UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
For the quarterly period ended October 3, 2010
OR
For the transition period from to
Commission File No. 001-06462
TERADYNE, INC.
(Exact name of registrant as specified in its charter)
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)
978-370-2700
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files) Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):
Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The number of shares outstanding of the registrant’s only class of Common Stock as of November 8, 2010 was 181,400,000 shares.
INDEX
Item 1.
Financial Statements (unaudited):
Condensed Consolidated Balance Sheets as of October 3, 2010 and December 31, 2009
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended October 3, 2010 and October 4, 2009
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended October 3, 2010 and October 4, 2009
Notes to Condensed Consolidated Financial Statements
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
Item 4.
Controls and Procedures
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Item 6.
Exhibits
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PART I
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
Current assets:
Cash and cash equivalents
Marketable securities
Accounts receivable, net of allowance for doubtful accounts of $3,754 and $3,770 at October 3, 2010 and December 31, 2009, respectively
Inventories:
Parts
Assemblies in process
Finished goods
Deferred tax assets
Prepayments and other current assets
Total current assets
Property, plant, and equipment, at cost
Less: accumulated depreciation
Net property, plant, and equipment
Long-term marketable securities
Intangible assets, net
Retirement Plan assets
Other assets
Total assets
Current liabilities:
Accounts payable
Accrued employees’ compensation and withholdings
Deferred revenue and customer advances
Other accrued liabilities
Accrued income taxes
Current debt
Total current liabilities
Long-term deferred revenue and customer advances
Retirement plans liabilities
Deferred tax liabilities
Long-term other accrued liabilities
Long-term debt
Total liabilities
Commitments and contingencies (Note N)
Common stock, $0.125 par value, 1,000,000 shares authorized, 181,327 shares and 174,908 shares issued and outstanding at October 3, 2010 and December 31, 2009, respectively
Additional paid-in capital
Accumulated other comprehensive loss
Accumulated deficit
Total shareholders’ equity
Total liabilities and shareholders’ equity
The accompanying notes, together with the Notes to Consolidated Financial Statements included in Teradyne’s
Annual Report on Form 10-K for the year ended December 31, 2009, are an integral part of the condensed
consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Net revenues:
Products
Services
Total net revenues
Cost of revenues:
Cost of products
Cost of services
Total cost of revenues
Gross profit
Operating expenses:
Engineering and development
Selling and administrative
Acquired intangible asset amortization
Restructuring and other, net
Total operating expenses
Income (loss) from operations
Interest income
Interest expense and other
Income (loss) before income taxes
Income tax provision (benefit)
Net income (loss)
Net income (loss) per common share:
Basic
Diluted
Weighted average common share—basic
Weighted average common share—diluted
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation
Amortization
Stock-based compensation
Provision for excess and obsolete inventory
Loss on sale and impairment of marketable securities, net
Non-cash charge for sale of inventories revalued at the date of acquisition
Revolving credit facility issue costs
Deferred taxes
Other
Changes in operating assets and liabilities, net of businesses acquired:
Accounts receivable
Inventories
Accounts payable and accrued expenses
Retirement plan contributions
Net cash provided by operating activities
Cash flows from investing activities:
Purchases of property, plant and equipment
Purchases of available-for-sale marketable securities
Proceeds from sales of available-for-sale marketable securities
Proceeds from sales of trading marketable securities
Proceeds from life insurance
Acquisition of businesses, net of cash acquired
Net cash used for investing activities
Cash flows from financing activities:
Issuance of common stock under employee stock option and stock purchase plans
Payments of long-term debt
Proceeds from long-term debt
Repayment of revolving credit facility principal
Net cash provided by financing activities
Effect of exchange rate changes on cash and cash equivalents
Increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A. The Company
Teradyne, Inc. (“Teradyne”) is a leading global supplier of automatic test equipment. Teradyne’s automatic test equipment products and services include:
semiconductor test (“Semiconductor Test”) systems; and
military/aerospace (“Mil/Aero”) test instrumentation and systems, hard disk drive test (“HDD”) systems, circuit-board test and inspection (“Commercial Board Test”) systems, and automotive diagnostic and test (“Diagnostic Solutions”) systems (collectively these products represent “Systems Test Group”).
B. Accounting Policies
Basis of Presentation
The condensed consolidated interim financial statements include the accounts of Teradyne and its subsidiaries. All significant intercompany balances and transactions have been eliminated. These interim financial statements are unaudited and reflect all normal recurring adjustments that are, in the opinion of management, necessary for the fair presentation of such interim financial statements. Certain prior year’s amounts were reclassified to conform to the current year presentation. The December 31, 2009 condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.
The accompanying financial information should be read in conjunction with the consolidated financial statements and notes thereto contained in Teradyne’s Annual Report on Form 10-K, filed with the SEC on March 1, 2010 for the year ended December 31, 2009.
Preparation of Financial Statements
The preparation of consolidated financial statements requires management to make estimates and judgments that affect the amounts reported in the financial statements. Actual results may differ significantly from these estimates.
Revenue Recognition
In October 2009, the Financial Accounting Standards Board (“FASB”) amended the accounting standards for revenue recognition to remove tangible products containing non-software and software components that function together to deliver the product’s essential functionality from the scope of industry-specific software revenue recognition guidance. In October 2009, the FASB also amended the accounting standards for arrangements with multiple deliverables. Teradyne elected to early adopt this accounting guidance at the beginning of its first quarter of 2010 on a prospective basis. Adoption had no material impact on Teradyne’s financial position or results of operations in the three and nine months ended October 3, 2010.
Teradyne recognizes revenue when there is persuasive evidence of an arrangement, title and risk of loss have passed, delivery has occurred or the services have been rendered, the sales price is fixed or determinable and collection of the related receivable is reasonably assured. Title and risk of loss generally pass to Teradyne’s customers upon shipment or at delivery destination point. In circumstances where either title or risk of loss pass upon destination, acceptance or cash payment, Teradyne defers revenue recognition until such events occur.
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.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 the control of Teradyne.
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.
C. Recently Issued Accounting Pronouncements
In March 2010, FASB issued an Accounting Standards Update (“ASU”) 2010-17, “Milestone Method of Revenue Recognition”, to Accounting Standards Codification (“ASC”) 605,“Revenue Recognition.” The guidance in this consensus allows the milestone method as an acceptable revenue recognition methodology when an arrangement includes substantive milestones. The guidance provides a definition of substantive milestone and should be applied regardless of whether the arrangement includes single or multiple deliverables or units of accounting. The scope of this consensus is limited to the transactions involving milestones relating to research and development deliverables. The guidance includes enhanced disclosure requirements about each arrangement, individual milestones and related contingent consideration, information about substantive milestones and factors considered in the determination. The consensus is effective prospectively to milestones achieved in fiscal years, and interim periods within those years, after June 15, 2010. Early application and retrospective application are permitted. Teradyne will adopt this final consensus prospectively in January 2011 and the adoption is not expected to have a material impact on Teradyne’s financial position or results of operations.
