UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
For the quarterly period ended March 31, 2013
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.)
600 Riverpark Drive, North Reading,
Massachusetts
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):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The number of shares outstanding of the registrant’s only class of Common Stock as of May 3, 2013 was 190,641,051 shares.
INDEX
Condensed Consolidated Balance Sheets as of March 31, 2013 and December 31, 2012
Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2013 and April 1, 2012
Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2013 and April 1, 2012
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2013 and April 1, 2012
Notes to Condensed Consolidated Financial Statements
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures about Market Risk
Controls and Procedures
PART I
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands,
except per share information)
Current assets:
Cash and cash equivalents
Marketable securities
Accounts receivable, less allowance for doubtful accounts of $4,180 and $4,118 at March 31, 2013 and December 31, 2012, respectively
Inventories:
Parts
Assemblies in process
Finished goods
Deferred tax assets
Prepayments and other current assets
Total current assets
Net property, plant and equipment
Other assets
Retirement plans assets
Intangible assets, net
Goodwill
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, 190,422 shares and 187,908 shares issued and outstanding at March 31, 2013 and December 31, 2012, respectively
Additional paid-in capital
Accumulated other comprehensive income
Retained earnings
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, 2012, 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 assets amortization
Restructuring and other
Total operating expenses
Income from operations
Interest income
Interest expense and other
(Loss) income before income taxes
Income tax (benefit) provision
Net income
Net income per common share:
Basic
Diluted
Weighted average common share—basic
Weighted average common share—diluted
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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Other comprehensive (loss) income:
Available-for-sale marketable securities:
Net unrealized gains on marketable securities arising during period
Less: Reclassification adjustment for net gains included in net income
Net change
Defined benefit pension and postretirement plans:
Amortization of prior service benefit included in net periodic pension and postretirement cost
Other comprehensive (loss) income
Comprehensive income
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Adjustments to reconcile net income to net cash (used for) provided by operating activities:
Depreciation
Amortization
Stock-based compensation
Provision for excess and obsolete inventory
Deferred taxes
Non cash charge for the sale of inventories revalued at the date of acquisition
Contingent consideration adjustment
Other
Changes in operating assets and liabilities:
Accounts receivable
Inventories
Prepayments and other assets
Accounts payable and other accrued expenses
Retirement plans contributions
Net cash (used for) provided by operating activities
Cash flows from investing activities:
Purchases of property, plant and equipment
Purchases of marketable securities
Proceeds from maturities of marketable securities
Proceeds from sales of marketable securities
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
Payments of contingent consideration
Net cash provided by financing activities
Decrease 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. (the “Company” or “Teradyne”) is a leading global supplier of automatic test equipment. Teradyne’s automatic test equipment products and services include:
semiconductor test (“Semiconductor Test”) systems;
wireless test (“Wireless Test”) systems; and
military/aerospace (“Mil/Aero”) test instrumentation and systems, storage test (“Storage Test”) systems, and circuit-board test and inspection (“Commercial Board Test”) systems (collectively these products represent “Systems Test”).
B. Accounting Policies
Basis of Presentation
The condensed consolidated interim financial statements include the accounts of Teradyne and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated. These interim financial statements are unaudited and reflect all normal recurring adjustments that are, in the opinion of management, necessary for the fair presentation of such interim financial statements. Certain prior year’s amounts were reclassified to conform to the current year presentation. The December 31, 2012 condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.
The accompanying financial information should be read in conjunction with the consolidated financial statements and notes thereto contained in Teradyne’s Annual Report on Form 10-K, filed with the U.S. Security and Exchange Commission (“SEC”) on March 1, 2013, for the year ended December 31, 2012.
Preparation of Financial Statements and Use of Estimates
The preparation of consolidated financial statements requires management to make estimates and judgments that affect the amounts reported in the financial statements. Actual results may differ significantly from these estimates.
C. Recently Issued Accounting Pronouncements
In December 2011, the FASB issued ASU No. 2011-11, “Disclosures about Offsetting Assets and Liabilities.” This ASU is intended to enhance the understanding of the effects of netting arrangements on an entity’s financial statements, including financial instruments and derivative instruments that are either offset or subject to a master netting arrangement. The scope of this ASU includes derivatives, sale and repurchase agreements, reverse sale and repurchase agreements, and securities borrowing and lending arrangements. The provisions of this ASU are effective for interim and annual periods beginning on or after January 1, 2013. Teradyne adopted this ASU effective January 1, 2013. See Note D “Financial Instruments and Derivatives.”
