. The cash flow estimates used to determine the impairment contain management’s best estimates using appropriate assumptions and projections at that time. As a result of the Wireless Test segment goodwill impairment charge in the second quarter of 2016, we performed an impairment test of the Wireless Test segment’s intangible and long-lived assets based on a comparison of the estimated undiscounted cash flows to the recorded value of the assets. As a result of the analysis, we recorded an $83.3 million impairment charge in the second quarter of 2016 in acquired intangible assets impairment on the statements of operations.

Restructuring and Other

Other

During the year ended December 31, 2016, we recorded $15.9 million of other charges of which $15.3 million was for the increase in the fair value of the Universal Robots contingent consideration liability,

 

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$0.6 million for the increase in the fair value of the AIT contingent consideration liability, $4.2 million for an impairment of fixed assets and $1.2 million for expenses related to an earthquake in Kumamoto, Japan, partially offset by $5.4 million of property insurance recovery related to the Japan earthquake.

During the year ended December 31, 2015, we recorded $3.6 million of other charges, of which $5.3 million was for the increase in the fair value of the Universal Robots contingent consideration liability and $1.0 million for acquisition costs related to Universal Robots, partially offset by a $2.9 million gain from fair value adjustments to decrease the acquisition contingent consideration liability related to ZTEC Instruments Inc. (“ZTEC”) ($1.6 million) and AIT ($1.3 million).

During the year ended December 31, 2014, we recorded a $0.6 million gain from the fair value adjustment to decrease the ZTEC acquisition contingent consideration, partially offset by $0.4 million of acquisition costs related to AIT.

Restructuring

During the year ended December 31, 2016, we recorded $6.0 million of severance charges related to headcount reductions of 146 people, of which 102 people were in Wireless Test and 44 people were in Semiconductor Test.

During the year ended December 31, 2015, we recorded $1.5 million of severance charges related to headcount reductions of 23 people primarily in System Test and Semiconductor Test.

During the year ended December 31, 2014, we recorded $1.6 million of severance charges related to headcount reductions of approximately 43 people, primarily in Semiconductor Test and Wireless Test.

The remaining accrual for severance of $2.1 million is reflected in the accrued employees’ compensation and withholdings on the balance sheet and is expected to be paid by June 2017.

Interest and Other

 

     2016     2015     2014     2015-2016
Change
    2014-2015
Change
 
     (in millions)  

Interest income

   $ (9.3   $ (7.2   $ (6.3   $ (2.1   $ (0.9

Interest expense

     3.6       1.9       6.9       1.7       (5.0

Other (income) expense, net

     0.7       (4.8     0.4       5.5       (5.2

Interest income increased by $2.1 million, from 2015 to 2016, due primarily to higher marketable securities balances and higher interest rates in 2016. Interest income increased by $0.9 million from 2014 to 2015 due primarily to higher interest rates on marketable securities

Interest expense increased by $1.7 million, from 2015 to 2016, due primarily to $1.0 million of interest expense related to our convertible senior notes in 2016 and $0.7 million due primarily to costs related to the revolving credit facility and realized losses on sales of marketable securities in 2016. Interest expense decreased by $5.0 million, from 2014 to 2015, due primarily to the first quarter 2014 repayment of our previously issued convertible debt.

In 2015, other (income) expense, net included a $5.4 million gain from the sale of an equity investment.

 

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(Loss) Income Before Income Taxes

 

     2016     2015     2014     2015-2016
Change
    2014-2015
Change
 
     (in millions)  

Semiconductor Test

   $ 311.9     $ 260.2     $ 255.8     $ 51.7     $ 4.4  

System Test

     28.9       25.1       12.1       3.8       13.0  

Wireless Test

     (371.4     (13.8     (116.2     (357.6     102.4  

Industrial Automation

     (16.8     (7.6     —         (9.2     (7.6

Corporate (1)

     (7.7     (10.7     (56.3     3.0       45.5  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ (55.1   $ 253.1     $ 95.4     $ (308.2   $ 157.7  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Included in Corporate are pension and postretirement plans actuarial gains and losses, contingent consideration adjustments, interest income and interest expense.

The decrease in income before income taxes from 2015 to 2016 was primarily due to a $254.9 million goodwill impairment charge and an $83.3 million acquired intangible assets impairment charge related to Wireless Test in 2016, and amortization of intangible assets related to our June 2015 acquisition of Universal Robots, which is our Industrial Automation segment, partially offset by higher revenues in Semiconductor Test application processor market and $3.2 million of pension actuarial gains in 2016 as compared to actuarial losses of $17.7 million in 2015.

The increase in income before income taxes from 2014 to 2015 was primarily due to a $98.9 million goodwill impairment charge related to Wireless Test in 2014 and lower pension expense related to actuarial losses of $17.7 million in 2015 as compared to $46.6 million in 2014. Actuarial losses of $46.6 million in 2014 were primarily related to increases in life expectancy in the U.S.

Income Taxes

Income tax benefit for 2016 totaled $11.6 million. Income tax expense for 2015 and 2014 totaled $46.6 million and $14.1 million, respectively. The effective tax rate for 2016, 2015 and 2014 was 21.1%, 18.4% and 14.8%, respectively.

The increase in the effective tax rate from 2015 to 2016 resulted from a shift in the geographic distribution of income which decreased income subject to taxation in the U.S. relative to lower tax rate jurisdictions, reductions in uncertain tax positions resulting from the expiration of statutes and the settlement of an audit, and an increase in non-taxable foreign exchange gains. These increases in the effective tax rate were partially offset by the effect of the non-deductible goodwill impairment charge, which reduced the benefit of the loss before income taxes in the U.S.

The increase in the effective tax rate from 2014 to 2015 resulted from a shift in the geographic distribution of income, which increased income subject to taxation in the U.S. relative to lower tax rate jurisdictions and a reduction in the benefit from U.S. research and development tax credits. These increases in the effective tax rate were partially offset by decreases associated with uncertain tax positions and a non-deductible goodwill impairment charge.

We qualify for a tax holiday in Singapore by fulfilling the requirements of an agreement with the Singapore Economic Development Board under which certain headcount and spending requirements must be met. The tax savings attributable to the tax holiday for the years ended December 31, 2016, 2015 and 2014 were $17.0 million or $0.08 per diluted share, $11.5 million or $0.05 per diluted share and $13.2 million or $0.06 per diluted share, respectively. The tax holiday is scheduled to expire on December 31, 2020.

 

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Contractual Obligations

The following table reflects our contractual obligations as of December 31, 2016:

 

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

Convertible debt

   $ 460,000      $ —        $ —        $ —        $ 460,000      $ —    

Purchase obligations

     260,715        247,855        12,860        —          —          —    

Retirement plans contributions

     110,872        5,912        8,104        8,392        88,464        —    

Operating lease obligations

     72,111        16,467        28,991        16,523        10,130        —    

Interest on long-term debt

     40,314        5,814        11,500        11,500        11,500        —    

Fair value of contingent consideration

     38,332        1,050        37,282        —          —          —    

Other long-term liabilities reflected on the balance sheet under GAAP (1)

     64,249        —          23,463        —          —          40,786  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,046,593      $ 277,098      $ 122,200      $ 36,415      $ 570,094      $ 40,786  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(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 balance increased $604 million to $1,613 million from 2015 to 2016.

In 2016, changes in operating assets and liabilities provided cash of $40.8 million. This was due to a $33.7 million decrease in operating assets and a $7.1 million increase in operating liabilities.

The decrease in operating assets was due to an $18.3 million decrease in accounts receivable due to increased collections and a $34.3 million decrease in inventories, partially offset by an $18.9 million increase in prepayments and other assets.

The increase in operating liabilities was due to a $18.4 million increase in income taxes, a $3.9 million increase in accounts payable and a $7.6 million increase in other accrued liabilities, partially offset by a $13.2 million decrease in accrued employee compensation due primarily to variable compensation and employee stock compensation awards’ payroll tax payments, $6.0 million of retirement plans contributions and a $3.6 million decrease in customer advance payments and deferred revenue.