D. Financial Instruments and Derivatives
Financial Instruments
Teradyne uses the market and income approach to value its financial instruments and there was no change in valuation techniques used by Teradyne during the nine months ended October 3, 2010 and October 4, 2009. As defined in ASC 820-10, “Fair Value Measurements and Disclosures”, fair value is the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. ASC 820-10 requires that assets and liabilities are carried at fair value and are classified in one of the following three categories:
Level 1: Quoted prices in active markets for identical assets as of the reporting date.
Level 2: Inputs other than Level 1, that are observable either directly or indirectly as of the reporting date. For example, a common approach for valuing fixed income securities is the use of matrix pricing. Matrix pricing is a mathematical technique used to value securities by relying on the securities’ relationship to other benchmark quoted prices.
Level 3: Unobservable inputs that are not supported by market data. Unobservable inputs are developed based on the best information available, which might include Teradyne’s own data.
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For the right to sell the auction rate securities, held by Teradyne, back to UBS (“UBS Put”), Teradyne elected fair value treatment under ASC 825-10, “Financial Instruments.” The UBS Put was the only instrument of this nature or type that Teradyne held and for which Teradyne has elected the fair value option under ASC 825-10. The UBS Put was exercised in June 2010.
In January 2010, FASB issued ASU 2010-6, “Improving Disclosures about Fair Value Measurement”, which requires interim disclosures regarding significant transfers in and out of Level 1 and Level 2 fair value measurements. Additionally, this ASU requires disclosure for each class of assets and liabilities and disclosures about the valuation techniques and inputs used to measure fair value for both recurring and non-recurring fair value measurements. These disclosures are required for fair value measurements that fall in either Level 2 or Level 3. Further, the ASU requires separate presentation of Level 3 activity for the fair value measurements. Teradyne adopted the interim disclosure requirements under this ASU during the quarter ended April 4, 2010, with the exception of the separate presentation in the Level 3 activity rollforward, which is not effective until fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years.
During the nine months ended October 3, 2010, there were no significant transfers in and out of Level 1 and Level 2.
The following table sets forth by fair value hierarchy Teradyne’s financial assets and liabilities that were measured at fair value on a recurring basis as of October 3, 2010 and December 31, 2009.
Assets
Available for sale securities:
Money market funds
U.S. government agency securities
U.S. Treasury securities
Corporate debt securities
Municipal bonds
Commercial paper
Certificates of deposit and time deposits
Equity and debt mutual funds
Non-U.S. government securities
Total
Trading securities:
Auction rate securities
Derivatives
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Reported as follows:
UBS Put
Liabilities
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The following table represents changes in the fair value of Level 3 financial assets:
Balance at beginning of period
Sale of auction rate securities
Change in unrealized gain included in interest income
Change in unrealized loss included in interest expense and other
Balance at end of period
Sale of auction rate securities and exercise of UBS Put
During the nine months ended October 3, 2010, Teradyne recorded a net loss of $0.4 million from sales of marketable securities and exercise of UBS Put. During the nine months ended October 4, 2009, Teradyne recorded a net loss of $1.3 million from sales of marketable securities.
During the nine months ended October 4, 2009, Teradyne determined that it did not intend to hold certain marketable securities for a period of time sufficient to allow for recovery in market value and recognized an other-than-temporary impairment loss in the amount of $0.7 million.
Realized losses from sale of marketable securities, decreases in auction rate securities fair value and other-than-temporary impairment losses are included in interest expense and other. Increases in auction rate securities fair value are included in interest income.
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The carrying amounts and fair values of financial instruments at October 3, 2010 and December 31, 2009 are as follows:
Cash equivalents
Convertible debt(1)
Japan loan
The fair values of cash, accounts receivable, net and accounts payable approximate the carrying amount due to the short term maturities of these instruments.
The following table summarizes available-for-sale marketable securities which are recorded at fair value:
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Short-term marketable 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 of October 3, 2010 and December 31, 2009, the fair market value of investments with unrealized losses totaled $51.7 million and $34.8 million, respectively. Teradyne determined that the unrealized losses in the amount of $0.1 million and $0.6 million, respectively, related to these investments are temporary.
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Teradyne conducts business in a number of foreign countries, with certain transactions denominated in local currencies. The purpose of Teradyne’s foreign currency management is to minimize the effect of exchange rate fluctuations on certain foreign denominated net monetary assets. Teradyne does not use derivative financial instruments for trading or speculative purposes.
To minimize the effect of exchange rate fluctuations associated with the remeasurement of net monetary assets denominated in foreign currencies, Teradyne enters into foreign currency forward contracts. The change in fair value of these derivatives is recorded directly in earnings, and is used to offset the change in fair value of the net monetary assets denominated in foreign currencies.
The notional amount of foreign exchange contracts hedging monetary assets and liabilities denominated in foreign currencies was $59.6 million and $56.9 million at October 3, 2010 and December 31, 2009, respectively.
The following table summarizes the fair value of derivative instruments as of October 3, 2010 and December 31, 2009.
Balance Sheet Location
Derivatives not designated as hedging instruments:
Foreign exchange contracts
The following table summarizes the effect of derivative instruments in the statement of operations recognized during the three and nine months ended October 3, 2010 and October 4, 2009. The table does not reflect the corresponding gain (loss) from the hedged balance sheet.
See Debt footnote E regarding derivatives related to convertible senior notes.
E. Debt
Loan Agreement
On March 31, 2009, Teradyne K.K., Teradyne’s wholly-owned subsidiary in Japan, entered into a loan agreement with a local bank in Japan to borrow approximately $10.0 million. The loan has a term of 5 years and
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a fixed interest rate of 1.4%. Approximately $6.0 million of the loan is collateralized by a real estate mortgage on Teradyne K.K.’s building and land in Kumamoto, Japan and approximately $4.0 million is unsecured. Teradyne, Inc. has guaranteed payment of the loan obligation. The loan is amortized over the term of the loan with semiannual principal payments of approximately $1.0 million payable on September 30 and March 30 each year. At October 3, 2010, approximately $2.4 million of the outstanding loan principal is included in current debt and approximately $6.0 million is classified as long-term debt.
Convertible Senior Notes
On March 31, 2009, Teradyne entered into an underwriting agreement regarding a public offering of $175 million aggregate principal amount of 4.50% convertible senior notes due March 15, 2014 (the “Notes”). On April 1, 2009, the underwriters exercised their option to purchase an additional $15 million aggregate principal amount of the Notes for a total aggregate principal amount of $190 million. The Notes bear interest at a rate of 4.50% per annum, payable semi-annually in arrears on March 15 and September 15 of each year, beginning on September 15, 2009. The Notes will mature on March 15, 2014, unless earlier repurchased by Teradyne or converted. The Notes are senior unsecured obligations and rank equally with all of Teradyne’s existing and future senior debt and senior to any of Teradyne’s subordinated debt.