In February 2013, the Financial Accounting Standards Board (FASB) issued ASU 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income” amending the disclosure requirements regarding the reporting of amounts reclassified out of accumulated other comprehensive income. The amendment does not change the current requirement for reporting net income or other comprehensive income, but requires additional disclosures about significant amounts reclassified out of accumulated other comprehensive income including the effect of the reclassification
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on the related net income line items. The provisions of this ASU are effective for interim and annual periods beginning on or after January 1, 2013. Teradyne adopted this amendment effective January 1, 2013. See Note I “Accumulated Other Comprehensive Income.”
D. Financial Instruments and Derivatives
Financial Instruments
Teradyne uses the market and income approach to value its financial instruments and there was no change in valuation techniques used by Teradyne during the three months ended March 31, 2013 and April 1, 2012. As defined in ASC 820-10, “Fair Value Measurements and Disclosures,” fair value is the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. ASC 820-10 requires that assets and liabilities are carried at fair value and are classified in one of the following three categories:
Level 1: Quoted prices in active markets for identical assets as of the reporting date.
Level 2: Inputs other than Level 1, that are observable either directly or indirectly as of the reporting date. For example, a common approach for valuing fixed income securities is the use of matrix pricing. Matrix pricing is a mathematical technique used to value securities by relying on the securities’ relationship to other benchmark quoted prices.
Level 3: Unobservable inputs that are not supported by market data. Unobservable inputs are developed based on the best information available, which might include Teradyne’s own data.
Most of Teradyne’s fixed income securities are classified as Level 2, with the exception of U.S. Treasury securities and investments in equity and debt mutual funds, which are classified as Level 1, and contingent consideration, which is classified as Level 3. The majority of Level 2 securities are priced by third party pricing vendors. These pricing vendors utilize the most recent observable market information in pricing these securities or, if specific prices are not available, use other observable inputs like market transactions involving identical or comparable securities.
There were no realized losses recorded in the three months ended March 31, 2013 and April 1, 2012. Realized gains recorded in the three months ended March 31, 2013 and April 1, 2012 were $0.3 million and $0.3 million, respectively. Realized gains are included in interest income.
During the three months ended March 31, 2013 and April 1, 2012, there were no transfers in or out of Level 1, Level 2 or Level 3 financial instruments.
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The following table sets forth by fair value hierarchy Teradyne’s financial assets and liabilities that were measured at fair value on a recurring basis as of March 31, 2013 and December 31, 2012.
Assets
Cash
Cash equivalents
Available-for-sale securities:
U.S. Treasury securities
U.S. government agency securities
Commercial paper
Corporate debt securities
Equity and debt mutual funds
Certificates of deposit and time deposits
Non-U.S. government securities
Total
Liabilities
Contingent consideration
Derivatives
Reported as follows:
Long-term marketable securities
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Changes in the fair value of Level 3 contingent consideration for the three months ended March 31, 2013 were as follows:
Balance at December 31, 2012
Payments
Balance at March 31, 2013
The carrying amounts and fair values of financial instruments at March 31, 2013 and December 31, 2012 were as follows:
Convertible debt(1)
Japan loan
The fair values of cash and cash equivalents, accounts receivable, net and accounts payable approximate the carrying amount due to the short-term maturities of these instruments.
The following tables summarize the composition of available-for-sale marketable securities at March 31, 2013 and December 31, 2012:
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As of March 31, 2013, the fair market value of marketable securities with unrealized losses totaled $43.4 million. Of this value, $0.3 million had unrealized losses greater than one year and $43.1 million had unrealized losses less than one year. As of December 31, 2012, the fair market value of marketable securities with unrealized losses totaled $59.1 million. There were no unrealized losses greater than one year.
The contractual maturities of available-for-sale marketable securities at March 31, 2013 were as follows:
Due within one year
Due after 1 year through 5 years
Due after 5 years through 10 years
Due after 10 years
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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 currency denominated net monetary assets. Teradyne does not use derivative financial instruments for trading or speculative purposes.
To minimize the effect of exchange rate fluctuations associated with the remeasurement of monetary assets and liabilities denominated in foreign currencies, Teradyne enters into foreign currency forward contracts. The change in fair value of these derivatives is recorded directly in earnings, and is used to offset the change in fair value of the monetary assets and liabilities denominated in foreign currencies.
The notional amount of foreign exchange contracts hedging monetary assets and liabilities denominated in foreign currencies was $69.0 million and $64.1 million at March 31, 2013 and December 31, 2012, respectively.
The following table summarizes the fair value of derivative instruments at March 31, 2013 and December 31, 2012.
Derivatives not designated as hedging instruments:
Foreign exchange contracts
Teradyne had no offsetting foreign exchange contracts at March 31, 2013 and December 31, 2012.