Investing activities during 2016 used cash of $640.5 million, due to $1,656.3 million used for purchases of marketable securities, and $85.3 million used for purchases of property, plant and equipment, partially offset by proceeds from maturities and sales of marketable securities of $243.2 million and $852.8 million, respectively, and proceeds from property insurance of $5.1 million related to the Japan earthquake.

Financing activities during 2016 provided cash of $237.8 million, due to $450.8 million of proceeds from the issuance of senior convertible notes, net of issuance costs, $67.9 million of proceeds from the issuance of warrants, $20.5 million from the issuance of common stock under employee stock purchase and stock option plans and $6.2 million from the tax benefit related to employee stock compensation awards, partially offset by $146.3 million used for the repurchase of 6.8 million shares of common stock at an average price of $21.39 per share, $100.8 million used for the purchase of convertible note hedges, $48.6 million used for dividend payments and $11.7 million used for a payment related to the Universal Robots acquisition contingent consideration.

 

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In 2015, changes in operating assets and liabilities, net of businesses acquired, provided cash of $9.3 million. This was due to a $38.7 million increase in operating assets and a $48.0 million increase in operating liabilities.

The increase in operating assets was due to a $57.3 million increase in accounts receivable due to an increase in sales during the last month of the fourth quarter of 2015 compared to 2014, partially offset by a $15.6 million decrease in inventories and a $3.0 million decrease in prepayments and other assets.

The increase in operating liabilities was due to a $37.0 million increase in accounts payable as a result of our planned inventory increase in the fourth quarter of 2015 as we added material to maintain attractive lead times, a $17.0 million increase in customer advance payments and deferred revenue and a $11.3 million increase in other accrued liabilities, partially offset by $12.1 million of retirement plans contributions and a $5.2 million increase in income taxes.

Investing activities during 2015 used cash of $113.7 million, due to $1,424.0 million used for purchases of marketable securities, $282.7 million used for the acquisition of Universal Robots, and $89.9 million used for purchases of property, plant and equipment, partially offset by proceeds from maturities and sales of marketable securities of $360.3 million and $1,316.1 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 $79.1 million was primarily due to an increase in purchases of testers for customer leasing in 2014.

Financing activities during 2015 used cash of $328.7 million, due to $300.0 million used for the repurchase of 15.6 million shares of common stock at an average price of $19.20 per share, $50.7 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 $19.5 million from the issuance of common stock under employee stock purchase and stock option plans and $4.7 million from the tax benefit related to employee stock compensation awards.

In 2014, changes in operating assets and liabilities, net of businesses acquired, provided cash of $68.5 million. This was due to a $101.4 million decrease in operating assets and a $32.9 million decrease in operating liabilities.

The decrease in operating assets was due to a $41.5 million decrease in prepayments and other assets primarily related to a reduction in prepayments to our contract manufacturers, a $51.8 million decrease in inventories due to higher sales, and an $8.1 million decrease in accounts receivable.

The decrease in operating liabilities was due to $33.9 million of retirement plan contributions, a $17.0 million decrease in other accrued liabilities, a $16.9 million decrease in accounts payable, a $7.3 million decrease in accrued employee compensation due primarily to employee stock awards payroll taxes and variable compensation payments, and a $4.3 million convertible note interest payment, partially offset by a $24.4 million increase in income taxes, and a $22.0 million increase in customer advance payments and deferred revenue.

Investing activities during 2014 used cash of $332.9 million, due to $1,578.7 million used for purchases of marketable securities and $169.0 million used for purchases of property, plant and equipment, and $19.4 million used for the acquisition of AIT, completed in October 2014, partially offset by proceeds from sales and maturities of marketable securities that provided cash of $859.7 million and $570.4 million, respectively, and net proceeds from life insurance of $4.2 million primarily related to the cash surrender value from the cancellation of Teradyne owned life insurance policies on its retired chief executive officer. The increase in purchase of property, plant and equipment of $62.3 million in 2014 compared to the year ended December 31, 2013 is primarily due to testers used for customer leases.

Financing activities during 2014 used cash of $206.6 million, due to $191.0 million used for payments on long-term debt related to the convertible note and a loan in Japan and $37.4 million used for dividend payments,

 

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partially offset by $21.3 million provided by the issuance of common stock under employee stock purchase and stock option plans and $0.5 million from the tax benefit related to stock options and restricted stock units.

In January 2016, May 2016, August 2016 and November 2016, our Board of Directors declared a quarterly cash dividend of $0.06 per share. Total dividend payments in 2016 were $48.6 million.

In January 2015, May 2015, August 2015 and November 2015, our Board of Directors declared a quarterly cash dividend of $0.06 per share. Total dividend payments in 2015 were $50.7 million.

In January 2014, our Board of Directors declared an initial quarterly cash dividend of $0.06 per share. In each of the second, third and fourth quarters of 2014, we paid a cash dividend of $0.06 per share. Total dividend payments in 2014 were $37.4 million.

In January 2017, our Board of Directors declared a quarterly cash dividend of $0.07 per share to be paid on March 20, 2017 to shareholders of record as of February 24, 2017. Payment of future cash dividends are subject to the discretion of our Board of Directors and will depend, among other things, upon our earnings, capital requirements and financial condition.

In January 2015, our Board of Directors authorized the repurchase of up to $500 million of common stock. In 2015, we repurchased 15.6 million shares of common stock at an average price of $19.20, for a total cost of $300.0 million. In 2016, we repurchased 6.8 million shares of common stock at an average price of $21.39, for a total cost of $146.3 million. The cumulative repurchases as of December 31, 2016 totaled 22.5 million shares of common stock for $446.3 million at an average price per share of $19.87.

In December 2016, our Board of Directors approved a new $500 million share repurchase authorization which commenced on January 1, 2017. We intend to repurchase at least $200 million in 2017. Our January 2015 stock repurchase program was terminated on December 31, 2016.

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 $768 million of cash outside the U.S. that if repatriated would incur additional taxes. Determination of the additional taxes that would be incurred is not practicable due to uncertainty regarding the remittance structure, the mix of earnings and earnings and profit pools in the year of remittance, and overall complexity of the calculation. Inflation has not had a significant long-term impact on earnings.

Retirement Plans

ASC 715-20, Compensation—Retirement Benefits—Defined Benefit Plans, ” requires an employer with defined benefit plans or other postretirement benefit plans to recognize an asset or a liability on its balance sheet for the overfunded or underfunded status of the plans as defined by ASC 715-20. The pension asset or liability represents the difference between the fair value of the pension plan’s assets and the projected benefit obligation as of December 31. For other postretirement benefit plans, the liability is the difference between the fair value of the plan’s assets and the accumulated postretirement benefit obligation as of December 31.

For the year ended December 31, 2016, our pension income, which includes the U.S. Qualified Pension Plan (“U.S. Plan”), certain qualified plans for non-U.S. subsidiaries, and a U.S. Supplemental Executive Defined Benefit Plan, was approximately $(0.3) million. The largest portion of our 2016 pension income was $(5.2) million for our U.S. Plan. Pension expense or income is calculated based upon a number of actuarial assumptions. Discount rate and expected return on assets are two assumptions which are important elements of pension plan expense (income) and asset/liability measurement. We evaluate our discount rate and expected rate

 

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of return on assets assumptions annually on a plan and country specific basis. We evaluate other assumptions related to demographic factors, such as retirement age, mortality and turnover periodically, and update them to reflect our experience and expectations for the future. In the fourth quarter of 2014, we updated the mortality assumptions related to our U.S. retirement plans using the mortality tables published in October 2014 by the U.S. Society of Actuaries. The change in the mortality assumptions resulted in approximately $39.0 million of actuarial losses in 2014 for the U.S. retirement plans.

In developing the expected return on U.S. Plan assets assumption, we evaluated input from our investment manager and pension consultants, including their forecast of asset class return expectations. We believe that 4.8% was an appropriate rate to use for 2016. The December 31, 2016 asset allocation for our U.S. Plan was 88% invested in fixed income securities, 10% invested in equity securities, and 2% invested in other securities. Our investment manager regularly reviews the actual asset allocation and periodically rebalances the portfolio to ensure alignment with our target allocations.