The Notes may be converted, under certain circumstances and during certain periods, at an initial conversion rate of approximately 182.65 shares of Teradyne’s common stock per $1,000 principal amount of Notes, which is equivalent to an initial conversion price of approximately $5.48, a 25% conversion premium based on the last reported sale price of $4.38 per share of Teradyne’s common stock on March 31, 2009. The conversion rate is subject to adjustment in certain circumstances.
Holders may convert their Notes at their option prior to the close of business on the business day immediately preceding December 15, 2013, under the following circumstances: (1) during the five business-day period after any five consecutive trading day period (the “measurement period”) in which the price per Note for each day of that measurement period was less than 98% of the product of the last reported sale price of Teradyne’s common stock and the conversion rate for such date; (2) during any calendar quarter, if the last reported sale price of Teradyne’s common stock for 20 or more trading days in a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter exceeds 130% of the applicable conversion price in effect on the last trading day of the immediately preceding calendar quarter; or (3) upon the occurrence of certain specified events. Additionally, the Notes are convertible during the last three months prior to the March 15, 2014 maturity date. Upon conversion, holders will receive, at Teradyne’s option, shares of Teradyne common stock, cash or a combination of cash and shares of Teradyne common stock, subject to Teradyne’s option to irrevocably elect to settle all future conversions in cash up to the principal amount of the Notes and shares of common stock for any excess.
During the three months ended October 3, 2010, the following circumstance that allows holders to convert their Notes at their option prior to December 15, 2013 occurred: the last reported sale price of Teradyne’s common stock for 20 or more trading days in a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter exceeded 130% of the conversion price in effect on the last trading day of the immediately preceding calendar quarter. As of November 10, 2010, no holders have exercised their option to convert their Notes.
Teradyne may not redeem the Notes prior to their maturity. Holders of the Notes may require Teradyne to purchase in cash all or a portion of their Notes at a price equal to 100% of the principal amount, plus accrued and unpaid interest, upon the occurrence of certain fundamental changes involving Teradyne (which include, among
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others, the liquidation or dissolution of Teradyne, the acquisition of 50% or more of the total voting shares of Teradyne, certain mergers and consolidations, and the delisting of Teradyne’s stock).
Concurrently with the offering of the Notes, Teradyne entered into a convertible note hedge transaction with a strike price equal to the initial conversion price of the Notes, or approximately $5.48. The convertible note hedge allows Teradyne to receive shares of its common stock and/or cash related to the excess conversion value that it would pay to the holders of the Notes upon conversion. The convertible note hedges will cover, subject to customary antidilution adjustments, approximately 34,703,196 shares of Teradyne’s common stock. Teradyne paid approximately $64.6 million for the convertible note hedges.
Separately, Teradyne entered into a warrant transaction with a strike price of approximately $7.67 per share, which is 75% higher than the closing price of Teradyne’s common stock on March 31, 2009. The warrants will be net share settled and will cover, subject to customary antidilution adjustments, approximately 34,703,196 shares of Teradyne’s common stock. Teradyne received approximately $43.0 million for the warrants.
The convertible notes hedge and warrant transaction will generally have the effect of increasing the conversion price of the Notes to approximately $7.67 per share of Teradyne’s common stock, representing a 75% conversion premium based upon the closing price of Teradyne’s common stock on March 31, 2009.
The notes are classified as long-term debt in the balance sheet at October 3, 2010 and December 31, 2009. The below tables represent the components of Teradyne’s convertible senior notes:
Debt principal
Unamortized debt discount
Net carrying amount of the convertible debt
Contractual interest expense on the coupon
Amortization of the discount component and debt issue fees
Total interest expense on the convertible debt
As of October 3, 2010, the unamortized discount was $48.7 million, which will be amortized over approximately 3.5 years, and the carrying amount of the equity component was $63.4 million. As of October 3, 2010, the conversion rate was equal to the initial conversion price of approximately $5.48 per share and the if-converted value of the Notes was $385.2 million.
Revolving Credit Facility
On April 7, 2009, Teradyne terminated its revolving credit facility agreement. Teradyne used approximately $123.3 million of the net proceeds of the Notes offering to repay $122.5 million of principal and $0.8 million of accrued interest outstanding under the revolving credit facility agreement.
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F. Deferred Revenue and Customer Advances
Deferred revenue and customer advances consist of the following and are included in short and long-term deferred revenue and customer advances.
Customer advances
Maintenance, training and extended warranty
Undelivered elements
Acceptance
Total deferred revenue and customer advances
G. Product Warranty
Teradyne generally provides a one-year warranty on its products commencing upon installation or shipment. A provision is recorded upon revenue recognition to cost of revenues for estimated warranty expense based on historical experience. Related costs are charged to the warranty accrual as incurred. The balance below is included in other accrued liabilities.
Accruals for warranties issued during the period
Accruals related to pre-existing warranties
Settlements made during the period
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 deferred revenue and customer advances and long-term other accrued liabilities.
Deferral of new extended warranty revenue
Recognition of extended warranty deferred revenue
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H. Stock-Based Compensation
During the nine months ended October 3, 2010, Teradyne granted service-based restricted stock units to employees, and service-based stock options and service and performance-based restricted stock units to executive officers. The total number of restricted stock units granted was 2.6 million at the weighted average grant date fair value of $9.42. Service-based restricted stock units granted to employees and executive officers vest in equal installments over four years. The percentage level of performance satisfied for performance-based grants is assessed on or near the anniversary of the grant date and, in turn, that percentage level determines the number of performance-based restricted stock units available for vesting over the vesting period; portions of the performance-based grants not available for vesting are forfeited. The total number of stock options granted to executive officers was 0.3 million at the weighted average grant date fair value of $4.10. These stock options vest in equal installments over four years, and have a term of seven years from the date of grant.
During the nine months ended October 4, 2009, Teradyne granted service-based restricted stock units to employees, and service-based restricted stock units and stock options to executive officers. The total number of restricted stock units granted was 4.2 million at the weighted average grant date fair value of $4.91. The total number of stock options granted was 1.1 million at the weighted average grant date fair value of $1.97. Restricted stock units and stock options vest in equal installments over four years. These stock options have a term of seven years from the date of grant.
The fair value of stock options was estimated using the Black-Scholes option-pricing model with the following assumptions:
Expected life (years)
Interest rate
Volatility-historical
Dividend yield
Teradyne determined the stock options’ expected life based upon historical exercise data for executive officers, the age of the executive officers and the terms of the stock option grant. Volatility was determined using historical volatility for a period equal to the expected life. The risk-free rate was determined using the U.S. Treasury yield curve in effect at the time of grant.
