UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
For the quarterly period ended September 28, 2014
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 October 31, 2014 was 216,494,252 shares.
INDEX
Condensed Consolidated Balance Sheets as of September 28, 2014 and December 31, 2013
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 28, 2014 and September 29, 2013
Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 28, 2014 and September 29, 2013
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 28, 2014 and September 29, 2013
PART I
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
Current assets:
Cash and cash equivalents
Marketable securities
Accounts receivable, less allowance for doubtful accounts of $2,438 and $2,912 at September 28, 2014 and December 31, 2013, respectively
Inventories:
Parts
Assemblies in process
Finished goods
Deferred tax assets
Prepayments
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
Total liabilities
Commitments and contingencies (Note O)
Common stock, $0.125 par value, 1,000,000 shares authorized, 216,482 shares and 191,731 shares issued and outstanding at September 28, 2014 and December 31, 2013, 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, 2013, 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 (exclusive of acquired intangible assets amortization shown separately below)
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 (income) expense
Income before income taxes
Income tax provision
Net income
Net income per common share:
Basic
Diluted
Weighted average common shares—basic
Weighted average common shares—diluted
Cash dividend declared per common share
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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Other comprehensive income (loss):
Available-for-sale marketable securities:
Net unrealized gains (losses) on marketable securities arising during period, net of tax (benefit) expense of $(139), $358, $1,103, $(367)
Less: Reclassification adjustment for net gains included in net income, net of tax (benefit) of $(348), $(109), $(591), $(231)
Defined benefit pension and post-retirement plans:
Amortization of net prior service benefit included in net periodic pension expense and post-retirement income, net of tax (benefit) of $(42), $(40), $(127), $(119)
Other comprehensive income (loss)
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 provided by operating activities:
Depreciation
Amortization
Stock-based compensation
Provision for excess and obsolete inventory
Deferred taxes
Contingent consideration fair value adjustment
Tax benefit related to stock options and restricted stock units
Retirement plans actuarial gains
Impairment loss on property, plant and equipment
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 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
Proceeds from life insurance
Net cash used for investing activities
Cash flows from financing activities:
Issuance of common stock under employee stock purchase and stock options plans
Payments of dividend
Payments of long-term debt
Payments of contingent consideration
Net cash (used for) provided by financing activities
(Decrease) 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. (the “Company” or “Teradyne”) is a leading global supplier of automatic test equipment. Teradyne’s automatic test equipment products and services include:
B. Accounting Policies
Basis of Presentation
The consolidated interim financial statements include the accounts of Teradyne and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated. These interim financial statements are unaudited and reflect all normal recurring adjustments that are, in the opinion of management, necessary for the fair presentation of such interim financial statements. Certain prior year’s amounts were reclassified to conform to the current year presentation. The December 31, 2013 condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.
The accompanying financial information should be read in conjunction with the consolidated financial statements and notes thereto contained in Teradyne’s Annual Report on Form 10-K, filed with the U.S. Securities and Exchange Commission (“SEC”) on February 28, 2014, for the year ended December 31, 2013.
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
On July 18, 2013, Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2013-11, “Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” Under this ASU, unrecognized tax benefits will be netted against all available same-jurisdiction loss or other tax carryforwards that would be utilized, rather than only against carryforwards that are created by unrecognized tax benefits. The provisions of this ASU are effective for interim and annual periods beginning on or after December 15, 2013. Teradyne’s implementation of this ASU did not have a material impact on Teradyne’s financial position and results of operations.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”which will replace numerous requirements in U.S. GAAP, including industry-specific requirements, and provide companies with a single revenue recognition model for recognizing revenue from contracts with customers. The
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core principle of the new standard is that a company should recognize revenue to show the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The new standard will be effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. For Teradyne, the standard will be effective in the first quarter of 2017. The two permitted transition methods under the new standard are the full retrospective method, in which case the standard would be applied to each prior reporting period presented, or the modified retrospective method, in which case the cumulative effect of applying the standard would be recognized at the date of initial application. Teradyne has not yet selected a transition method. Teradyne is currently evaluating the impact of this ASU on its financial position and results of operations.