We recognize net actuarial gains and losses and the change in the fair value of plans assets in our operating results in the year in which they occur or upon any interim remeasurement of the plans. We calculate the expected return on plan assets using the fair value of the plan assets. Actuarial gains and losses are generally measured annually as of December 31 and, accordingly, recorded during the fourth quarter of each year or upon any interim remeasurement of the plans.

The discount rate that we utilized for determining future pension obligations for the U.S. Plan is based on the Citigroup Pension Index adjusted for the U.S. Plan’s expected cash flows and was 3.9% at December 31, 2016, down from 4.0% at December 31, 2015. We estimate that in 2017 we will recognize approximately $0.8 million of pension expense for the U.S. Plan. The U.S. Plan pension expense estimate for 2017 is based on a 3.9% discount rate and a 4.0% return on assets. Future pension expense or income will depend on future investment performance, changes in future discount rates and various other factors related to the employee population participating in our pension plans.

As of December 31, 2016, our pension plans had unrecognized pension prior service cost of $0.1 million.

We performed a sensitivity analysis, which expresses the potential U.S. Plan (income) expense for the year ending December 31, 2017, which would result from changes to either the discount rate or the expected return on plan assets. The below estimates exclude the impact of any potential actuarial gains or losses. It is difficult to reliably forecast or predict whether there will be any actuarial gains or losses in 2017 as they are primarily driven by events and circumstances beyond our control, such as changes in interest rates and the performance of the financial markets.

 

     Discount Rate  

Return on Plan Assets

   3.4%     3.9%     4.4%  
     (in millions)  

3.5%

   $ 1.6     $ 2.3     $ 2.9  

4.0%

     0.1       0.8       1.4  

4.5%

     (1.4     (0.7     (0.1

The assets of the U.S. Plan consist substantially of fixed income securities. U.S. Plan assets have increased from $298.4 million at December 31, 2015 to $307.3 million at December 31, 2016 while the U.S. Plan’s liability increased from $297.8 million at December 31, 2015 to $299.6 million at December 31, 2016.

Our funding policy is to make contributions to our pension plans in accordance with local laws and to the extent that such contributions are tax deductible. During 2016, we made contributions of $1.9 million to the U.S. Plan, $2.6 million to the U.S. supplemental executive defined benefit pension plan and $0.9 million to certain qualified plans for non-U.S. subsidiaries. In 2017, we expect to contribute approximately $1.9 million to the U.S.

 

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Plan and $2.6 million to the U.S. supplemental executive defined benefit pension plan. Contributions to be made in 2017 to certain qualified plans for non-U.S. subsidiaries are based on local statutory requirements and are estimated at approximately $0.8 million.

Equity Compensation Plans

In addition to our 1996 Employee Stock Purchase Plan discussed in Note O: “Stock Based Compensation” in Notes to Consolidated Financial Statements, we have a 2006 Equity and Cash Compensation Incentive Plan (the “2006 Equity Plan”) under which equity securities are authorized for issuance. The 2006 Equity Plan was initially approved by stockholders on May 25, 2006.

At our annual meeting of stockholders held May 21, 2013, our stockholders approved an amendment to the 2006 Equity Plan to increase the number of shares issuable thereunder by 10.0 million, for an aggregate of 32.0 million shares issuable thereunder, and our stockholders also approved an amendment to our 1996 Employee Stock Purchase Plan to increase the number of shares issuable thereunder by 5.0 million, for an aggregate of 30.4 million shares issuable thereunder. At our annual meeting of stockholders held May 12, 2015, our stockholders approved an amendment to the 2006 Equity Plan to extend its term until May 12, 2025.

The following table presents information about these plans as of December 31, 2016 (share numbers in thousands):

 

Plan category

   Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
    Weighted-average
exercise price of
outstanding options,
warrants and rights
     Number of securities remaining
available for future issuance
under equity compensation
plans (excluding securities
reflected in column one)
 

Equity plans approved by shareholders

     4,336 (1)    $ 18.03        13,399 (2) 

Equity plans not approved by shareholders (3,4)

     368       2.71        —    
  

 

 

      

 

 

 

Total

     4,704       11.93        13,399  
  

 

 

      

 

 

 

 

(1) Includes 3,777,628 shares of restricted stock units that are not included in the calculation of the weighted average exercise price.
(2) Consists of 9,545,419 securities available for issuance under the 2006 Equity Plan and 3,853,638 of securities available for issuance under the Employee Stock Purchase Plan.
(3) In connection with the 2008 acquisition of Eagle Test (the “Eagle Acquisition”), we assumed the options granted under the Eagle Test Systems, Inc. 2003 Stock Option and Grant Plan and the Eagle Test Systems, Inc. 2006 Stock Option and Incentive Plan (collectively, the “Eagle Plans”). Upon the consummation of the Eagle Acquisition, these options were converted automatically into options to purchase an aggregate of 3,594,916 shares of our common stock. No additional awards will be granted under the Eagle Plans. As of December 31, 2016, there were outstanding options exercisable for an aggregate of 57,928 shares of our common stock pursuant to the Eagle Plans, with a weighted average exercise price of $3.54 per share.
(4) In connection with the 2011 acquisition of LitePoint Corporation (the “LitePoint Acquisition”), we assumed the options granted under the LitePoint Corporation 2002 Stock Plan (the “LitePoint Plan”). Upon the consummation of the LitePoint Acquisition, these options were converted automatically into options to purchase an aggregate of 2,828,344 shares of our common stock. No additional awards will be granted under the LitePoint Plan. As of December 31, 2016, there were outstanding options exercisable for an aggregate of 310,437 shares of our common stock pursuant to the LitePoint Plan, with a weighted average exercise price of $2.55 per share.

The purpose of the 2006 Equity Plan is to motivate employees, officers and directors by providing equity ownership and compensation opportunities in Teradyne. The aggregate number of shares available under the

 

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2006 Equity Plan as of December 31, 2016 was 9,545,419 shares of our common stock. The 2006 Equity Plan authorizes the grant of stock-based awards in the form of (1) non-qualified and incentive stock options, (2) stock appreciation rights, (3) restricted stock awards and restricted stock unit awards, (4) phantom stock, and (5) other stock-based awards. Awards may be tied to time-based vesting schedules and/or performance-based vesting measured by reference to performance criteria chosen by the Compensation Committee of the Board of Directors, which administers the 2006 Equity Plan. Awards may be made to any employee, officer, consultant and advisor of Teradyne and our subsidiaries, as well as, to our directors. The maximum number of shares of stock-based awards that may be granted to one participant during any one fiscal year is 2,000,000 shares of common stock. The 2006 Equity Plan will expire on May 12, 2025.

As of December 31, 2016, total unrecognized compensation expense related to non-vested restricted stock units and options was $40.6 million, and is expected to be recognized over a weighted average period of 2.3 years.

Performance Graph

The following graph compares the change in our cumulative total shareholder return in our common stock with (i) the NYSE Composite Index and (ii) the Morningstar Semiconductor Equipment & Materials Industry Group (compiled by Morningstar, Inc.). The comparison assumes $100.00 was invested on December 31, 2011 in our common stock and in each of the foregoing indices and assumes reinvestment of dividends, if any. Historic stock price performance is not necessarily indicative of future price performance.

 

LOGO

Recently Issued Accounting Pronouncements

On January 26, 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-04, “Intangibles—Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment.” The new guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance will remain largely unchanged. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. The same one-step impairment test will be applied to goodwill at all reporting units, even those with zero or negative carrying amounts. Entities

 

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will be required to disclose the amount of goodwill at reporting units with zero or negative carrying amounts. The revised guidance will be applied prospectively, and is effective in 2020. Early adoption is permitted for any impairment tests performed after January 1, 2017. We are currently evaluating the impact of this ASU on our financial position, results of operations and statements of cash flows.