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I. Comprehensive Income (Loss)
Comprehensive income (loss) is calculated as follows:
Foreign currency translation adjustment
Unrealized gain on investments, net of tax of $0
Actuarial gains (losses) arising during period, net of tax of $293, $0, $1,540 and $(984)
Amortization included in net periodic pension and post-retirements costs:
Actuarial losses, net of tax of $21, $29, $109 and $176
Prior service costs, net of tax of $0
Comprehensive income (loss)
J. Intangible Assets
Amortizable intangible assets consist of the following and are included in intangible assets on the balance sheet:
Developed technology
Customer relationships and service and software maintenance contracts
Trade names and trademarks
Total intangible assets
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Aggregate intangible asset amortization expense was $7.3 million and $22.0 million, respectively, for the three and nine months ended October 3, 2010 and $8.2 million and $24.7 million, respectively, for the three and nine months ended October 4, 2009. Estimated intangible asset amortization expense for each of the five succeeding fiscal years is as follows:
Year
2010 (remainder)
2011
2012
2013
2014
K. Net Income (Loss) per Common Share
The following table sets forth the computation of basic and diluted net income (loss) per common share:
Net income (loss) for basic net income (loss) per share
Income impact of assumed conversion of convertible notes
Net income (loss) for diluted net income (loss) per share
Shares used in net income (loss) per common share-basic
Effect of dilutive potential common shares:
Incremental shares from assumed conversion of convertible note
Warrants
Restricted stock units
Stock options
Stock purchase rights
Dilutive potential common shares
Shares used in net income (loss) per common share-diluted
Net income (loss) per common share-basic
Net income (loss) per common share-diluted
The computation of diluted net income per common share for the three and nine months ended October 3, 2010 excludes the effect of the potential exercise of options to purchase approximately 4.4 million and 5.5 million shares and restricted stock units of 0.1 million and 0.1 million shares, respectively, because the effect would have been anti-dilutive.
The computation of diluted net income per common share for the three months ended October 4, 2009 excludes the effect of the potential exercise of options to purchase approximately 7.7 million shares and restricted stock units of 2.3 million because the effect would have been anti-dilutive. In addition, approximately 34.7 million shares of common stock issuable upon conversion of the Notes were excluded from the calculation of net income per share because the effect would have been anti-dilutive.
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The computation of diluted net loss per common share for the nine months ended October 4, 2009 excludes all outstanding stock options, restricted stock units and warrants because Teradyne had a net loss and inclusion would be anti-dilutive.
Teradyne’s call option on its common stock (convertible note hedge transaction) is excluded from the calculation of diluted shares because the effect would be anti-dilutive. See Debt footnote E regarding convertible note hedge transaction.
L. Restructuring and Other, Net
Restructuring
In response to a downturn in the industry, Teradyne initiated restructuring activities across all segments to reduce costs, principally through headcount reductions and facility consolidations. The tables below represent activity related to these actions. The remaining accrual for severance and benefits is reflected in the accrued employees’ compensation and withholdings account on the balance sheet and is expected to be paid by the end of 2010. The remaining accrual for lease payments on vacated facilities is reflected in the other accrued liabilities account and the long-term other accrued liabilities account and is expected to be paid over the lease terms, the latest of which expires in 2013. Teradyne expects to pay approximately $2.2 million against the lease accruals over the next twelve months. Teradyne’s future lease commitments are net of expected sublease income of $1.6 million as of October 3, 2010.
Severance and Benefits:
Balance at December 31, 2008
Provision
Cash payments
Balance at December 31, 2009
Change in estimate
Balance at April 4, 2010
Balance at July 4, 2010
Balance at October 3, 2010
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Facility Exit Costs:
During the nine months ended October 3, 2010, Teradyne recorded restructuring charges related to ongoing efforts to lower expenses and its cost structure and an additional charge due to a change in estimated severance benefits related to a prior period activity. The restructuring charges consisted of the following activities:
Q1 2010 Actions:
$0.8 million of severance charges related to headcount reductions of 14 people, of which $0.4 million and 10 people were in Systems Test Group and $0.4 million and 4 people were in Semiconductor Test.
Q2 2010 Actions:
$1.1 million of severance charges related to headcount reductions of approximately 10 people in Systems Test Group; and
$0.8 million of facility charges in Systems Test Group related to the early exit of leased facilities in Kontich, Belgium and Stockport, United Kingdom.
Q3 2010 Actions:
$1.4 million of severance charges related to headcount reductions of 22 people in Systems Test Group.
Q2 2009 Actions:
$0.3 million related to a change in the estimated severance benefits related to headcount reduction activities across both segments.
Pre-2009 Actions:
$(2.4) million credit related to the early exit of previously impaired leased facilities in Westford, Massachusetts.
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During the nine months ended October 4, 2009, Teradyne recorded restructuring charges related to ongoing efforts to lower expenses and its cost structure in light of the industry wide decline in orders for semiconductor equipment. The restructuring charges consisted of the following activities:
Q3 2009 Actions:
$4.4 million of charges across both segments related to the early exit of a leased facility in North Reading, Massachusetts and Novi, Michigan.
$14.1 million of severance charges related to headcount reductions of 316 people, of which $9.7 million and 267 people were in Semiconductor Test, $2.7 million and 25 people were in Corporate, and $1.7 million and 24 people were in Systems Test Group.
Q1 2009 Actions:
$17.6 million of severance charges related to headcount reductions of 518 people, of which $14.9 million and 460 people were in Semiconductor Test, $1.9 million and 42 people were in Systems Test Group, and $0.8 million and 16 people were in Corporate.
During the nine months ended October 4, 2009, Teradyne recorded the following activity:
$1.1 million of long-lived asset impairment charges across both segments primarily related to disposal of fixed assets as a result of the consolidation of Teradyne’s facilities in North Reading, Massachusetts; and
$(2.0) million of credits related to finalization of certain Eagle Test purchase accounting items.
M. Retirement Plans
Defined Benefit Pension Plans
Teradyne has defined benefit pension plans covering a portion of domestic employees and employees of certain non-U.S. subsidiaries. Benefits under these plans are based on employees’ years of service and compensation. Teradyne’s funding policy is to make contributions to these plans in accordance with local laws and to the extent that such contributions are tax deductible. The assets of these plans consist primarily of equity and fixed income securities. In addition, Teradyne has foreign unfunded defined benefit pension plans and an unfunded supplemental executive defined benefit plan in the United States to provide retirement benefits in excess of levels allowed by the Employment Retirement Income Security Act and the Internal Revenue Code.
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Components of net periodic pension cost for all plans for the three and nine months ended October 3, 2010 and October 4, 2009 were as follows:
Service cost
Interest cost
Expected return on plan assets
Amortization of unrecognized:
Prior service cost
Net loss
Curtailment gain
Settlement loss
Total net periodic pension cost
In the nine months ended October 3, 2010, Teradyne made $45.0 million of discretionary contributions to the U.S. Qualified Pension Plan.