D. Financial Instruments and Derivatives
Cash Equivalents
Teradyne considers all highly liquid investments with maturities of three months or less at the date of acquisition to be cash equivalents.
Financial Instruments
Teradyne accounts for its investments in debt and equity securities in accordance with the provisions of ASC 320-10, “Investments—Debt and Equity Securities.” ASC 320-10 requires that certain debt and equity securities be classified into one of three categories; trading, available-for-sale or held-to-maturity securities. As of September 28, 2014, Teradyne’s investments in debt and equity securities were classified as available-for-sale and recorded at their fair market value.
On a quarterly basis, Teradyne reviews its investments to identify and evaluate those that have an indication of a potential other-than-temporary impairment. Factors considered in determining whether a loss is other-than-temporary include:
Teradyne uses the market and income approach techniques to value its financial instruments and there were no changes in valuation techniques during the three and nine months ended September 28, 2014 and September 29, 2013. As defined in ASC 820-10 “Fair Value Measurements and Disclosures”, fair value is the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. ASC 820-10 requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:
Level 1: Quoted prices in active markets for identical assets as of the reporting date.
Level 2: Inputs other than Level 1, that are observable either directly or indirectly as of the reporting date. For example, a common approach for valuing fixed income securities is the use of matrix pricing, a technique used to value securities by relying on the securities’ relationship to other benchmark quoted prices, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
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.
Substantially all of Teradyne’s fixed income securities are classified as Level 2, with the exception of investments in equity and debt mutual funds, which are classified as Level 1, and contingent consideration, which
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is classified as Level 3. The majority of Teradyne’s Level 2 securities are priced by 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.
During the nine months ended September 28, 2014 and September 29, 2013, there were no transfers in or out of Level 1, Level 2 or Level 3 financial instruments.
Realized gains and (losses) for the three and nine months ended September 28, 2014 and September 29, 2013 were as follows:
Realized gains
Realized (losses)
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 September 28, 2014 and December 31, 2013.
Assets
Cash
Cash equivalents
Available-for-sale securities:
U.S. Treasury securities
U.S. government agency securities
Commercial paper
Corporate debt securities
Certificates of deposit and time deposits
Equity and debt mutual funds
Total
Liabilities
Contingent consideration
Derivatives
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Reported as follows:
Long-term marketable securities
Non-U.S. government securities
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Contingent consideration relates to Teradyne’s acquisition of ZTEC Instruments, Inc. (“ZTEC”) on October 25, 2013. The total purchase price included $2.2 million in fair value of contingent consideration payable upon achievement of certain customer order and revenue targets through 2015. The maximum amount of contingent consideration that could be paid is $5.0 million. Based on the projected results for the acquisition, no value was assigned to the revenue component of the contingent consideration.
The acquisition date valuation of the customer order component of the contingent consideration utilized the following assumptions: (1) probability of meeting each benchmark; (2) expected timing of meeting each benchmark; and (3) discount rate reflecting the risk associated with the expected payments. The probabilities and timing for each benchmark were estimated based on a review of the historical and projected results. A discount rate of 5.2 percent was selected based on the cost of debt for the business, as a significant portion of the risk in achieving the customer order contingent consideration was captured in the probabilities assigned to meeting each benchmark. Teradyne assesses these assumptions and estimates on a quarterly basis as additional data impacting the assumptions is obtained. During the three and nine months ended September 28, 2014, the fair value of the customer order component of the contingent consideration was reduced by $0.6 million based on updated assumptions and estimates. The fair value reduction was recorded as a gain in restructuring and other in the statement of operations.
Changes in the fair value of Level 3 contingent consideration for the three and nine months ended September 28, 2014 and September 29, 2013 were as follows:
Contingent consideration related to Teradyne’s acquisition of ZTEC
in October 2013
Balance at December 31, 2013
Contingent consideration payments
Balance at March 30, 2014
Balance at June 29, 2014
Fair value adjustment
Balance at September 28, 2014
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Contingent consideration related to Teradyne’s acquisition of LitePoint
in October 2011
Balance at December 31, 2012
Balance at March 31, 2013
Balance at June 30, 2013
Balance at September 29, 2013
The carrying amounts and fair values of Teradyne’s financial instruments at September 28, 2014 and December 31, 2013 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 nature of these instruments.