On October 24, 2016, the FASB issued ASU 2016-16, “Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other than Inventory . Under current Generally Accepted Accounting Principles (“GAAP”), the tax effects of intra-entity asset transfers are deferred until the transferred asset is sold to a third party or otherwise recovered through use. The new guidance requires recognition of the tax expense from the sale of the asset in the seller’s tax jurisdiction when the transfer occurs, even though the pre-tax effects of that transaction are eliminated in consolidation. Any deferred tax asset that arises in the buyer’s jurisdiction would also be recognized at the time of the transfer. The new guidance does not apply to intra-entity transfers of inventory. The income tax consequences from the sale of inventory from one member of a consolidated entity to another will continue to be deferred until the inventory is sold to a third party. The new guidance will be effective in fiscal years beginning after December 15, 2017. Early adoption is permitted. The modified retrospective approach will be required for transition to the new guidance, with a cumulative-effect adjustment recorded in retained earnings as of the beginning of the period of adoption. We do not expect this ASU to have a material impact on our financial position, results of operations and statements of cash flows.

On March 31, 2016, the FASB issued ASU 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” This ASU changes how companies account for certain aspects of share-based payment awards to employees, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statements of cash flows. This pronouncement is effective for annual periods beginning after December 15, 2016. Early adoption is permitted. Adoption of the new guidance will require recognition of excess tax benefits and tax deficiencies in the consolidated statements of operations on a prospective basis, with a cumulative effect adjustment to retained earnings for any prior year excess tax benefits or tax deficiencies not previously recorded. We expect the cumulative effect adjustment to increase retained earnings and deferred tax assets by approximately $39 million. In the years ended December 31, 2016, 2015 and 2014, we recorded excess tax benefits of $6.1 million, $4.6 million, and $0.2 million, respectively, as a component of additional paid-in capital. In accordance with this ASU, amounts for future periods related to the difference between the fair value of a restricted stock unit (“RSU”) on the grant date and the fair value on the vest date will be recorded as a discrete benefit or expense to the current income tax provision in the period in which the RSU vests. A majority of the future amounts will be recorded during the first quarter consistent with the vesting of a majority of our RSU grants.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” The guidance in this ASU supersedes the lease recognition requirements in Accounting Standards Codification (“ASC”) Topic 840, “Leases.” The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record an ROU asset and a lease liability on the balance sheet for all leases with terms longer than twelve months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the statements of operation. The new standard is effective for annual periods beginning after December 15, 2018 with early adoption permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. We are currently evaluating the impact of this ASU on our financial position and results of operations.

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities . This ASU provides guidance for the recognition, measurement, presentation, and disclosure of financial instruments. The new pronouncement revises accounting related to equity investments and the presentation of certain fair value changes for financial liabilities measured at fair value. Among other things, it amends the presentation and disclosure requirements of equity securities that do not result in consolidation and are not accounted for under the equity method. Changes

 

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in the fair value of these equity securities will be recognized directly in net income. This pronouncement is effective for fiscal years beginning after December 15, 2017. We are currently evaluating the impact of this ASU on our financial position and results of operations.

In November 2015, the FASB issued ASU 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes . ASU 2015-17 simplifies the presentation of deferred income taxes by eliminating the separate classification of deferred income tax liabilities and assets into current and noncurrent amounts in the balance sheet. The new guidance requires that all deferred tax liabilities and assets be classified as noncurrent in the balance sheet. This ASU is effective for annual periods beginning after December 15, 2016, and may be applied either prospectively or retrospectively to all periods presented. Early adoption is permitted. We early adopted this ASU prospectively in the first quarter of 2016.

In April 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. ASU 2015-03 does not specifically address requirements for the presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements. On August 8, 2015, the FASB issued ASU 2015-15, “Interest—Imputation of Interest (Subtopic 835-30)” clarifying that debt issuance costs related to line-of-credit arrangements could be presented as an asset and amortized over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. We adopted this ASU in the first quarter of 2016. Adoption of this ASU did not have a material impact on our financial position and results of operations.

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40). ” ASU 2014-15 provides guidance on management’s responsibility in evaluating whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. This ASU is effective for annual periods ending after December 15, 2016. We do not expect this ASU to have a material impact on our consolidated financial statements.

In May 2014, the FASB issued 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. In August 2015, FASB issued ASU 2015-14, which deferred the effective date of the new revenue standard by one year. For Teradyne, the standard will be effective in the first quarter of 2018. 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 selected the modified retrospective transition method. We are currently evaluating the impact of this ASU on our financial position and results of operations.

 

Item 7A: Quantitative and Qualitati ve Disclosures about Market Risks

Concentration of Credit Risk

Financial instruments which potentially subject us to concentrations of credit risk consist principally of cash equivalents, marketable securities, forward currency contracts and accounts receivable. Our cash equivalents consist primarily of money market funds invested in U.S. Treasuries and government agencies. Our fixed income available-for-sale marketable securities have a minimum rating of AA by one or more of the major credit rating agencies. We place forward currency contracts with high credit-quality financial institutions in order to minimize credit risk exposure. Concentrations of credit risk with respect to accounts receivable are limited due to the large number of geographically dispersed customers. We perform ongoing credit evaluations of our customers’ financial condition and from time to time may require customers to provide a letter of credit from a bank to

 

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secure accounts receivable. There were no customers who accounted for more than 10% of our accounts receivable balance as of December 31, 2016. One customer accounted for more than 10% of our accounts receivable balance as of December 31, 2015.

Exchange Rate Risk Management

We regularly enter into foreign currency forward contracts to hedge the value of our monetary assets and liabilities in Japanese Yen, British Pound, Korean Won, Taiwan Dollar, Singapore Dollar and Euro. These foreign currency forward contracts have maturities of approximately one month. These contracts are used to minimize the effect of exchange rate fluctuations associated with the remeasurement of monetary assets and liabilities. We do not engage in currency speculation.

We performed a sensitivity analysis assuming a hypothetical 10% fluctuation in foreign exchange rates to the hedging contracts and the underlying exposures described above. As of December 31, 2016, 2015 and 2014, the analysis indicated that these hypothetical market movements would not have a material effect on our consolidated financial position, results of operations or cash flows.

Interest Rate Risk Management

We are exposed to potential losses due to changes in interest rates. Our interest rate exposure is primarily in the Netherlands, United States and Singapore related to short-term and long-term marketable securities.

In order to estimate the potential loss due to interest rate risk, a fluctuation in interest rates of 25 basis points was assumed. Market risk for the short and long-term marketable securities was estimated as the potential change in the fair value resulting from a hypothetical change in interest rates for securities contained in the investment portfolio. The potential change in the fair value from changes in interest rates is immaterial as of December 31, 2016 and 2015.

 

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Item 8: Financial Statements and Supplementary Data

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Teradyne, Inc.:

In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a) (1) present fairly, in all material respects, the financial position of Teradyne, Inc. and its subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Annual Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

As discussed in Note C to the consolidated financial statements, the Company changed the manner in which it classifies deferred taxes in 2016.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP

Boston, Massachusetts

March 1, 2017

 

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TERADYNE, INC.