The following table summarizes the effect of derivative instruments recognized in the statement of operations during the three months ended March 31, 2013 and April 1, 2012. The table does not reflect the corresponding gains (losses) from the remeasurement of the monetary assets and liabilities denominated in foreign currencies.
See Note E “Debt” regarding derivatives related to convertible senior notes.
E. Debt
Loan Agreement
On March 31, 2009, Teradyne K.K., Teradyne’s wholly-owned subsidiary in Japan, entered into a loan agreement with a local bank in Japan to borrow approximately $10.0 million (the loan is denominated in Japanese Yen). The loan has a term of 5 years and a fixed interest rate of 0.8%. Approximately $6.0 million of the loan is collateralized by a real estate mortgage on Teradyne K.K.’s building and land in Kumamoto, Japan
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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 March 31, 2013, the outstanding loan principal of approximately $3.2 million is included in current debt.
Convertible Senior Notes
In April 2009, Teradyne issued 4.50% convertible senior notes (the “Notes”) at an aggregate principal amount of $190 million. The Notes will mature on March 15, 2014, unless earlier repurchased by Teradyne or converted. The Notes are senior unsecured obligations and rank equally with all of Teradyne’s existing and future senior debt and senior to any of Teradyne’s subordinated debt.
The Notes may be converted, at the option of the holder, under certain circumstances and during certain periods, at an initial conversion rate of approximately 182.65 shares of Teradyne’s common stock per $1,000 principal amount of Notes, which is equivalent to an initial conversion price of approximately $5.48, a 25% conversion premium based on the last reported sale price of $4.38 per share of Teradyne’s common stock on March 31, 2009. The conversion rate is subject to adjustment in certain circumstances including but not limited to Teradyne issuing a cash or stock dividend or effecting a stock split.
During the three months ended March 31, 2013, the following circumstance occurred that allows holders to convert their Notes at their option prior to December 15, 2013: the last reported sale price of Teradyne’s common stock for 20 or more trading days in a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter exceeded 130% of the conversion price in effect on the last trading day of the immediately preceding calendar quarter. As of May 10, 2013, one holder exercised the option to convert two thousand dollars worth of Notes.
Concurrently with the offering of the Notes, Teradyne entered into a convertible note hedge transaction with a strike price equal to the initial conversion price of the Notes, or approximately $5.48. The convertible note hedge allows Teradyne to receive shares of its common stock and/or cash related to the excess conversion value that it would pay to the holders of the Notes upon conversion. The convertible note hedges will cover, subject to customary antidilution adjustments, approximately 34,703,196 shares of Teradyne’s common stock. Teradyne paid approximately $64.6 million for the convertible note hedges.
On March 31, 2009, Teradyne entered into a warrant transaction with a strike price of approximately $7.67 per share, which was 75% higher than the closing price of Teradyne’s common stock. Teradyne received approximately $43.0 million for the warrants.
The convertible note hedge and warrant transaction will generally have the effect of increasing the conversion price of the Notes to approximately $7.67 per share of Teradyne’s common stock, representing a 75% conversion premium based upon the closing price of Teradyne’s common stock on March 31, 2009.
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The Notes are classified as current debt in the balance sheet at March 31, 2013. The tables below represent the components of Teradyne’s convertible senior notes:
Debt principal
Unamortized debt discount
Net carrying amount of the convertible debt
Contractual interest expense
Amortization of the discount component and debt issue fees
Total interest expense on the convertible debt
As of March 31, 2013, the unamortized discount was $16.4 million, which will be amortized over the next twelve months, and the carrying amount of the equity component was $63.4 million. As of March 31, 2013, the conversion rate was equal to the initial conversion price of approximately $5.48 per share and the if-converted value of the Notes was $562.9 million.
F. Deferred Revenue and Customer Advances
Deferred revenue and customer advances consist of the following and are included in short- and long-term deferred revenue and customer advances.
Customer advances
Maintenance, training and extended warranty
Undelivered elements
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.
Balance at beginning of period
Accruals for warranties issued during the period
Adjustments related to pre-existing warranties
Settlements made during the period
Balance at end of period
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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
H. Stock-Based Compensation
Restricted stock unit awards granted to employees vest in equal installments over four years. A portion of restricted stock unit awards granted to executive officers is subject to time-based vesting and a portion is subject to performance-based vesting. The percentage level of performance satisfied for performance-based grants is assessed on or near the anniversary of the grant date and, in turn, that percentage level determines the number of performance-based restricted stock units available for vesting over the vesting period; portions of the performance-based grants not available for vesting will be forfeited. Stock options vest in equal installments over four years, and have a term of seven years from the date of grant.
During the three months ended March 31, 2013, Teradyne granted 1.8 million of restricted stock unit awards to employees at a weighted average grant date fair value of $16.57 and 0.2 million of service-based stock options to executive officers at a weighted average grant date fair value of $6.09.