Post-Retirement Benefit Plans
In addition to receiving pension benefits, U.S. Teradyne employees who meet early retirement eligibility requirements as of their termination dates may participate in Teradyne’s Welfare Plan, which includes death, and medical and dental benefits up to age 65. Death benefits provide a fixed sum to retirees’ survivors and are available to all retirees. Substantially all of Teradyne’s current U.S. employees (including executive officers) could become eligible for these benefits, and the existing benefit obligation relates primarily to those employees.
Components of net periodic post-retirement cost were as follows:
Prior service benefit
Total net periodic post-retirement cost
N. Commitments and Contingencies
Purchase Commitments
As of October 3, 2010, Teradyne had entered into purchase commitments for certain components and materials. The purchase commitments are for less than one year and aggregate to approximately $233.0 million.
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Legal Claims
Teradyne is subject to various legal proceedings and claims which have arisen in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on Teradyne’s results of operations, financial condition or cash flows.
O. Segment Information
Teradyne’s two reportable segments are Semiconductor Test and Systems Test Group. The Semiconductor Test segment includes operations related to the design, manufacturing and marketing of semiconductor test products and services. The Systems Test Group segment includes operations related to the design, manufacturing and marketing of products and services for military/aerospace instrumentation test, hard disk drive test, circuit-board test and inspection, and automotive diagnostic and test.
Teradyne evaluates performance based on several factors, of which the primary financial measure is business segment income before income taxes. The accounting policies of the business segments are the same as those described in Note B: “Accounting Policies” in Teradyne’s Annual Report on Form 10-K for the year ended December 31, 2009. Segment information is as follows:
Three months ended October 3, 2010:
Net revenues
Income (loss) before income taxes(1)(2)
Three months ended October 4, 2009:
Loss (income) before income taxes(1)(2)
Nine months ended October 3, 2010:
Nine months ended October 4, 2009:
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Included in the Semiconductor Test segment are charges for the following:
Cost of revenues—provision for excess and obsolete inventory
Cost of revenues—sale of previously written down inventory
Cost of revenues—inventory step-up
Included in the Systems Test Group segment are charges for the following:
Included in the Corporate and Eliminations segment are charges for the following:
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Statements in this Quarterly Report on Form 10-Q which are not historical facts, so called “forward looking statements,” are made pursuant to the safe harbor provisions of Section 21E of the Securities Exchange Act of 1934, as amended. Investors are cautioned that all forward looking statements involve risks and uncertainties, including those detailed in Teradyne’s filings with the Securities and Exchange Commission. See also Part II, Item 1A of this Quarterly Report on Form 10-Q and Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2009. Readers are cautioned not to place undue reliance on these forward-looking statements which reflect management’s analysis only as of the date hereof. Teradyne assumes no obligation to update these forward-looking statements to reflect actual results or changes in factors or assumptions affecting forward-looking statements, except as may be required by law.
Overview
Teradyne is a leading global supplier of automatic test equipment. We design, develop, manufacture, and sell automatic test systems and solutions used to test complex electronics in the consumer electronics, automotive, computing, telecommunications, and aerospace and defense industries. Our automatic test equipment products and services include:
We have a broad customer base which includes integrated device manufacturers (“IDMs”), outsourced sub-assembly and test providers (“OSATs”), wafer foundries, fabless companies that design, but contract with others for the manufacture of integrated circuits (“ICs”), manufacturers of circuit boards, automotive companies, HDD manufacturers, aerospace and military contractors as well as the United States Department of Defense.
The sales of our products and services are dependent, to a large degree, on customers who are subject to cyclical trends in the demand for their products. These cyclical periods have had, and will continue to have, a significant effect on our business since our customers often delay or accelerate purchases in reaction to changes in their businesses and to demand fluctuations in the semiconductor industry. Historically, these demand fluctuations have resulted in significant variations in our results of operations. This was particularly relevant beginning in the fourth quarter of fiscal year 2008 where we saw a significant decrease in revenue in our Semiconductor Test business which was impacted by the deteriorating global economy, which negatively impacted the entire semiconductor industry. The sharp swings in the semiconductor industry in recent years have generally affected the semiconductor test equipment and services industry more significantly than the overall capital equipment sector.
In response to the business downturn, we implemented significant permanent and temporary cost reduction measures. We reduced headcount worldwide, cut capital spending, and imposed temporary salary reductions and furloughs on our workforce. Due to the continued improvement in our business, we removed the temporary salary reductions and furloughs by the end of last year. We believe the permanent cost-cutting measures we took in the last two years will be of long term value.
Commencing in the fourth quarter of 2009, we have experienced improvement in our Semiconductor Test business. We believe our acquisitions of Nextest and Eagle Test and our entry into the high speed memory and HDD markets have enhanced our opportunities for growth. We will continue to invest in our business to expand further our addressable markets while tightly managing our costs. As the last four quarters have demonstrated, with our current cost structure, we can achieve significantly higher profitability than we achieved at comparable revenue levels in the past.
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Critical Accounting Policies and Estimates
We have identified the policies which are critical to understanding our business and our results of operations. Except as stated below, management believes that there have been no significant changes during the nine months ended October 3, 2010 to the items disclosed as our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in its Annual Report on Form 10-K for the fiscal year ended December 31, 2009.
In October 2009, the Financial Accounting Standards Board (“FASB”) amended the accounting standards for revenue recognition to remove tangible products containing non-software and software components that function together to deliver the product’s essential functionality from the scope of industry-specific software revenue recognition guidance. In October 2009, the FASB also amended the accounting standards for arrangements with multiple deliverables. We elected to early adopt this accounting guidance at the beginning of our first quarter of 2010 on a prospective basis. Adoption had no material impact on our financial position or results of operations in the three and nine months ended October 3, 2010.
We recognize revenue when there is persuasive evidence of an arrangement, title and risk of loss have passed, delivery has occurred or the services have been rendered, the sales price is fixed or determinable and collection of the related receivable is reasonably assured. Title and risk of loss generally pass to 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.
Our 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 us to perform tests of the product to ensure that performance meets the published product specifications or customer requested specifications, which are generally conducted prior to shipment. Where the criteria cannot be demonstrated prior to shipment, revenue is deferred until customer acceptance has been received. We also defer the portion of the sales price that is not due until acceptance, which represents deferred profit.
For multiple element arrangements, we allocate revenue to all deliverables based on their relative selling prices. In such circumstances, a hierarchy is used to determine the selling price for allocating revenue to deliverables as follows: (i) vendor-specific objective evidence of selling price (“VSOE”), (ii) third-party evidence of selling price (“TPE”), and (iii) best estimate of the selling price (“BESP”). For a delivered item to be considered a separate unit, the delivered item must have value to the customer on a standalone basis and the delivery or performance of the undelivered item must be considered probable and substantially in our control.