CONSOLIDATED BALANCE SHEETS

 

     December 31,  
     2016     2015  
     (in thousands, except per
share information)
 
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 307,884     $ 264,705  

Marketable securities

     871,024       477,696  

Accounts receivable, less allowance for doubtful accounts of $2,356 and $2,407 in 2016 and 2015, respectively

     192,444       211,293  

Inventories, net

     135,958       153,588  

Deferred tax assets

     —         54,973  

Prepayments

     108,454       91,519  

Other current assets

     8,039       6,194  
  

 

 

   

 

 

 

Total current assets

     1,623,803       1,259,968  

Property, plant and equipment, net

     253,821       273,414  

Marketable securities

     433,843       265,928  

Deferred tax assets

     107,405       7,404  

Other assets

     12,165       13,080  

Retirement plans assets

     7,712       636  

Intangible assets, net

     100,401       239,831  

Goodwill

     223,343       488,413  
  

 

 

   

 

 

 

Total assets

   $ 2,762,493     $ 2,548,674  
  

 

 

   

 

 

 
LIABILITIES     

Current liabilities:

    

Accounts payable

   $ 95,362     $ 92,358  

Accrued employees’ compensation and withholdings

     109,944       113,994  

Deferred revenue and customer advances

     84,478       85,527  

Other accrued liabilities

     51,382       43,727  

Contingent consideration

     1,050       15,500  

Accrued income taxes

     30,480       21,751  
  

 

 

   

 

 

 

Total current liabilities

     372,696       372,857  

Retirement plans liabilities

     106,938       103,531  

Long-term deferred revenue and customer advances

     23,463       25,745  

Deferred tax liabilities

     12,144       26,663  

Long-term other accrued liabilities

     28,642       32,156  

Long-term contingent consideration

     37,282       21,936  

Long-term debt

     352,669       —    
  

 

 

   

 

 

 

Total liabilities

     933,834       582,888  
  

 

 

   

 

 

 

Commitments and contingencies (Note K)

    
SHAREHOLDERS’ EQUITY     

Common stock, $0.125 par value, 1,000,000 shares authorized; 199,177 and 203,641 shares issued and outstanding at December 31, 2016 and 2015, respectively

     24,897       25,455  

Additional paid-in capital

     1,593,684       1,480,647  

Accumulated other comprehensive loss

     (20,214     (8,144

Retained earnings

     230,292       467,828  
  

 

 

   

 

 

 

Total shareholders’ equity

     1,828,659       1,965,786  
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 2,762,493     $ 2,548,674  
  

 

 

   

 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

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TERADYNE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

 

     Years Ended December 31,  
     2016     2015     2014  
     (in thousands, except per share amounts)  

Revenues:

      

Products

   $ 1,453,248     $ 1,340,566     $ 1,364,024  

Services

     300,002       299,012       283,800  
  

 

 

   

 

 

   

 

 

 

Total revenues

     1,753,250       1,639,578       1,647,824  

Cost of revenues:

      

Cost of products

     659,097       591,772       640,787  

Cost of services

     134,586       132,163       128,229  
  

 

 

   

 

 

   

 

 

 

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

     793,683       723,935       769,016  
  

 

 

   

 

 

   

 

 

 

Gross profit

     959,567       915,643       878,808  
  

 

 

   

 

 

   

 

 

 

Operating expenses:

      

Engineering and development

     291,025       292,250       291,639  

Selling and administrative

     315,682       306,313       319,713  

Acquired intangible assets amortization

     52,648       69,031       70,771  

Acquired intangible assets impairment

     83,339       —         —    

Goodwill impairment

     254,946       —         98,897  

Restructuring and other

     21,942       5,080       1,365  
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     1,019,582       672,674       782,385  
  

 

 

   

 

 

   

 

 

 

(Loss) income from operations

     (60,015     242,969       96,423  

Non-operating (income) expenses:

      

Interest income

     (9,296     (7,214     (6,259

Interest expense

     3,637       1,876       6,934  

Other (income) expense, net

     704       (4,817     372  
  

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

     (55,060     253,124       95,376  

Income tax (benefit) provision

     (11,639     46,647       14,104  
  

 

 

   

 

 

   

 

 

 

Net (loss) income

   $ (43,421   $ 206,477     $ 81,272  
  

 

 

   

 

 

   

 

 

 

Net (loss) income per common share:

      

Basic

   $ (0.21   $ 0.98     $ 0.40  
  

 

 

   

 

 

   

 

 

 

Diluted

   $ (0.21   $ 0.97     $ 0.37  
  

 

 

   

 

 

   

 

 

 

Weighted average common shares—basic

     202,578       211,544       202,908  
  

 

 

   

 

 

   

 

 

 

Weighted average common shares—diluted

     202,578       213,321       222,550  
  

 

 

   

 

 

   

 

 

 

Cash dividend declared per common share

   $ 0.24     $ 0.24     $ 0.18  
  

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

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TERADYNE, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

 

     Years Ended December 31,  
     2016     2015     2014  
     (in thousands)  

Net (loss) income

   $ (43,421   $ 206,477     $ 81,272  

Other comprehensive (loss) income, net of tax:

      

Foreign currency translation adjustment, net of tax of $0, $0, $0

     (13,162     (8,759     —    

Available-for-sale marketable securities:

      

Unrealized gains (losses) on marketable securities:

      

Unrealized gains (losses) on marketable securities arising during period, net of tax of $923, $(1,667), $1,449, respectively

     2,037       (3,075     2,417  

Less: Reclassification adjustment for gains included in net (loss) income, net of tax of $(255), $(390), $(645), respectively

     (683     (704     (1,433
  

 

 

   

 

 

   

 

 

 
     1,354       (3,779     984  
  

 

 

   

 

 

   

 

 

 

Defined benefit pension and post-retirement plans:

      

Amortization of prior service (credit) cost included in net periodic pension and post-retirement expense/income, net of tax of $(190), $(169), $(169), respectively

     (321     (295     (295

Prior service income arising during period, net of tax of $34, $0, $0, respectively

     59       —         —    
  

 

 

   

 

 

   

 

 

 
     (262     (295     (295
  

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income

     (12,070     (12,833     689  
  

 

 

   

 

 

   

 

 

 

Comprehensive (loss) income

   $ (55,491   $ 193,644     $ 81,961  
  

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

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TERADYNE, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

Years Ended December 31, 2016, 2015 and 2014

 

    Common
Stock
Shares
Issued
    Common
Stock Par
Value
    Additional
Paid-in
Capital
    Accumulated
Other
Comprehensive
Income (Loss)
    Retained
Earnings
    Total
Shareholders’
Equity
 
    (in thousands)  

Balance, December 31, 2013

    191,731     $ 23,966     $ 1,390,896     $ 4,000     $ 566,232     $ 1,985,094  

Issuance of stock to employees under benefit plans, net of shares withheld for payroll tax of $12,018

    3,661       458       8,815           9,273  

Warrant settlement

    21,221       2,653       (2,653         —    

Stock-based compensation expense

        39,868           39,868  

Tax benefit related to stock options and restricted stock units

        209           209  

Cash dividends

            (37,425     (37,425

Net income

            81,272       81,272  

Unrealized gains on marketable securities:

           

Unrealized gains on marketable securities, net of tax of $1,449

          2,417         2,417  

Less: reclassification adjustment for gains included in net income, net of tax of $(645)

          (1,433       (1,433

Amortization of prior service (credit) cost, net of tax of $(169)

          (295       (295
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2014

    216,613       27,077       1,437,135       4,689       610,079       2,078,980  

Issuance of stock to employees under benefit plans, net of shares withheld for payroll tax of $10,597

    2,649       331       8,602           8,933  

Stock-based compensation expense

        30,285           30,285  

Repurchase of common stock

    (15,621     (1,953         (297,996     (299,949

Tax benefit related to stock options and restricted stock units

        4,625           4,625  

Cash dividends

            (50,732     (50,732

Net income

            206,477       206,477  

Foreign currency translation adjustment

          (8,759       (8,759

Unrealized losses on marketable securities:

           

Unrealized losses on marketable securities, net of tax of $(1,667)

          (3,075       (3,075

Less: reclassification adjustment for gains included in net income, net of tax of $(390)

          (704       (704

Amortization of prior service (credit) cost, net of tax of $(169)

          (295       (295
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2015

    203,641       25,455       1,480,647       (8,144     467,828       1,965,786  

Issuance of stock to employees under benefit plans, net of shares withheld for payroll tax of $9,808

    2,377       297       10,368           10,665  

Equity component of convertible notes

        100,836           100,836  

Equity component of convertible notes issuance cost

        (2,017         (2,017

Purchase of convertible notes hedges

        (100,834         (100,834

Proceeds from issuance of warrants

        67,852           67,852  

Stock-based compensation expense

        30,745           30,745  

Repurchase of common stock

    (6,841     (855         (145,476     (146,331

Tax benefit related to stock options and restricted stock units

        6,087           6,087  

Cash dividends

            (48,639     (48,639

Net loss

            (43,421     (43,421

Foreign currency translation adjustment

          (13,162       (13,162

Unrealized gains on marketable securities:

           

Unrealized gains on marketable securities, net of tax of $923

          2,037         2,037  

Less: reclassification adjustment for gains included in net income, net of tax of $(255)

          (683       (683

Amortization of prior service (credit) cost, net of tax of $(190)

          (321       (321

Prior service income arising during period, net of tax of $34

          59         59  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2016

    199,177     $ 24,897     $ 1,593,684     $ (20,214   $ 230,292     $ 1,828,659  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

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CONSOLIDATED STATEMENTS OF CASH FLOWS

TERADYNE, INC.