During the three months ended April 1, 2012, Teradyne granted 1.5 million of restricted stock unit awards to employees at a weighted average grant date fair value of $16.88 and 0.2 million of service-based stock options to executive officers at a weighted average grant date fair value of $6.85.
The fair value of stock options was estimated using the Black-Scholes option-pricing model with the following assumptions:
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.
Effective January 1, 2013, the price paid by employees for Teradyne’s common stock purchased through the employee stock purchase plan is equal to 85% of the stock price on the last business day of the purchase period.
During 2012, the price paid by employees for Teradyne’s common stock purchased through the employee stock purchase plan was equal to 85% of the lower of the stock price on the first or last business day of the purchase period.
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The weighted-average fair value of employee stock purchase rights granted in the three months ended April 1, 2012 was $4.09. The fair value of the employees’ purchase rights granted in the three months ended April 1, 2012 was estimated using the Black-Scholes option-pricing model with the following assumptions:
I. Accumulated Other Comprehensive Income
At March 31, 2013 and December 31, 2012, the accumulated other comprehensive income balances were as follows:
Retirement plans prior service benefit, net of tax of $(125) and $(125)
Unrealized gains on marketable securities, net of tax of $835 and $835
Total accumulated other comprehensive income
Reclassifications out of accumulated other comprehensive income to the statement of operations for the three months ended March 31, 2013 and April 1, 2012, were as follows:
Details about Accumulated Other Comprehensive IncomeComponents
Available-for-Sale Marketable Securities
Unrealized gains
Amortization of Defined Benefit Pension andPostretirement Plans
Prior service benefit
Total Reclassifications
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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
Customer backlog
Total intangible assets
Aggregate intangible asset amortization expense was $18.0 million and $18.4 million, respectively, for the three months ended March 31, 2013 and April 1, 2012. Estimated intangible asset amortization expense for each of the five succeeding fiscal years is as follows:
Year
2013 (remainder)
2014
2015
2016
2017
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K. Net Income per Common Share
The following table sets forth the computation of basic and diluted net income per common share:
Net income for basic net income per share
Weighted average common shares-basic
Effect of dilutive potential common shares:
Incremental shares from assumed conversion of convertible Note(1)
Convertible note hedge warrant shares(2)
Restricted stock units
Stock options
Employee stock purchase rights
Dilutive potential common shares
Weighted average common shares-diluted
Net income per common share-basic
Net income per common share-diluted
The computation of diluted net income per common share for the three months ended March 31, 2013 excludes the effect of the potential exercise of stock options to purchase approximately 0.4 million shares because the effect would have been anti-dilutive.
The computation of diluted net income per common share for the three months ended April 1, 2012 excludes the effect of the potential exercise of stock options to purchase approximately 0.3 million shares and restricted stock units of 1.0 million because the effect would have been anti-dilutive.
With respect to Teradyne’s convertible debt, Teradyne intends to settle its conversion spread (i.e., the intrinsic value of the embedded option feature contained in the convertible debt) in shares. Teradyne accounts for its conversion spread using the treasury stock method.
L. Restructuring and Other
During the three months ended April 1, 2012, Teradyne recorded a $1.9 million fair value adjustment to decrease the LitePoint acquisition contingent consideration.
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Restructuring
In response to a downturn in the industry in 2008 and 2009, Teradyne initiated restructuring activities across its Semiconductor Test and Systems Test segments to reduce costs, principally through headcount reductions and facility consolidations. The remaining accrual for severance and benefits of $0.2 million is reflected in the accrued employees’ compensation and withholdings on the balance sheet and is expected to be paid by October 2013. The remaining accrual for lease payments on vacated facilities of $0.8 million is reflected in the other accrued liabilities and is expected to be paid by October 2013. As of March 31, 2013, Teradyne subleased approximately 20% of its unoccupied space.
Balance at December 31, 2011
Cash payments
Change in estimate
Q2 2012 Activity:
Provision
Q3 2012 Activity:
Q1 2013 Activity:
During the three months ended March 31, 2013, Teradyne recorded a $0.4 million of severance charges related to headcount reductions of 2 people in Systems Test and 2 people in Semiconductor Test.
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
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and to the extent that such contributions are tax deductible. The assets of these plans consist primarily of fixed income and equity securities. In addition, Teradyne has an unfunded supplemental executive defined benefit plan in the United States to provide retirement benefits in excess of levels allowed by the Employment Retirement Income Security Act (“ERISA”) and the Internal Revenue Code (“IRC”), as well as unfunded foreign plans.