Our post-shipment obligations include installation, training services, one-year standard warranties, and extended warranties. Installation does not alter the product capabilities, does not require specialized skills or 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 customer’s ability to use the product. We defer revenue for the selling price of installation and training.
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SELECTED RELATIONSHIPS WITHIN THE CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
Percentage of total net revenues:
Net revenue:
Interest & other
Provision (benefit) for income taxes
Provision/benefit for income taxes as percentage of income (loss) before income taxes
Results of Operations
Third Quarter 2010 Compared to Third Quarter 2009
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:
Semiconductor Test
Systems Test Group
Total Company
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Revenue
Net revenues for our two reportable segments were as follows:
Net revenues increased by $239.9 million or 92%, primarily due to the increase in Semiconductor Test revenue of $275.2 million or 159%, as a result of higher sales across all System-on-Chip products with power management, microcontroller and mobile/wireless being the strongest. Systems Test Group revenue was down by $35.3 million or 40%, primarily due to the decrease in sales of HDD test systems.
Our revenues by region as a percentage of total net revenue were as follows:
Malaysia
Taiwan
United States
China
Philippines
Singapore
Korea
Europe
Japan
Thailand
Rest of World
Gross Profit
Our gross profit was as follows:
Percent of Total Revenue
Gross profit as a percentage of revenue increased 14.2 percentage points. This increase was the result of an increase of 8.3 points from higher sales volume and an increase of 7.7 points related to product mix. These increases were partially offset by a decrease of 1.8 points primarily due to higher variable compensation.
We assess the carrying value of our inventory on a quarterly basis by estimating future demand and comparing that demand against on-hand and on-order inventory positions. Forecasted revenue information is obtained from the sales and marketing groups and incorporates factors such as backlog and future revenue
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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 four quarters, is written-down to estimated net realizable value.
During the three months ended October 3, 2010, we recorded an inventory provision of $3.7 million included in cost of revenues, due to the downward revisions to previously forecasted demand levels. Of the $3.7 million of total excess and obsolete provisions recorded in the three months ended October 3, 2010, $3.5 million was related to Semiconductor Test and $0.2 million was related to Systems Test Group.
During the three months ended October 4, 2009, we recorded an inventory provision of $6.0 million included in cost of revenues, due to the following factors:
Downward revisions to previously forecasted demand levels as a result of economic conditions experienced in the semiconductor industry in the third quarter of 2009 resulted in an inventory provision of $3.5 million for inventory not expected to be consumed; and
A decline in demand versus forecast for our Liquid Crystal Display (“LCD”) test product due to the global economic downturn, lower product pricing by competitors, the introduction of a new product by a competitor and consolidation among a number of the expected buyers of the product, resulted in an inventory provision of $2.5 million.
Of the $6.0 million of total excess and obsolete provisions recorded in the three months ended October 4, 2009, $5.2 million was related to Semiconductor Test and $0.8 million was related to Systems Test Group.
During the three months ended October 3, 2010 and October 4, 2009, we scrapped $1.6 million and $27.0 million of inventory, respectively. During the three months ended October 3, 2010 and October 4, 2009, we sold $1.3 million and $0.6 million, respectively, of previously written-down or written-off inventory. As of October 3, 2010, we had inventory related reserves for amounts which had been written-down or written-off totaling $127.8 million. We have no pre-determined timeline to scrap the remaining inventory.
Engineering and Development
Engineering and development expenses were as follows:
The increase of $11.8 million in engineering and development expenses is due primarily to an $8.5 million increase in variable compensation, $1.5 million due to increased project spending and $1.8 million from the restoration of temporary pay cuts.
Selling and Administrative
Selling and administrative expenses were as follows:
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The increase of $14.8 million in selling and administrative expenses is due primarily to a $13.0 million increase in variable compensation, and $2.9 million from the restoration of temporary pay cuts, partially offset by a $1.1 million decrease in spending related to cost reduction initiatives taken in 2009.
Restructuring and Other, Net
In response to a downturn in the industry, we initiated restructuring activities across all segments to reduce costs, principally through headcount reductions and facility consolidations. The tables below represent activities related to these actions. The remaining accrual for severance and benefits is reflected in the accrued employees’ compensation and withholdings account on the balance sheet and is expected to be paid by the end of 2010. The remaining accrual for lease payments on vacated facilities is reflected in the other accrued liabilities account and the long-term other accrued liabilities account and is expected to be paid over the lease terms, the latest of which expires in 2013. We expect to pay approximately $2.2 million against the lease accruals over the next twelve months. Our future lease commitments are net of expected sublease income of $1.6 million as of October 3, 2010.
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During the three months ended October 3, 2010, we recorded restructuring charges related to ongoing efforts to lower expenses and our cost structure and credits related to an early exit of previously impaired facilities. The restructuring activity consisted of the following:
$1.4 million of severance charges related to headcount reductions of approximately 22 people in Systems Test Group.
$0.2 million of additional severance charges related to headcount reductions in Systems Test Group.
$(0.1) million credits related to a change in the estimated severance benefits related to headcount reduction activities across both segments. Pre-2009 Actions:
During the three months ended October 4, 2009, Teradyne recorded restructuring charges related to ongoing efforts to lower expenses and its cost structure in light of the industry wide decline in orders for semiconductor equipment. The restructuring charges consisted of the following activities:
$4.4 million of charges across both segments related to the early exit of leased facilities in North Reading, Massachusetts and Novi, Michigan.
$1.3 million of additional severance charges related to headcount reductions across both segments.
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During the three months ended October 4, 2009, Teradyne recorded $(0.5) million of credits related to finalization of certain Eagle Test purchase accounting items.
Interest and Other
Interest income increased by $0.5 million from the third quarter of 2009 to 2010. Interest expense and other increased by $1.0 million from the third quarter of 2009 to 2010. Interest expense and other for the third quarter of 2010 included $4.9 million of interest expense related to our convertible debt. Interest expense and other for the third quarter of 2009 included $4.3 million of interest expense related to our convertible debt.
Income Taxes
For the three months ended October 3, 2010, we recorded a tax provision of $6.7 million, which consisted primarily of foreign taxes. For the three months ended October 4, 2009, we recorded a tax benefit of $1.5 million primarily due to tax refunds recorded for U.S. loss carrybacks. Due to the continued uncertainty of realization, we have maintained our valuation allowance at October 3, 2010 for deferred tax assets in the U.S. and Singapore. We do not expect to significantly reduce our valuation allowance until sufficient positive evidence exists, including sustained profitability, that realization is more likely than not.
Nine Months of 2010 Compared to Nine Months of 2009
Net revenues increased by $734.1 million or 133%, primarily due to the increase in Semiconductor Test revenue of $796.5 million or 225%, as a result of higher sales across all System-on-Chip products with power management, microcontroller and mobile/wireless being the strongest. System Test Group revenue was down by $62.4 million or 32%, primarily due to the decrease in sales of HDD test systems and Mil/Aero test instrumentation.