The following tables summarize the composition of available-for-sale marketable securities at September 28, 2014 and December 31, 2013:
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As of September 28, 2014, the fair market value of investments with unrealized losses was $212.2 million. Of this value, $5.0 million had unrealized losses greater than one year and $207.2 million had unrealized losses less than one year. As of December 31, 2013, the fair market value of investments with unrealized losses was $241.8 million. Of this value, $0.9 million had unrealized losses greater than one year and $240.9 million had unrealized losses less than one year. Teradyne reviews its investments to identify and evaluate investments that have an indication of possible impairment. Based on this review, Teradyne determined that the unrealized losses related to these investments, at September 28, 2014 and December 31, 2013, were temporary.
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The contractual maturities of investments held at September 28, 2014 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
Contractual maturities of investments held at September 28, 2014 exclude equity and debt mutual funds as they do not have a contractual maturity date.
Teradyne conducts business in a number of foreign countries, with certain transactions denominated in local currencies. The purpose of Teradyne’s foreign currency management is to minimize the effect of exchange rate fluctuations on certain foreign currency denominated monetary assets and liabilities. Teradyne does not use derivative financial instruments for trading or speculative purposes.
To minimize the effect of exchange rate fluctuations associated with the remeasurement of monetary assets and liabilities denominated in foreign currencies, Teradyne enters into foreign currency forward contracts. The change in fair value of these derivatives is recorded directly in earnings, and is used to offset the change in value of the monetary assets and liabilities denominated in foreign currencies.
The notional amount of foreign currency forward contracts was $67.9 million and $74.8 million at September 28, 2014 and December 31, 2013, respectively.
The fair value of the outstanding contracts was a loss of $0.6 million and a gain of $0.2 million at September 28, 2014 and December 31, 2013, respectively. The following table summarizes the fair value of derivative instruments at September 28, 2014 and December 31, 2013:
Derivatives not designated as hedging instruments:
Foreign currency forward contracts
Teradyne had no offsetting foreign exchange contracts at September 28, 2014 and December 31, 2013.
In the three and nine months ended September 28, 2014, Teradyne recorded net realized gains (losses) of $0.2 million and $(1.6) million, respectively, related to foreign currency forward contracts hedging net monetary positions. In the three and nine months ended September 29, 2013, Teradyne recorded net realized gains of $0.0 million and $4.1 million, respectively, related to foreign currency forward contracts hedging net monetary positions. Gains and losses on foreign currency forward contracts and foreign currency remeasurement gains and losses on monetary assets and liabilities are included in interest expense and other.
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The following table summarizes the effect of derivative instruments recognized in the statement of operations during the three and nine months ended September 28, 2014 and September 29, 2013. The table does not reflect the corresponding gains (losses) from the remeasurement of the monetary assets and liabilities denominated in foreign currencies. For the three and nine months ended September 28, 2014, (losses) gains from the remeasurement of the monetary assets and liabilities denominated in foreign currencies were $(0.4) million and $0.9 million, respectively. For the three and nine months ended September 29, 2013, losses from the remeasurement of the monetary assets and liabilities denominated in foreign currencies were $(0.4) million and $(5.0) million, respectively.
Foreign exchange contracts
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 was denominated in Japanese Yen). The loan had a term of 5 years and a fixed interest rate of 0.8%. Approximately $6.0 million of the loan was collateralized by a real estate mortgage on Teradyne K.K.’s building and land in Kumamoto, Japan and approximately $4.0 million was unsecured. Teradyne, Inc. guaranteed payment of the loan obligation. The loan was amortized over the term of the loan with semiannual principal payments of approximately $1.0 million on September 30 and March 30 each year. The final principal and interest payments were made in March 2014.