Teradyne’s net periodic pension cost was comprised of the following:
Service cost
Interest cost
Expected return on plan assets
Amortization of unrecognized prior service cost
Settlement loss
Total net periodic pension cost
In the three months ended March 31, 2013, Teradyne contributed $0.4 million to the U.S. supplemental executive defined benefit pension plan and $0.3 million to certain qualified plans for non-U.S. subsidiaries.
Postretirement 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 could become eligible for these benefits, and the existing benefit obligation relates primarily to those employees.
Teradyne’s net periodic postretirement benefit was comprised of the following:
Amortization of unrecognized prior service benefit
Total net periodic postretirement benefit
N. Commitments and Contingencies
Purchase Commitments
As of March 31, 2013, Teradyne had entered into purchase commitments for certain components and materials. The purchase commitments aggregate to approximately $192.6 million, of which $190.2 million is for less than one year.
Legal Claims
Teradyne is subject to various legal proceedings and claims which have arisen in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on Teradyne’s results of operations, financial condition or cash flows.
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O. Income Taxes
The income tax benefit of $8.0 million for the three months ended March 31, 2013, included approximately a $6.7 million of discrete tax benefit related to 2012 U.S. federal research and development tax credit retrospectively reinstated under the American Taxpayer Relief Act of 2012. The income tax expense for the three months ended April 1, 2012, of $7.7 million included a $3.2 million of discrete tax benefit resulting from reductions in uncertain tax positions related to statute expirations of transfer pricing issues.
P. Segment Information
Teradyne has three operating segments (Semiconductor Test, Wireless Test, and Systems Test), which are its reportable segments. The Semiconductor Test segment includes operations related to the design, manufacturing and marketing of semiconductor test products and services. The Wireless Test segment includes operations related to design, manufacturing and marketing of wireless test products and services. The Systems Test segment includes operations related to design, manufacturing and marketing of products and services for military/aerospace instrumentation test, storage test and circuit-board test. Each operating segment has a segment manager who is directly accountable to and maintains regular contact with Teradyne’s chief operating decision maker (Teradyne’s chief executive officer) to discuss operating activities, financial results, forecasts, and plans for the segment.
Teradyne evaluates performance based on several factors, of which the primary financial measure is business segment income before income taxes. The accounting policies of the business segments are the same as those described in Note B “Accounting Policies” in Teradyne’s Annual Report on Form 10-K for the year ended December 31, 2012. Segment information is as follows:
Three months ended March 31, 2013:
Net revenues
Income (loss) before income taxes(1)(2)
Three months ended April 1, 2012:
Included in the Semiconductor Test segment are charges for the following:
Cost of revenues—provision for excess and obsolete inventory
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Included in the Wireless Test segment are charges for the following:
Cost of revenues—inventory step-up
Included in the Systems Test segment are charges for the following:
Included in Corporate and Eliminations are credits for the following:
Q. Stock Repurchase Program
In November 2010, Teradyne’s board of directors authorized a stock repurchase program for up to $200 million. In the three months ended March 31, 2013 and April 1, 2012, Teradyne did not repurchase any shares. Cumulatively, as of March 31, 2013, Teradyne has repurchased 2.6 million shares of common stock for $31.2 million at an average price of $11.84.
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Statements in this Quarterly Report on Form 10-Q which are not historical facts, so called “forward looking statements,” are made pursuant to the safe harbor provisions of Section 21E of the Securities Exchange Act of 1934, as amended. Investors are cautioned that all forward looking statements involve risks and uncertainties, including those detailed in our filings with the Securities and Exchange Commission. See also Part II, Item 1A of this Quarterly Report on Form 10-Q and Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2012. Readers are cautioned not to place undue reliance on these forward-looking statements which reflect management’s analysis only as of the date hereof. We assume no obligation to update these forward-looking statements to reflect actual results or changes in factors or assumptions affecting forward-looking statements, except as may be required by law.
Overview
We are a leading global supplier of automatic test equipment. We design, develop, manufacture and sell automatic test systems and solutions used to test semiconductors, wireless products, hard disk drives and circuit boards in the consumer electronics, wireless, automotive, industrial, computing, communications and aerospace and defense industries. Our automatic test equipment products and services include:
military/aerospace (“Mil/Aero”) test instrumentation and systems, storage test (“Storage Test”) systems, and circuit-board test and inspection (“Commercial Board Test”) systems, collectively these products represent “Systems Test”.
We have a broad customer base which includes integrated device manufacturers (“IDMs”), outsourced semiconductor assembly and test providers (“OSATs”), wafer foundries, fabless companies that design, but contract with others for the manufacture of integrated circuits (“ICs”), developers of wireless devices and consumer electronics, manufacturers of circuit boards, automotive suppliers, wireless product manufacturers, storage device manufacturers, aerospace and military contractors.