 

    Years Ended December 31,  
    2016     2015     2014  
    (in thousands)  

Cash flows from operating activities:

     

Net (loss) income

  $ (43,421   $ 206,477     $ 81,272  

Adjustments to reconcile net (loss) income from operations to net cash provided by operating activities:

     

Depreciation

    64,782       68,181       73,390  

Amortization

    55,227       72,592       79,154  

Stock-based compensation

    30,750       30,451       40,307  

Provision for excess and obsolete inventory

    17,493       21,332       22,193  

Goodwill impairment

    254,946       —         98,897  

Acquired intangible assets impairment

    83,339       —         —    

Deferred taxes

    (62,936     (7,124     (19,928

Tax benefit related to employee stock compensation awards

    (6,198     (4,715     (535

Impairment of fixed assets

    4,179       —         —    

Property insurance recovery

    (5,363     —         —    

Gain from the sale of an equity investment

    —         (5,406     —    

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

    —         1,567       —    

Retirement plans actuarial (gains) losses

    (3,203     17,732       46,564  

Contingent consideration adjustment

    15,896       2,489       (630

Other

    (448     (34     2,874  

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

     

Accounts receivable

    18,325       (57,267     8,060  

Inventories

    34,263       15,559       51,803  

Prepayments and other assets

    (18,882     3,034       41,537  

Accounts payable and other accrued expenses

    (1,706     48,213       (45,430

Deferred revenue and customer advances

    (3,634     17,011       22,033  

Retirement plan contributions

    (6,044     (12,095     (33,916

Income taxes

    18,434       (5,156     24,417  
 

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

    445,799       412,841       492,062  
 

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

     

Purchases of property, plant and equipment

    (85,272     (89,878     (168,982

Purchases of available-for-sale marketable securities

    (1,656,267     (1,424,002     (1,578,743

Proceeds from maturities of available-for-sale marketable securities

    243,232       360,264       570,358  

Proceeds from sales of available-for-sale marketable securities

    852,794       1,316,131       859,729  

Proceeds from property insurance

    5,051       —         —    

Acquisition of businesses, net of cash acquired

    —         (282,741     (19,419

Proceeds from life insurance

    —         1,098       4,184  

Proceeds from the sale of an equity investment

    —         5,406       —    
 

 

 

   

 

 

   

 

 

 

Net cash used for investing activities

    (640,462     (113,722     (332,873
 

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

     

Proceeds from issuance of convertible notes, net of issuance costs

    450,800       —         —    

Purchase of convertible note hedges

    (100,834     —         —    

Proceeds from issuance of warrants

    67,852       —         —    

Issuance of common stock under stock option and stock purchase plans

    20,473       19,530       21,291  

Repurchase of common stock

    (146,331     (299,949     —    

Tax benefit related to employee stock compensation awards

    6,198       4,715       535  

Dividend payments

    (48,619     (50,713     (37,425

Payment of revolving credit facility costs

    —         (2,253     —    

Payments of long-term debt

    —         —         (190,972

Payments of contingent consideration

    (11,697     —         —    
 

 

 

   

 

 

   

 

 

 

Net cash provided by (used for) financing activities

    237,842       (328,670     (206,571
 

 

 

   

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

    43,179       (29,551     (47,382

Cash and cash equivalents at beginning of year

    264,705       294,256       341,638  
 

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of year

  $ 307,884     $ 264,705     $ 294,256  
 

 

 

   

 

 

   

 

 

 

Supplementary disclosure of cash flow information:

     

Cash paid for:

     

Interest

  $ 446     $ 301     $ 4,294  

Income taxes

  $ 40,424     $ 35,218     $ 25,893  

The accompanying notes are an integral part of the consolidated financial statements.

 

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TERADYNE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A.    THE COMPANY

Teradyne, Inc. (“Teradyne”) is a leading global supplier of automation equipment for test and industrial applications. Teradyne designs, develops, manufactures and sells automatic test systems used to test semiconductors, wireless products, data storage and complex electronics systems in the consumer electronics, wireless, automotive, industrial, computing, communications, and aerospace and defense industries. Teradyne’s industrial automation products include collaborative robots used by global manufacturing and light industrial customers to improve quality, increase manufacturing efficiency and decrease manufacturing costs. Teradyne’s automatic test equipment and industrial automation products and services include:

 

   

semiconductor test (“Semiconductor Test”) systems;

 

   

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

 

   

industrial automation (“Industrial Automation”) products; and

 

   

wireless test (“Wireless Test”) systems.

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

B.    ACCOUNTING POLICIES

The consolidated financial statements include the accounts of Teradyne and its wholly-owned subsidiaries. All significant intercompany balances and transactions are eliminated. Certain prior years’ amounts were reclassified to conform to the current year presentation.

Preparation of Financial Statements and Use of Estimates

The preparation of consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. On an on-going basis, management evaluates its estimates, including those related to inventories, investments, goodwill, intangible and other long-lived assets, accounts receivable, income taxes, deferred tax assets and liabilities, pensions, warranties, and loss contingencies. Management bases its estimates on historical experience and on appropriate and customary assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ significantly from these estimates.

Revenue Recognition

Teradyne recognizes revenues, including revenues from distributors, 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 upon destination, acceptance or cash payment, Teradyne defers revenue

 

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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 upon shipment or at delivery destination point, even if Teradyne 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 revenues when product revenue is recognized. Teradyne classifies shipping and handling costs in cost of revenue. Teradyne does not provide its customers with contractual rights of return for any of its products.

As of December 31, 2016 and 2015, deferred revenue and customer advances consisted of the following and are included in the short and long-term deferred revenue and customer advances:

 

     2016      2015  
     (in thousands)  

Extended warranty

   $ 46,753      $ 46,499  

Equipment maintenance and training

     39,037        30,616  

Customer advances, undelivered elements and other

     22,151        34,157  
  

 

 

    

 

 

 

Total deferred revenue and customer advances

   $ 107,941      $ 111,272  
  

 

 

    

 

 

 

 

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Product Warranty

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

 

     Amount  
     (in thousands)  

Balance at December 31, 2013

   $ 6,660  

Accruals for warranties issued during the period

     15,406  

Accruals related to pre-existing warranties

     (2,008

Settlements made during the period

     (11,116
  

 

 

 

Balance at December 31, 2014

     8,942  

Acquisition

     409  

Accruals for warranties issued during the period

     11,539  

Accruals related to pre-existing warranties

     (3,159

Settlements made during the period

     (10,806
  

 

 

 

Balance at December 31, 2015

     6,925  

Accruals for warranties issued during the period

     14,291  

Accruals related to pre-existing warranties

     (1,354

Settlements made during the period

     (12,659
  

 

 

 

Balance at December 31, 2016

   $ 7,203  
  

 

 

 

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

 

     Amount  
     (in thousands)  

Balance at December 31, 2013

   $ 34,909  

Deferral of new extended warranty revenue

     29,519  

Recognition of extended warranty deferred revenue

     (21,128
  

 

 

 

Balance at December 31, 2014

     43,300  

Acquisition

     870  

Deferral of new extended warranty revenue

     28,549  

Recognition of extended warranty deferred revenue

     (26,220
  

 

 

 

Balance at December 31, 2015

     46,499  

Deferral of new extended warranty revenue

     27,182  

Recognition of extended warranty deferred revenue

     (26,928
  

 

 

 

Balance at December 31, 2016

   $ 46,753  
  

 

 

 

Accounts Receivable and Allowance for Doubtful Accounts

Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The volatility of the industries that Teradyne serves can cause certain of its customers to experience shortages of cash flows, which can impact their ability to make required payments. Teradyne maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. Estimated allowances for doubtful accounts are reviewed periodically taking into account the customer’s recent payment history, the customer’s current financial statements and other information regarding the customer’s credit worthiness. Account balances are written off against the allowance when it is determined the receivable will not be recovered.