Convertible Senior Notes
In April 2009, Teradyne issued 4.50% convertible senior notes (the “Notes”) at an aggregate principal amount of $190 million and a conversion price of $5.4750 or 182.65 shares of Teradyne’s common stock per $1,000 principal amount of Notes. The Notes had a maturity date of March 15, 2014. Substantially all of the Notes were converted prior to March 15, 2014 and were “net share settled,” meaning that the holders received, for each $1,000 in principal amount of Notes, $1,000 in cash and approximately 131.95 shares of Teradyne common stock (calculated by taking 182.65 shares less 50.7 shares). The 50.7 shares were determined by dividing the $1,000 principal amount by the $19.74 average trading price of Teradyne’s common stock over the 25 day trading period from February 5, 2014 to March 12, 2014.
Teradyne satisfied the Notes “net share settlement” by paying the aggregate principal amount of $190 million in cash and issuing 25.1 million shares of common stock. On March 13, 2014, Teradyne exercised its call option agreement entered into with Goldman, Sachs & Co. (the “hedge counterparty”) at the time of issuance of the Notes and received 25.1 million shares of Teradyne’s common stock, which were retired.
From June 17, 2014 to September 17, 2014, the hedge counterparty exercised its warrant agreement entered into with Teradyne at the time of issuance of the Notes. The warrants were net share settled. In the three and nine months ended September 28, 2014, Teradyne issued 19.3 million and 21.2 million shares of its common stock, respectively, for warrants exercised at a weighted average strike price of $7.6348 and $7.6351, respectively.
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The tables below represent the components of Teradyne’s convertible senior notes:
Debt principal
Unamortized debt discount
Net carrying amount of the convertible debt
The interest expense on Teradyne’s convertible senior notes for the three and nine months ended September 28, 2014 and September 29, 2013 was as follows:
Contractual interest expense
Amortization of the discount component and debt issue fees
Total interest expense on the convertible debt
F. Prepayments
Prepayments consist of the following and are included in prepayments on the balance sheet:
Contract manufacturer prepayments
Prepaid maintenance and other services
Prepaid taxes
Other prepayments
Total prepayments
G. Deferred Revenue and Customer Advances
Deferred revenue and customer advances consist of the following and are included in short and long-term deferred revenue and customer advances on the balance sheet:
Extended warranty
Equipment maintenance and training
Customer advances
Undelivered elements
Total deferred revenue and customer advances
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H. 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 warranty balance below is included in other accrued liabilities on the balance sheet.
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
When Teradyne receives revenue for extended warranty beyond one year, it is deferred and recognized on a straight-line basis over the contract period. Related costs are expensed as incurred. The extended warranty balance below is included in short and long-term deferred revenue and customer advances on the balance sheet.
Deferral of new extended warranty revenue
Recognition of extended warranty deferred revenue
I. Stock-Based Compensation
In January 2014, Teradyne granted 0.1 million of performance-based restricted stock units (“PRSUs”) to its executive officers with a performance metric based on relative total shareholder return (“TSR”). Teradyne’s three-year TSR performance will be measured against the Philadelphia Semiconductor Index, which consists of thirty companies in the semiconductor device and capital equipment industries. The final number of TSR PRSUs that vest will vary based upon the level of performance achieved from 200% of the target shares to 0% of the target shares. All TSR PRSUs will vest upon the three-year anniversary of the January 24, 2014 grant date. No TSR PRSUs will vest if the executive officer is no longer an employee at the end of the three-year period. The TSR PRSUs are valued using a Monte Carlo simulation model. The number of units expected to be earned, based upon the achievement of the TSR market condition, is factored into the grant date Monte Carlo valuation. Compensation expense is recognized on a straight-line basis over the three-year service period. Compensation expense is recognized regardless of the eventual number of units that are earned based upon the market condition, provided the executive officer remains an employee at the end of the three-year period. Compensation expense is reversed if the executive officer is not an employee at the end of the three-year service period. During
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the nine months ended September 28, 2014, Teradyne granted 0.1 million TSR performance-based restricted stock unit awards with an estimated grant date fair value of $22.06 per award. The fair value was estimated using the Monte Carlo simulation model with the following assumptions:
Risk-free interest rate
Teradyne volatility-historical
Philadelphia Semiconductor Index volatility-historical
Dividend yield
Expected volatility was based on the historical volatility of Teradyne’s stock and the Philadelphia Semiconductor Index over the most recent three-year period. The risk-free interest rate was determined using the U.S. Treasury yield curve in effect at the time of grant. Dividend yield was based upon an estimated annual dividend amount of $0.24 per share divided by Teradyne’s January 24, 2014 stock price of $19.16.