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Gross profit as a percentage of revenue increased 20.8 percentage points. This increase was the result of an increase of 13.9 points from higher sales volume and an increase of 8.2 points related to product mix. These increases were partially offset by a decrease of 1.3 points primarily due to higher variable compensation.
We assess the carrying value of our inventory on a quarterly basis by estimating future demand and comparing that demand against on-hand and on-order inventory positions. Forecasted revenue information is obtained from the sales and marketing groups and incorporates factors such as backlog and future revenue demand. This quarterly process identifies obsolete and excess inventory. Obsolete inventory, which represents items for which there is no demand, is fully reserved. Excess inventory, which represents inventory items that are not expected to be consumed during the next four quarters, is written-down to estimated net realizable value.
During the nine months ended October 3, 2010, we recorded an inventory provision of $5.4 million included in cost of revenues, due to the downward revisions to previously forecasted demand levels. Of the $5.4 million of total excess and obsolete provisions recorded in the nine months ended October 3, 2010, $4.0 million was related to Semiconductor Test and $1.4 million was related to Systems Test Group.
During the nine months ended October 4, 2009, we recorded an inventory provision of $23.7 million included in cost of revenues, due to the following factors:
Downward revisions to previously forecasted demand levels as a result of worsening economic conditions experienced in the semiconductor and automotive industries in the first nine months of 2009 resulted in an inventory provision of $15.1 million for inventory not expected to be consumed; and
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A decline in demand versus forecast for our Liquid Crystal Display (“LCD”) test product due to the global economic downturn, lower product pricing by competitors, the introduction of a new product by a competitor and consolidation among a number of the expected buyers of the product, resulted in an inventory provision of $5.9 million; and
During late 2008, we introduced the next versions of our Nextest Magnum memory test product. At that time, it was anticipated that demand would continue for the existing version of the product within its installed base of customers. An overall decline in the memory market combined with a portion of our customers accelerating their purchasing of the newer version of the product resulted in an inventory provision of $2.7 million.
Of the $23.7 million of total excess and obsolete provisions recorded in the nine months ended October 4, 2009, $17.0 million was related to Semiconductor Test and $6.7 million was related to Systems Test Group.
During the nine months ended October 3, 2010 and October 4, 2009, we scrapped $3.7 million and $29.0 million of inventory, respectively. During the nine months ended October 3, 2010, we sold $6.5 million of previously written-down or written-off inventory. As of October 3, 2010, we had inventory related reserves for amounts which had been written-down or written-off totaling $127.8 million. We have no pre-determined timeline to scrap the remaining inventory.
The increase of $25.7 million in engineering and development expenses is due primarily to a $19.5 million increase in variable compensation and $6.2 million increase from the restoration of temporary pay cuts.
The increase of $26.4 million in selling and administrative expenses is due primarily to a $27.6 million increase in variable compensation and $9.9 million from the restoration of temporary pay cuts, offset by an $11.1 million decrease in other spending related to workforce reductions and other cost reduction initiatives taken in 2009.
In response to a downturn in the industry, we initiated restructuring activities across all segments to reduce costs, principally through headcount reductions and facility consolidations. The tables below represent activity
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related to these actions. The remaining accrual for severance and benefits is reflected in the accrued employees’ compensation and withholdings account on the balance sheet and is expected to be paid by the end of 2010. The remaining accrual for lease payments on vacated facilities is reflected in the other accrued liabilities account and the long-term other accrued liabilities account and is expected to be paid over the lease terms, the latest of which expires in 2013. We expect to pay approximately $2.2 million against the lease accruals over the next twelve months. Our future lease commitments are net of expected sublease income of $1.6 million as of October 3, 2010.
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During the nine months ended October 3, 2010, we recorded restructuring charges related to ongoing efforts to lower expenses and our cost structure and an additional charge due to a change in estimated severance benefits related to a prior period activity. The restructuring charges consisted of the following activities:
$0.8 million of severance charges related to headcount reductions of approximately 14 people, of which $0.4 million and 10 people were in Systems Test Group and $0.4 million and 4 people were in Semiconductor Test.
$1.0 million of severance charges related to headcount reductions of approximately 10 people in Systems Test Group; and
During the nine months ended October 4, 2009, we recorded restructuring charges related to ongoing efforts to lower expenses and our cost structure in light of the industry wide decline in orders for semiconductor equipment. The restructuring charges consisted of the following activities:
$4.4 million of charges across both segments related to the early exit of a leased facilities in North Reading, Massachusetts and Novi, Michigan.
$14.1 million of severance charges related to headcount reductions of approximately 316 people, of which $9.7 million and 267 people were in Semiconductor Test, $2.7 million and 25 people were in Corporate, and $1.7 million and 24 people were in Systems Test Group.
$17.6 million of severance charges related to headcount reductions of approximately 518 people, of which $14.9 million and 460 people were in Semiconductor Test, $1.9 million and 42 people were in Systems Test Group, and $0.8 million and 16 people were in Corporate.
During the nine months ended October 4, 2009, we recorded the following activity:
$1.1 million of long-lived asset impairment charges across both segments primarily related to disposal of fixed assets as a result of the consolidation of our facilities in North Reading, Massachusetts; and
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Interest income increased by $3.1 million from the first nine months of 2009 to 2010 due primarily to a gain from the sale of auction rate securities of $2.7 million. Interest expense and other increased by $1.5 million from the first nine months of 2009 to 2010 due primarily to a loss of $2.7 million on the exercise of the auction rate securities related UBS Put and $5.4 million increase in interest expense related to our convertible note, partially offset by a $0.7 million decrease in realized and other–than-temporary impairment losses on our marketable securities and $1.4 million decrease in foreign exchange losses. In addition, the first nine months of 2009 included $2.1 million of interest expense related to the revolving credit facility and $2.5 million other expense related to the write off of the remaining debt issue costs due to the termination of our revolving credit facility agreement.
For the nine months ended October 3, 2010, we recorded a tax provision of $21.0 million, which consisted primarily of foreign taxes. For the nine months ended October 4, 2009, we recorded a tax benefit of $11.5 million primarily due to benefiting operating losses in foreign jurisdictions. Due to the continued uncertainty of realization, we have maintained our valuation allowance at October 3, 2010 for deferred tax assets in the U.S. and Singapore. We do not expect to significantly reduce our valuation allowance until sufficient positive evidence exists, including sustained profitability, that realization is more likely than not.
Contractual Obligations
The following table reflects our contractual obligations as of October 3, 2010:
Payments Due by Period
2010
Beyond 2014
As of October 3, 2010, the total amount of unrecognized tax benefit for uncertain tax positions and the accrual for the related interest, net of the federal benefit, was $9.1 million and $1.4 million, respectively, and was included in long-term other accrued liabilities. We are unable to make a reasonably reliable estimate of when a cash settlement will occur with tax authorities as the timing of examinations and ultimate resolutions of those examinations is uncertain.