In 2011, we acquired LitePoint Corporation (“LitePoint”) to expand our product portfolio of test equipment in the wireless test sector. LitePoint designs, develops, and supports advanced wireless test solutions for the development and manufacturing of wireless devices, including smart phones, tablets, notebooks/laptops, personal computer peripherals, and other Wi-Fi and cellular enabled devices. LitePoint is our Wireless Test segment.
The sales of our products and services are dependent, to a large degree, on customers who are subject to cyclical trends in the demand for their products. These cyclical periods have had, and will continue to have, a significant effect on our business since our customers often delay or accelerate purchases in reaction to changes in their businesses and to demand fluctuations in the semiconductor industry. Historically, these demand fluctuations have resulted in significant variations in our results of operations. This was particularly relevant beginning in the fourth quarter of fiscal year 2008 where we saw a significant decrease in revenues 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.
We believe our acquisitions of LitePoint, Eagle Test and Nextest, and our entry into the high speed memory and storage test markets have enhanced our opportunities for growth. We will continue to invest in our business to expand further our addressable markets while tightly managing our costs.
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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. There have been no significant changes during the three months ended March 31, 2013 to the items disclosed as our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012.
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SELECTED RELATIONSHIPS WITHIN THE CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
Percentage of total net revenues:
Acquired intangible asset amortization
Results of Operations
First Quarter 2013 Compared to First Quarter 2012
Book to Bill Ratio
Book to bill ratio is calculated as net bookings divided by net sales. Book to bill ratio by reportable segment was as follows:
Semiconductor Test
Wireless Test
Systems Test
Total Company
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Revenues
Net revenues by reportable segments were as follows:
The decrease of $56.1 million or 21% in Semiconductor Test revenues from the three months ended April 1, 2012 to the three months ended March 31, 2013, was primarily due to a decrease in system-on-a-chip (“SOC”) test product sales. The decrease in Systems Test revenue of $62.5 million or 64% was primarily due to a decrease in sales due to lower product volume in Storage Test systems.
Our revenues by region as a percentage of total net revenue were as follows:
United States
China
Taiwan
Korea
Europe
Singapore
Malaysia
Japan
Philippines
Thailand
Rest of World
Gross Profit
Our gross profit was as follows:
Percent of Total Revenue
Gross profit as a percent of revenue increased by 6.6 percentage points from the three months ended April 1, 2012 to the three months ended March 31, 2013, primarily due to a favorable product mix in SOC Semiconductor Test products and lower Storage Test systems sales.
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We assess the carrying value of our inventory on a quarterly basis by estimating future demand and comparing that demand against on-hand and on-order inventory positions. Forecasted revenue information is obtained from the sales and marketing groups and incorporates factors such as backlog and future revenue demand. This quarterly process identifies obsolete and excess inventory. Obsolete inventory, which represents items for which there is no demand, is fully reserved. Excess inventory, which represents inventory items that are not expected to be consumed during the next four quarters, is written-down to estimated net realizable value.
During the three months ended March 31, 2013, we recorded an inventory provision of $3.8 million due to the downward revisions to previously forecasted demand levels. Of the $3.8 million of total excess and obsolete provisions, $2.7 million was related to Wireless Test, $0.9 million was related to Systems Test, and $0.2 million was related to Semiconductor Test.
During the three months ended April 1, 2012, we recorded an inventory provision of $1.6 million included in cost of revenues, due to the downward revisions to previously forecasted demand levels. Of the $1.6 million of total excess and obsolete provisions recorded in the three months ended April 1, 2012, $0.9 million was related to Systems Test, $0.5 million was related to Wireless Test, and $0.2 million was related to Semiconductor Test.
During the three months ended March 31, 2013 and April 1, 2012, we scrapped $0.6 million and $4.1 million of inventory, respectively. During the three months ended March 31, 2013 and April 1, 2012, we sold $1.8 million and $1.3 million, respectively, of previously written-down or written-off inventory. As of March 31, 2013, we had inventory related reserves for amounts which had been written-down or written-off totaling $143.3 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 $1.5 million in engineering and development expenses from the three months ended April 1, 2012 to the three months ended March 31, 2013, was due primarily to increased spending in Semiconductor Test, partially offset by lower variable compensation.
Selling and Administrative
Selling and administrative expenses were as follows:
The increase of $1.3 million in selling and administrative expenses from the three months ended April 1, 2012 to the three months ended March 31, 2013, was due primarily to increased sales and marketing spending in Wireless Test and Semiconductor Test, partially offset by lower variable compensation.
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Restructuring and Other
During the three months ended April 1, 2012, we recorded a $1.9 million fair value adjustment to decrease the LitePoint acquisition contingent consideration.