During the nine months ended September 28, 2014, Teradyne granted 1.7 million of service-based restricted stock unit awards to employees at a weighted average grant date fair value of $19.09 and 0.1 million of service-based stock options to executive officers at a weighted average grant date fair value of $5.49.
During the nine months ended September 29, 2013, Teradyne granted 1.9 million of service-based restricted stock unit awards to employees at a weighted average grant date fair value of $16.60 and 0.2 million of service-based stock options to executive officers at a weighted average grant date fair value of $6.09.
Restricted stock unit awards granted to employees vest in equal annual installments over four years. Stock options vest in equal annual installments over four years, and have a term of seven years from the date of grant.
The fair value of stock options was estimated using the Black-Scholes option-pricing model with the following assumptions:
Expected life (years)
Volatility-historical
Teradyne determined the stock options’ expected life based upon historical exercise data for executive officers, the age of the executive officers and the terms of the stock option grant. Volatility was determined using historical volatility for a period equal to the expected life. The risk-free interest rate was determined using the U.S. Treasury yield curve in effect at the time of grant. Dividend yield was based upon an estimated annual dividend amount of $0.24 per share divided by Teradyne’s January 24, 2014 stock price of $19.16.
Effective January 31, 2014, Michael Bradley retired as Chief Executive Officer of Teradyne. Mr. Bradley will continue to serve on Teradyne’s Board of Directors. On January 22, 2014, Teradyne entered into an agreement (the “Retirement Agreement”) with Mr. Bradley. Under the Retirement Agreement, Mr. Bradley’s unvested restricted stock units and stock options granted prior to his retirement date will continue to vest in accordance with their terms through January 31, 2017; and any vested options or options that vest during that period may be exercised for the remainder of the applicable option term. In the Retirement Agreement, Mr. Bradley agreed to be bound by non-competition and non-solicitation restrictions through January 31, 2017. In January 2014, Teradyne recorded a one-time charge to stock-based compensation expense of $6.6 million related to the Retirement Agreement.
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J. Accumulated Other Comprehensive Income
Changes in accumulated other comprehensive income, which is presented net of tax, consist of the following:
Balance at December 31, 2013, net of tax of $794, $(284)
Other comprehensive income before reclassifications, net of tax of $1,103, $0
Amounts reclassified from accumulated other comprehensive income, net of tax of $(591), $(127)
Net current period other comprehensive income
Balance at September 28, 2014, net of tax of $1,306, $(411)
Reclassifications out of accumulated other comprehensive income to the statement of operations for the three and nine months ended September 28, 2014 and September 29, 2013 were as follows:
Details about Accumulated Other Comprehensive Income
Components
Unrealized gains, net of tax of $348, $109, $591, $231
Amortization of defined benefit pension and postretirement plans:
Prior service benefit, net of tax of $42, $40, $127, $119
Total reclassifications
K. Intangible Assets
Amortizable intangible assets consist of the following and are included in intangible assets, net on the balance sheet:
Developed technology
Customer relationships
Trade names and trademarks
Total intangible assets
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Customer backlog
Aggregate intangible asset amortization expense was $18.3 million and $54.8 million, respectively, for the three and nine months ended September 28, 2014 and $18.1 million and $54.2 million, respectively, for the three and nine months ended September 29, 2013. Estimated intangible asset amortization expense for each of the five succeeding fiscal years is as follows:
Year
2014 (remainder)
2015
2016
2017
2018
Thereafter
L. 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 and diluted net income per share
Weighted average common shares-basic
Effect of dilutive potential common shares:
Incremental shares from assumed conversion of convertible notes (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
Incremental shares from conversion of the convertible notes for the nine months ended September 28, 2014 were calculated using the difference between the average Teradyne stock price from January 1, 2014 through March 12, 2014 and the conversion price of $5.4750, multiplied by 34.7 million shares. The result
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The computation of diluted net income per common share for the three and nine months ended September 28, 2014 excludes the effect of the potential exercise of stock options to purchase approximately 0.3 million shares because the effect would have been anti-dilutive.