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Liquidity and Capital Resources
Our cash, cash equivalents and marketable securities balance increased by $380.5 million in the first nine months of 2010 to $899.3 million. Cash activity for the first nine months of 2010 and 2009 was as follows:
Cash provided by operating activities:
Net income (loss), adjusted for non-cash items
Change in operating assets and liabilities, net of businesses acquired
Total cash provided by operating activities
Total cash used for investing activities
Total cash provided by financing activities
Effects on exchange rate changes on cash and cash equivalents
In the nine months ended October 3, 2010, changes in operating assets and liabilities, net of businesses acquired, used cash of $34.7 million. This was due to a $169.6 million increase in operating assets and a $134.9 million increase in operating liabilities. The increase in operating assets was due to an increase in accounts receivable of $181.3 million due to higher sales volume, partially offset by a $10.8 million decrease in inventories, and a decrease in other current assets of $0.9 million. The increase in operating liabilities was due to a $68.4 million increase in customer advance payments, a $7.2 million increase in deferred revenue, a $50.8 million decrease in pension liabilities due to pension contributions, a $4.3 million decrease in other accrued expenses due to convertible note interest payments, partially offset by a $66.6 million increase in accounts payable, a $30.1 million increase in accrued employee compensation due to higher variable compensation, a $14.6 million increase in accrued income taxes, and a $6.6 million increase in other accrued liabilities.
Investing activities during the nine months ended October 3, 2010 used cash of $412.5 million, due to $478.3 million used for purchases of marketable securities and $54.0 million used for purchases of property, plant and equipment, partially offset by proceeds from sales of marketable securities that provided cash of $118.6 million, and proceeds from life insurance that provided cash of $1.1 million.
Financing activities during the nine months ended October 3, 2010 provided cash of $39.9 million, $42.2 million was from the issuance of common stock under stock option and stock purchase plans which was offset by $2.3 million of cash used for a payment on a long-term debt related to the Japan loan.
In the nine months ended October 4, 2009, changes in operating assets and liabilities, net of businesses acquired, provided cash of $75.2 million. This was due to a decrease in operating assets of $11.2 million and an increase in operating liabilities of $64.0 million. The decrease in operating assets consisted mainly of a decrease in inventory of $45.9 million partially offset by an increase of $30.0 million in accounts receivable due to higher sales volume. The increase in operating liabilities consisted of an increase in advanced customer payments, accounts payable, deferred revenue and other accrued expenses of $69.7 million partially offset by retirement plan contributions of $5.7 million.
Investing activities in the nine months ended October 4, 2009 used cash of $37.6 million due to investments in property, plant and equipment of $26.6 million, payment of transaction fees related to the Eagle Test acquisition of $3.7 million and purchases of marketable securities of $31.5 million, partially offset by sales of marketable securities that provided cash of $23.1 million and proceeds from life insurance policies that provided cash of $1.1 million.
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During the nine months ended October 4, 2009, financing activities provided cash of $64.6 million due to approximately $163.0 million of net proceeds from the issuance of the senior convertible notes, $10.0 million of long-term debt proceeds from a loan in Japan and $15.3 million from the issuance of common stock under stock option and stock purchase plans. These increases were partially offset by $122.5 million of cash used for the repayment of our revolving credit facility and $1.1 million of cash used for principal payment on long-term debt.
We believe our cash, cash equivalents and marketable securities balance of $899.3 million will be sufficient to meet working capital and expenditure needs for at least the next twelve months. Inflation has not had a significant long-term impact on earnings.
Equity Compensation Plans
As discussed in “Note N: Stock Based Compensation” in our 2009 Form 10-K, we have a 1996 Employee Stock Purchase Plan and a 2006 Equity and Cash Compensation Incentive Plan (the “2006 Equity Plan”).
The purpose of the 1996 Employee Stock Purchase Plan is to encourage stock ownership by all eligible employees of Teradyne. The purpose of the 2006 Equity Plan is to provide equity ownership and compensation opportunities in Teradyne to our employees, officers, directors, consultants and/or advisors. Both plans were approved by our shareholders.
Recently Issued Accounting Pronouncements
In March 2010, FASB issued an Accounting Standards Update 2010-17, “Milestone Method of Revenue Recognition”, to Accounting Standards Codification 605, “Revenue Recognition.”The guidance in this consensus allows the milestone method as an acceptable revenue recognition methodology when an arrangement includes substantive milestones. The guidance provides a definition of substantive milestone and should be applied regardless of whether the arrangement includes single or multiple deliverables or units of accounting. The scope of this consensus is limited to the transactions involving milestones relating to research and development deliverables. The guidance includes enhanced disclosure requirements about each arrangement, individual milestones and related contingent consideration, information about substantive milestones and factors considered in the determination. The consensus is effective prospectively to milestones achieved in fiscal years, and interim periods within those years, after June 15, 2010. Early application and retrospective application are permitted. We will adopt this final consensus prospectively in January 2011 and the adoption is not expected to have a material impact on our financial position or results of operations.
For “Quantitative and Qualitative Disclosures about Market Risk” affecting Teradyne, see Item 7a. “Quantitative and Qualitative Disclosures about Market Risks,” in our Annual Report on Form 10-K filed with the SEC on March 1, 2010. There were no material changes in our exposure to market risk from those set forth in our Annual Report for the fiscal year ended December 31, 2009.
As of the end of the period covered by this report, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15(b) promulgated under the Exchange Act. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective in ensuring that material information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, including ensuring that such material information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
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During the period covered by this report, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.
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PART II. OTHER INFORMATION
We are subject to various legal proceedings and claims which have arisen in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on our results of operations, financial condition or cash flows.
In addition to the other information set forth in this Form 10-Q, you should carefully consider the factors discussed in Part I, “Item 1A: Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2009, which could materially affect our business, financial condition or future results. The risk factors described in our Annual Report on Form 10-K remain applicable to our business. The risks described in our Annual Report on Form 10-K are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
In November 2007, Teradyne’s Board of Directors (the “Board”) authorized a $400 million stock repurchase program. During the three months ended October 3, 2010, Teradyne did not repurchase any shares of common stock. The cumulative repurchases as of October 3, 2010 total 8.5 million shares of common stock for $102.6 million at an average price of $12.14 per share. As of November 4, 2008, the Board suspended the stock repurchase program.
The following table includes information with respect to repurchases we made of our common stock during the quarter ended October 3, 2010 (in thousands):
Period
July 5, 2010 – August 1, 2010
August 2, 2010 – August 29, 2010
August 30, 2010 – October 3, 2010
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ExhibitNumber
Description
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
/s/ GREGORY R. BEECHER
Gregory R. Beecher
Vice President,
Chief Financial Officer and Treasurer
(Duly Authorized Officerand Principal Financial Officer)
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