 

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Inventories

Inventories are stated at the lower of cost (first-in, first-out basis) or net realizable value. On a quarterly basis, Teradyne uses consistent methodologies to evaluate all inventories for net realizable value. Teradyne records a provision for both excess and obsolete inventory when such write-downs or write-offs are identified through the quarterly review process. The inventory valuation is based upon assumptions about future demand, product mix and possible alternative uses.

Investments

Teradyne accounts for its investments in debt and equity securities in accordance with the provisions of ASC 320-10, 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. 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.

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. Teradyne uses the market and income approach techniques to value its financial instruments and there were no changes in valuation techniques during the years ended December 31, 2016, 2015 and 2014. 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 therefore 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.

In accordance with ASC 820-10, Teradyne measures its debt and equity investments at fair value. Teradyne’s debt and equity investments are primarily classified within Level 1 and 2. Acquisition-related contingent consideration is classified within Level 3. Teradyne determines the fair value of acquisition-related contingent consideration using a Monte Carlo simulation model. Assumptions utilized in the model include forecasted revenues, revenues volatility and discount rate.

 

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Prepayments

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

 

     2016      2015  
     (in thousands)  

Contract manufacturer prepayments

   $ 77,017      $ 66,283  

Prepaid maintenance and other services

     7,676        8,481  

Prepaid taxes

     4,664        3,781  

Other prepayments

     19,097        12,974  
  

 

 

    

 

 

 

Total prepayments

   $ 108,454      $ 91,519  
  

 

 

    

 

 

 

Retirement and Postretirement Plans

Teradyne recognizes net actuarial gains and losses and the change in the fair value of the plan assets in its operating results in the year in which they occur or upon any interim remeasurement of the plans. Teradyne calculates the expected return on plan assets using the fair value of the plan assets. Actuarial gains and losses are generally measured annually as of December 31 and, accordingly, recorded during the fourth quarter of each year or upon any interim remeasurement of the plans.

Goodwill, Intangible and Long-Lived Assets

Teradyne accounts for goodwill and intangible assets in accordance with ASC 350-10, Intangibles-Goodwill and Other. ” Intangible assets are amortized over their estimated useful economic life and are carried at cost less accumulated amortization. Goodwill is assessed for impairment at least annually in the fourth quarter, as of December 31, on a reporting unit basis, or more frequently when events and circumstances occur indicating that the recorded goodwill may be impaired. In accordance with ASC 350-10, Teradyne has the option to perform a qualitative assessment to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount. If Teradyne determines this is the case, Teradyne is required to perform the two-step goodwill impairment test to identify potential goodwill impairment and measure the amount of goodwill impairment loss to be recognized. If Teradyne determines that it is more-likely-than-not that the fair value of the reporting unit is greater than its carrying amounts, the two-step goodwill impairment test is not required.

In accordance with ASC 360-10, Impairment or Disposal of Long-Lived Assets, ” Teradyne reviews long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of these assets are no longer appropriate. Each impairment test is based on a comparison of the estimated undiscounted cash flows to the recorded value of the asset. If impairment is indicated, the asset is written down to its estimated fair value based on a discounted cash flow analysis. The cash flow estimates used to determine the impairment, if any, contain management’s best estimates using appropriate assumptions and projections at that time.

Property, Plant and Equipment

Property, plant and equipment are stated at cost and depreciated over the estimated useful lives of the assets. Leasehold improvements and major renewals are capitalized and included in property, plant and equipment accounts while expenditures for maintenance and repairs and minor renewals are charged to expense. When assets are retired, the assets and related accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in the consolidated statements of operations.

 

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Teradyne provides for depreciation of its assets principally on the straight-line method with the cost of the assets being charged to expense over their useful lives as follows:

 

Buildings

   40 years

Building improvements

   5 to 10 years

Leasehold improvements

   Lesser of lease term or 10 years

Furniture and fixtures

   10 years

Test systems manufactured internally

   6 years

Machinery and equipment

   3 to 5 years

Software

   3 to 5 years

Test systems manufactured internally are used by Teradyne for customer evaluations and manufacturing and support of its customers. Teradyne depreciates the test systems manufactured internally over a six-year life to cost of revenues, engineering and development, and selling and administrative expenses. Teradyne often sells internally manufactured test equipment to customers. Upon the sale of an internally manufactured test system, the net book value of the system is transferred to inventory and expensed as cost of revenues. The net book value of internally manufactured test systems sold in the years ended December 31, 2016, 2015 and 2014 was $11.4 million, $50.7 million and $9.7 million, respectively.

Engineering and Development Costs

Teradyne’s products are highly technical in nature and require a large and continuing engineering and development effort. Software development costs incurred prior to the establishment of technological feasibility are charged to expense. Software development costs incurred subsequent to the establishment of technological feasibility are capitalized until the product is available for release to customers. To date, the period between achieving technological feasibility and general availability of the product has been short and software development costs eligible for capitalization have not been material. Engineering and development costs are expensed as incurred and consist primarily of salaries, contractor fees, including non-recurring engineering charges related to product design, allocated facility costs, depreciation, and tooling costs.

Stock Compensation Plans and Employee Stock Purchase Plan

Stock-based compensation expense is based on the grant-date fair value estimated in accordance with the provisions of ASC 718-10, Compensation-Stock Compensation .” As required by ASC 718-10, Teradyne has made an estimate of expected forfeitures and is recognizing compensation costs only for those stock-based compensation awards expected to vest.

Under its stock compensation plans, Teradyne has granted stock options, restricted stock units and performance-based restricted stock units, and employees are eligible to purchase Teradyne’s common stock through its Employee Stock Purchase Plan (“ESPP”).

Income Taxes

Deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The measurement of deferred tax assets is reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax assets will not be realized. Teradyne performed the required assessment of positive and negative evidence regarding the realization of the net deferred tax assets in accordance with ASC 740, “Accounting for Income Taxes.” This assessment included the evaluation of scheduled reversals of deferred tax liabilities, estimates of projected future taxable income and tax-planning strategies. Although realization is not assured, based on its assessment, Teradyne concluded that it is more likely than not that such assets, net of the existing valuation allowance, will be realized. U.S. income taxes are not

 

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provided for on the earnings of non-U.S. subsidiaries which are expected to be reinvested indefinitely in operations outside the U.S. For intra-period tax allocations, Teradyne first utilizes non-equity related tax attributes, such as net operating losses and credit carryforwards and then equity-related tax attributes. Teradyne uses the with-and-without method for calculating excess stock compensation deductions and does not take into account any indirect impacts of excess stock compensation deductions on its research and development tax credits, domestic production activities deduction, and other differences between financial reporting and tax reporting.

Advertising Costs

Teradyne expenses all advertising costs as incurred. Advertising costs were $6.4 million, $3.3 million and $1.9 million in 2016, 2015 and 2014, respectively.

Translation of Non-U.S. Currencies

The functional currency for all 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).

Net foreign exchange gains and losses resulting from remeasurement are included in other (income) expense, net. For the years ended December 31, 2016 and 2015, gains from the remeasurement of the monetary assets and liabilities denominated in foreign currencies were $8.0 million and $2.5 million, respectively. For the year ended December 31, 2014, losses from the remeasurement of the monetary assets and liabilities denominated in foreign currencies were $0.9 million.

These amounts do not reflect the corresponding gains (losses) from foreign exchange contracts. See Note G: “Financial Instruments” regarding foreign exchange contracts.