The computation of diluted net income per common share for the three and nine months ended September 29, 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.
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M. Restructuring and Other
Restructuring
During the nine months ended September 28, 2014, Teradyne recorded $0.8 million of severance charges related to headcount reductions of approximately 30 people, primarily in Wireless Test. During the nine months ended September 29, 2013, Teradyne recorded $1.5 million of severance charges related to headcount reductions of approximately 40 people, of which $1.4 million was in System Test and $0.4 million was in Semiconductor Test, and a $(0.4) million credit in Corporate for a change in the estimated exit costs related to a leased facility.
Change in estimate
Cash payments
Q3 2013 Activity:
Provision
Q4 2013 Activity:
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Q2 2014 Activity:
Q3 2014 Activity:
The accrual balance 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 December 2014.
During the three and nine months ended September 28, 2014, Teradyne recorded a $0.6 million fair value adjustment to decrease the ZTEC acquisition contingent consideration.
N. Retirement Plans
ASC 715, “Compensation—Retirement Benefits” requires an employer with defined benefit plans or other postretirement benefit plans to recognize an asset or a liability on its balance sheet for the overfunded or underfunded status of the plans as defined by ASC 715. The pension asset or liability represents a difference between the fair value of the pension plan’s assets and the projected benefit obligation.
On October 27, 2014, the U.S. Society of Actuaries released new mortality tables. Teradyne will use the new mortality tables along with other updated pension valuation assumptions (discount rate, asset rate of return, etc.) as part of its annual fourth quarter pension obligation remeasurement. The estimated actuarial loss as a result of the new mortality tables and current discount rates is approximately $50 million.
Defined Benefit Pension Plans
Teradyne has defined benefit pension plans covering a portion of domestic employees and employees of certain non-U.S. subsidiaries. Benefits under these plans are based on employees’ years of service and compensation. Teradyne’s funding policy is to make contributions to these plans in accordance with local laws and to the extent that such contributions are tax deductible. The assets of these plans consist primarily of fixed income and equity securities. In addition, Teradyne has an unfunded supplemental executive defined benefit plan in the United States to provide retirement benefits in excess of levels allowed by the Employment Retirement Income Security Act (“ERISA”) and the Internal Revenue Code (“IRC”), as well as unfunded foreign plans. In the nine months ended September 28, 2014, Teradyne contributed $1.3 million to the U.S. supplemental executive defined benefit pension plan and $1.2 million to certain qualified plans for non-U.S. subsidiaries.
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For the three and nine months ended September 28, 2014 and September 29, 2013, 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
Actuarial loss (gain)
Total net periodic pension cost
Postretirement Benefit Plan
In addition to receiving pension benefits, U.S. Teradyne employees who meet early retirement eligibility requirements as of their termination dates may participate in Teradyne’s Welfare Plan, which includes death, 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.
For the three and nine months ended September 28, 2014 and September 29, 2013, Teradyne’s net periodic postretirement benefit was comprised of the following:
Amortization of unrecognized prior service benefit
Actuarial gain
Total net periodic post-retirement benefit
O. Commitments and Contingencies
Purchase Commitments
As of September 28, 2014, Teradyne had entered into purchase commitments for certain components and materials. The purchase commitments covered by the agreements aggregate to approximately $155.2 million, of which $147.4 million is for less than one year.
Legal Claims
Teradyne is subject to various legal proceedings and claims which have arisen in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on Teradyne’s results of operations, financial condition or cash flows.