In response to a downturn in the industry in 2008 and 2009, we initiated restructuring activities across our Semiconductor Test and Systems Test segments to reduce costs, principally through headcount reductions and facility consolidations. The remaining accrual for severance and benefits of $0.2 million is reflected in the accrued employees’ compensation and withholdings on the balance sheet and is expected to be paid by October 2013. The remaining accrual for lease payments on vacated facilities of $0.8 million is reflected in the other accrued liabilities and is expected to be paid by October 2013. As of March 31, 2013, we subleased approximately 20% of our unoccupied space.
During the three months ended March 31, 2013, we recorded $0.4 million of severance charges related to headcount reductions of 2 people in Systems Test and 2 people in Semiconductor Test.
Interest and Other
Interest income increased by $0.2 million from the three months ended April 1, 2012 to the three months ended March 31, 2013, due primarily to higher cash and marketable securities balances in the first quarter of 2013. Interest expense and other increased by $0.8 million from the three months ended April 1, 2012 to the three months ended March 31, 2013, due primarily to higher interest expense from increased convertible debt discount amortization.
Income Taxes
For the three months ended March 31, 2013, we recorded a tax benefit of $8.0 million which consisted primarily of foreign tax provisions and a U.S. deferred tax benefit. The tax benefit of $8.0 million included approximately $6.7 million of a discrete tax benefit related to a 2012 U.S. federal research and development tax credit retrospectively reinstated under the American Taxpayer Relief Act of 2012. For the three months ended April 1, 2012, we recorded a tax provision of $7.7 million, which primarily consisted of foreign taxes and a U.S. deferred tax provision.
On a quarterly basis, we evaluate the realizability of our deferred tax assets by jurisdiction and assess the need for a valuation allowance. At March 31, 2013, we believe that we will ultimately realize the deferred tax assets recorded on our condensed consolidated balance sheet. However, should we believe that it is more likely than not that our deferred tax assets would not be realized, our tax provision would increase in the period in which we determined that the realizability was not likely. We consider the probability of future taxable income and our historical profitability, among other factors, in assessing the realizability of our deferred tax assets.
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Contractual Obligations
The following table reflects our contractual obligations at March 31, 2013:
Debt Obligations
Interest on Debt
Contingent Acquisition Payments
Operating Lease Obligations
Purchase Obligations
Retirement Plan Contributions
Other Long-Term Liabilities Reflected on the Balance Sheet under GAAP(1)
Liquidity and Capital Resources
Our cash, cash equivalents and marketable securities balances decreased by $50.1 million in the three months ended March 31, 2013, to $956.3 million. Cash activity for the three months ended March 31, 2013 and April 1, 2012 was as follows:
Cash provided by operating activities:
Net income, adjusted for non-cash items
Change in operating assets and liabilities
Total cash (used for) provided by operating activities
Total cash used for investing activities
Total cash provided by financing activities
In the three months ended March 31, 2013, changes in operating assets and liabilities used cash of $85.9 million. This was due to an $18.3 million increase in operating assets and a $67.6 million decrease in operating liabilities.
The increase in operating assets was due to a $13.2 million increase in accounts receivable due to higher sales volume, a $4.0 million increase in inventories, and $1.1 million increase in other assets primarily due to an increase in prepayments. The decrease in operating liabilities was due to a $43.3 million decrease in accrued employee compensation due primarily to variable compensation and employee stock awards payroll taxes payments, a $10.1 million decrease in customer advance payments and deferred revenue, a $9.1 million decrease in accrued income taxes, a $4.8 million decrease in other accrued liabilities and a $1.1 million of retirement plan contributions, partially offset by a $0.8 million increase in accounts payable due to increased sales volume.
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Investing activities during the three months ended March 31, 2013 used cash of $5.8 million, due to $124.5 million used for purchases of marketable securities and $22.5 million used for purchases of property, plant and equipment, partially offset by proceeds from maturities and sales of marketable securities that provided cash of $119.5 million and $21.7 million, respectively.
Financing activities during the three months ended March 31, 2013 provided cash of $8.6 million, $8.9 million was from the issuance of common stock under stock option and stock purchase plans, partially offset by $0.3 million of cash used for payments related to LitePoint acquisition contingent consideration.
In the three months ended April 1, 2012, changes in operating assets and liabilities used cash of $79.1 million. This was due to a $66.7 million increase in operating assets and a $12.4 million decrease in operating liabilities.