Net Income (Loss) per Common Share

Basic net (loss) income per common share is calculated by dividing net (loss) income by the weighted average number of common shares outstanding during the period. Except where the result would be antidilutive, diluted net (loss) income per common share is calculated by dividing net (loss) income by the sum of the weighted average number of common shares plus common stock equivalents, if applicable.

For the year ended December 31, 2014, dilutive potential common shares included incremental shares from the assumed conversion of the convertible notes and the convertible notes hedge warrant shares. Incremental shares from the assumed conversion of the convertible notes were calculated using the difference between the average Teradyne stock price for the period and the conversion price of $5.48, multiplied by 34.7 million shares. The result of this calculation, representing the total intrinsic value of the convertible debt, was divided by the average Teradyne stock price for the period. Convertible notes hedge warrant shares were calculated using the difference between the average Teradyne stock price for the period and the warrant price of $7.67, 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 for 34.7 million shares at an exercise price of $5.48 was not used in the GAAP earnings per share calculation as its effect was anti-dilutive.

 

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In 2014, Teradyne settled its conversion spread (i.e., the intrinsic value of the embedded option feature contained in the convertible debt) in shares. Teradyne accounted for its conversion spread using the treasury stock method. Teradyne determined that it had the ability and intent to settle the principal amount of the convertible debt in cash; accordingly, the principal amount was excluded from the determination of diluted earnings per share.

With respect to its convertible debt issued in 2016, Teradyne has determined that it has the ability and intent to settle the principal of the convertible debt in cash; accordingly, the principal amount is excluded from the determination of diluted earnings per share. As a result, Teradyne is accounting for the conversion spread using the treasury stock method.

Comprehensive Income (Loss)

Comprehensive income (loss) includes net income, unrealized pension and postretirement prior service costs and benefits, unrealized gains and losses on investments in debt and equity marketable securities and foreign currency translation adjustment.

C.    RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

On January 26, 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-04, “Intangibles—Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment.” The new guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance will remain largely unchanged. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. The same one-step impairment test will be applied to goodwill at all reporting units, even those with zero or negative carrying amounts. Entities will be required to disclose the amount of goodwill at reporting units with zero or negative carrying amounts. The revised guidance will be applied prospectively, and is effective in 2020. Early adoption is permitted for any impairment tests performed after January 1, 2017. Teradyne is currently evaluating the impact of this ASU on its financial position, results of operations and statements of cash flows.

On October 24, 2016, the FASB issued ASU 2016-16, “Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other than Inventory . Under current Generally Accepted Accounting Principles (“GAAP”), the tax effects of intra-entity asset transfers are deferred until the transferred asset is sold to a third party or otherwise recovered through use. The new guidance requires recognition of the tax expense from the sale of the asset in the seller’s tax jurisdiction when the transfer occurs, even though the pre-tax effects of that transaction are eliminated in consolidation. Any deferred tax asset that arises in the buyer’s jurisdiction would also be recognized at the time of the transfer. The new guidance does not apply to intra-entity transfers of inventory. The income tax consequences from the sale of inventory from one member of a consolidated entity to another will continue to be deferred until the inventory is sold to a third party. The new guidance will be effective in fiscal years beginning after December 15, 2017. Early adoption is permitted. The modified retrospective approach will be required for transition to the new guidance, with a cumulative-effect adjustment recorded in retained earnings as of the beginning of the period of adoption. Teradyne does not expect this ASU to have a material impact on its financial position, results of operations and statements of cash flows.

On March 31, 2016, the FASB issued ASU 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” This ASU changes how companies account for certain aspects of share-based payment awards to employees, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statements of cash flows. This pronouncement is effective for annual periods beginning after December 15, 2016. Early adoption is permitted. Adoption of the new guidance will require recognition of excess tax benefits and tax deficiencies in

 

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the consolidated statements of operations on a prospective basis, with a cumulative effect adjustment to retained earnings for any prior year excess tax benefits or tax deficiencies not previously recorded. Teradyne expects the cumulative effect adjustment to increase retained earnings and deferred tax assets by approximately $39 million. In the years ended December 31, 2016, 2015 and 2014, Teradyne recorded excess tax benefits of $6.1 million, $4.6 million, and $0.2 million, respectively, as a component of additional paid-in capital. In accordance with this ASU, amounts for future periods related to the difference between the fair value of a restricted stock unit (“RSU”) on the grant date and the fair value on the vest date will be recorded as a discrete benefit or expense to the current income tax provision in the period in which the RSU vests. A majority of the future amounts will be recorded during the first quarter consistent with the vesting of a majority of Teradyne’s RSU grants.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” The guidance in this ASU supersedes the lease recognition requirements in Accounting Standards Codification (“ASC”) Topic 840, “Leases.” The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record an ROU asset and a lease liability on the balance sheet for all leases with terms longer than twelve months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the consolidated statements of operations. The new standard is effective for annual periods beginning after December 15, 2018, including interim periods within those years, with early adoption permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. Teradyne is currently evaluating the impact of this ASU on its financial position and results of operations.

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities . This ASU provides guidance for the recognition, measurement, presentation, and disclosure of financial instruments. The new pronouncement revises accounting related to equity investments and the presentation of certain fair value changes for financial liabilities measured at fair value. Among other things, it amends the presentation and disclosure requirements of equity securities that do not result in consolidation and are not accounted for under the equity method. Changes in the fair value of these equity securities will be recognized directly in net income. This pronouncement is effective for fiscal years and interim periods within those years beginning after December 15, 2017. Teradyne is currently evaluating the impact of this ASU on its financial position and results of operations.

In November 2015, the FASB issued ASU 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes . ASU 2015-17 simplifies the presentation of deferred income taxes by eliminating the separate classification of deferred income tax liabilities and assets into current and noncurrent amounts in the balance sheet. The new guidance requires that all deferred tax liabilities and assets be classified as noncurrent in the balance sheet. This ASU is effective for annual periods beginning after December 15, 2016, and may be applied either prospectively or retrospectively to all periods presented. Early adoption is permitted. Teradyne early adopted this ASU prospectively in the first quarter of 2016.

In April, 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. ASU 2015-03 does not specifically address requirements for the presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements. On August 8, 2015, the FASB issued ASU 2015-15, Interest—Imputation of Interest (Subtopic 835-30) ” clarifying that debt issuance costs related to line-of-credit arrangements could be presented as an asset and amortized over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. Teradyne adopted this ASU in the first quarter of 2016. Adoption of this ASU did not have a material impact on Teradyne’s financial position and results of operations.

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40). ” ASU 2014-15 provides guidance on management’s responsibility in evaluating whether there

 

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is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. This ASU is effective for annual periods ending after December 15, 2016. Teradyne does not expect this ASU to have a material impact on its consolidated financial statements.

In May 2014, the FASB issued 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. In August 2015, FASB issued ASU 2015-14, which deferred the effective date of the new revenue standard by one year. For Teradyne, the standard will be effective in the first quarter of 2018. 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 selected a modified retrospective transition method. Teradyne is currently evaluating the impact of this ASU on its financial position and results of operations.

D.    ACQUISITIONS

Business

Universal Robots

On June 11, 2015, Teradyne acquired all of the outstanding equity of Universal Robots A/S (“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, increase manufacturing efficiency and decrease manufacturing costs. Universal Robots is a separate operating and reportable segment, Industrial Automation. The total purchase price of $315.4 million consisted of $283.8 million of cash paid and $31.6 million of contingent consideration, measured at fair value. The contingent consideration was valued using a Monte Carlo simulation based on the following key inputs: (1) forecasted revenue (2) forecasted EBITDA (3) revenue volatility (4) EBITDA volatility; and (5) discount rate. 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. Based on Universal Robots’ calendar 2015 EBITDA results, Teradyne paid $15 million or 100% of the eligible EBITDA contingent consideration amount in the first quarter of 2016. The maximum payment for each of the two remaining Universal Robots earn-outs is $25.0 million.

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 $221.1 million was allocated to goodwill, which is not 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

&