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P. Income Taxes
The effective tax rate for the three months ended September 28, 2014 and September 29, 2013 was 18% and 21%, respectively. The decrease in the tax rate was primarily due to a more favorable geographic mix of income partially offset by an increase in reserves for uncertain tax positions.
The effective tax rate for the nine months ended September 28, 2014 and September 29, 2013 was 16% and 14%, respectively. The increase in the tax rate was primarily due to income tax expense for the nine months ended September 29, 2013 being reduced for a discrete tax benefit from the January 2013 reinstatement of the U.S. research and development credit for fiscal year 2012 and an increase in reserves for uncertain tax positions in fiscal year 2014, partially offset by a more favorable geographic mix of income in fiscal year 2014.
The effective tax rate for each of these periods is lower than the 35% U.S. statutory federal tax rate primarily due to the geographic mix of income and profits earned by Teradyne’s international subsidiaries being taxed at rates lower than the U.S. statutory rate.
As of September 28, 2014, Teradyne had $31.6 million of reserves for uncertain tax positions. As of December 31, 2013, Teradyne had $21.2 million of reserves for uncertain tax positions. The $10.4 million net increase in reserves for uncertain tax positions primarily relates to the allocation of income among jurisdictions. As of September 28, 2014, Teradyne anticipates the liability for uncertain tax positions could decrease by approximately $2.8 million over the next twelve months, primarily as a result of the expiration of statutes of limitations and clarification of tax laws. The potential decrease is primarily related to equity compensation.
Teradyne qualifies for a tax holiday in Singapore by fulfilling the requirements of an agreement with the Singapore Economic Development Board under which certain headcount and spending requirements must be met. The tax savings due to the tax holiday for the nine months ended September 28, 2014 were $12.3 million or $0.05 per diluted share. The tax holiday is currently expected to expire on December 31, 2015.
Q. Segment Information
Teradyne has three operating segments (Semiconductor Test, Wireless Test and System Test), which are its reportable segments. The Semiconductor Test segment includes operations related to the design, manufacturing and marketing of semiconductor test products and services. The Wireless Test segment includes operations related to design, manufacturing and marketing of wireless test products and services. The System 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.
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Teradyne evaluates performance based on several factors, of which the primary financial measure is business segment income before income taxes. The accounting policies of the business segments are the same as those described in Note B: “Accounting Policies” in Teradyne’s Annual Report on Form 10-K for the year ended December 31, 2013. Segment information is as follows:
Three months ended September 28, 2014:
Net revenues
Income before income taxes(1)(2)
Three months ended September 29, 2013:
Income (loss) before income taxes(1)(2)
Nine months ended September 28, 2014:
Nine months ended September 29, 2013:
Included in the Semiconductor Test segment are charges for the following:
Cost of revenues—provision for excess and obsolete inventory
Included in the Wireless Test segment are charges for the following:
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Included in the System Test segment are charges for the following:
Included in Corporate and Eliminations are credits for the following:
R. Shareholders’ Equity
Stock Repurchase Program
In November 2010, Teradyne’s Board of Directors authorized a stock repurchase program for up to $200 million. In the three and nine months ended September 28, 2014 and September 29, 2013, Teradyne did not repurchase any shares. The cumulative repurchases under the new program as of September 28, 2014 totaled 2.6 million shares of common stock for $31.2 million at an average price of $11.84.
Dividend
Holders of Teradyne’s common stock are entitled to receive dividends when they are declared by Teradyne’s Board of Directors. In January 2014, Teradyne’s Board of Directors declared an initial quarterly cash dividend of $0.06 per share that was paid on June 2, 2014 to stockholders of record as of May 9, 2014. In August 2014, Teradyne’s Board of Directors declared a quarterly cash dividend of $0.06 per share that was paid on September 26, 2014 to stockholders of record as of September 5, 2014. Dividend payments for the three and nine months ended September 28, 2014 were $12.8 million and $24.4 million, respectively. Payment of future cash dividends will rest within the discretion of Teradyne’s Board of Directors and will depend, among other things, upon Teradyne’s earnings, capital requirements and financial condition.