The increase in operating assets was due to a $92.2 million increase in accounts receivable resulting from higher sales volume, partially offset by $23.6 million decrease in inventories and a $1.9 million decrease in prepayments. The decrease in operating liabilities was due to a $46.1 million decrease in accrued employee compensation due primarily to variable compensation payments, a $4.2 million decrease in customer advance payments due to shipments of systems prepaid by customers, $1.1 million of retirement plan contributions, partially offset by a $36.5 million increase in accounts payable due to increase sales volume, and a $2.5 million increase in deferred revenue.
Investing activities during the three months ended April 1, 2012 used cash of $54.4 million, due to $80.1 million used for purchases of marketable securities and $27.1 million used for purchases of property, plant and equipment, partially offset by proceeds from maturities and sales of marketable securities that provided cash of $46.5 million and $6.3 million, respectively.
Financing activities during the three months ended April 1, 2012 provided cash of $2.9 million, $9.9 million was from the issuance of common stock under stock option and stock purchase plans, partially offset by $5.8 million of cash used for payments related to LitePoint acquisition contingent consideration and $1.2 million of cash used for payments on long-term debt related to the Japan loan.
We believe our cash, cash equivalents and marketable securities balance will be sufficient to meet working capital and expenditure needs for at least the next twelve months. The amount of cash, cash equivalents and marketable securities in the U.S. and our operations in the U.S. provide sufficient liquidity to fund our business activities in the U.S. We have approximately $300 million of cash outside the U.S. that if repatriated would incur additional taxes. Inflation has not had a significant long-term impact on earnings.
Equity Compensation Plans
As discussed in Note P “Stock Based Compensation” in our 2012 Form 10-K, we have a 1996 Employee Stock Purchase Plan and a 2006 Equity and Cash Compensation Incentive Plan (the “2006 Equity Plan”).
The purpose of the 1996 Employee Stock Purchase Plan is to encourage stock ownership by all eligible employees of Teradyne. The purpose of the 2006 Equity Plan is to provide equity ownership and compensation opportunities in Teradyne to our employees, officers, directors, consultants and/or advisors. Both plans were approved by our shareholders.
Recently Issued Accounting Pronouncements
In December 2011, the FASB issued ASU No. 2011-11, “Disclosures about Offsetting Assets and Liabilities.” This ASU is intended to enhance the understanding of the effects of netting arrangements on an entity’s financial statements, including financial instruments and derivative instruments that are either offset or
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subject to a master netting arrangement. The scope of this ASU includes derivatives, sale and repurchase agreements, reverse sale and repurchase agreements, and securities borrowing and lending arrangements. The provisions of this ASU are effective for interim and annual periods beginning on or after January 1, 2013. We adopted this ASU effective January 1, 2013. See Note D “Financial Instruments and Derivatives.”
In February 2013, the Financial Accounting Standards Board (FASB) issued ASU 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income” amending the disclosure requirements regarding the reporting of amounts reclassified out of accumulated other comprehensive income. The amendment does not change the current requirement for reporting net income or other comprehensive income, but requires additional disclosures about significant amounts reclassified out of accumulated other comprehensive income including the effect of the reclassification on the related net income line items. The provisions of this ASU are effective for interim and annual periods beginning on or after January 1, 2013. We adopted this amendment effective January 1, 2013. See Note I “Accumulated Other Comprehensive Income.”
For “Quantitative and Qualitative Disclosures about Market Risk” affecting Teradyne, see Item 7a, “Quantitative and Qualitative Disclosures about Market Risks,” in our Annual Report on Form 10-K filed with the SEC on March 1, 2013. There were no material changes in our exposure to market risk from those set forth in our Annual Report for the fiscal year ended December 31, 2012.
As of the end of the period covered by this report, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15(b) promulgated under the Exchange Act. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective in ensuring that material information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, including ensuring that such material information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
During the period covered by this report, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.
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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.
You should carefully consider the factors discussed in Part I, “Item 1A: Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2012, which could materially affect our business, financial condition or future results. The risk factors described in our Annual Report on Form 10-K remain applicable to our business.
The risks described in our Annual Report on Form 10-K are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
In November 2010, Teradyne’s board of directors authorized a stock repurchase program for up to $200 million. Cumulatively, as of March 31, 2013, we have repurchased 2.6 million shares of common stock for $31.2 million at an average price of $11.84.
The following table includes information with respect to repurchases we made of our common stock during the three months ended March 31, 2013 (in thousands except per share price):
Period
January 1, 2013 – January 27, 2013
January 28, 2013 – February 24, 2013
February 25, 2013 – March 31, 2013
We satisfy the U.S. minimum statutory withholding tax obligation due upon the vesting and the conversion of restricted stock units into shares of our common stock, by automatically withholding from the shares being issued a number of shares with an aggregate fair market value on the date of such vesting and conversion that would satisfy the minimum withholding amount due.
Not Applicable
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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 Officer
and Principal Financial Officer)
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