S. Subsequent Events
On October 31, 2014, Teradyne completed the acquisition of substantially all the assets of Avionics Interface Technologies, LLC (“AIT”) located in Omaha, Nebraska, for approximately $18.9 million and up to $2.1 million payable upon achievement of certain revenue and gross margin targets through December 31, 2016. The fair value of assets and liabilities acquired has not been disclosed because Teradyne has not completed the valuation. AIT is a leading provider of equipment for testing state-of-the-art data buses. The acquisition complements Teradyne’s Mil/Aero line of bus test instrumentation for commercial and defense avionics systems. AIT will be included in Teradyne’s System Test segment.
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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, 2013. 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:
We have a broad customer base which includes integrated device manufacturers (“IDMs”), outsourced semiconductor assembly and test providers (“OSATs”), wafer foundries, fabless companies that design, but contract with others for the manufacture of integrated circuits (“ICs”), developers of wireless devices and consumer electronics, manufacturers of circuit boards, automotive suppliers, wireless product manufacturers, storage device manufacturers, aerospace and military contractors.
In October 2013, we acquired ZTEC Instruments Inc. (“ZTEC”), a supplier of modular wireless test instruments. The acquisition of ZTEC expands our Wireless Test segment into the design verification test of wireless components and chipsets.
In October 2014, we acquired substantially all the assets of Avionics Interface Technologies, LLC, a leading provider of equipment for testing state-of-the-art data buses. The acquisition complements our Mil/Aero business unit’s line of bus test instrumentation so that we can provide complete test solutions for today’s commercial and defense avionics systems.
We will continue to invest in our business to further expand our addressable markets while tightly managing our costs.
The sales of our products and services are dependent, to a large degree, on customers who are subject to cyclical trends in the demand for their products. These cyclical periods have had, and will continue to have, a significant effect on our business because our customers often delay or accelerate purchases in reaction to changes in their businesses and to demand fluctuations in the semiconductor and electronics industries. Historically, these demand fluctuations have resulted in significant variations in our results of operations. The sharp swings in the semiconductor and electronics industries in recent years have generally affected the semiconductor and electronics test equipment and services industries more significantly than the overall capital equipment sector.
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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 nine months ended September 28, 2014 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, 2013.
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SELECTED RELATIONSHIPS WITHIN THE CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
Percentage of total net revenues:
Results of Operations
Third Quarter 2014 Compared to Third Quarter 2013
Book to Bill Ratio
Book to bill ratio calculated as net bookings divided by net sales. Book to bill ratio by reportable segment was as follows:
Semiconductor Test
Wireless Test
System Test
Total Company
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Revenues
Net revenues by reportable segment were as follows:
The increase in Semiconductor Test revenues of $75.9 million or 25% was primarily due to higher system-on-a-chip (“SOC”) product volume driven by application processors and an increase in service revenue. The decrease in Wireless Test revenue of $38.3 million or 41% was primarily due to lower connectivity and cellular product volume. The increase in System Test revenue of $7.0 million or 19% was primarily due to higher product volume in Production Board Test and Storage Test systems.
Our revenues by region as a percentage of total net revenues were as follows:
Taiwan
United States
China
Korea
Europe
Singapore
Malaysia
Philippines
Japan
Thailand
Rest of World
Gross Profit
Our gross profit was as follows:
Percent of total revenue
Gross profit as a percent of revenue decreased by 4.1 percentage points, due primarily to product mix in SOC Semiconductor Test and lower Wireless Test 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 twelve quarters, is written-down to estimated net realizable value.
During the three months ended September 28, 2014, we recorded an inventory provision of $6.4 million included in cost of revenues primarily due to downward revisions to previously forecasted demand levels. Of the $6.4 million of total excess and obsolete provisions, $4.4 million was related to Semiconductor Test, $1.3 million was related to Wireless Test, and $0.7 million was related to System Test.
During the three months ended September 29, 2013, we recorded an inventory provision of $3.8 million included in cost of revenues, due to the following factors:
During the three months ended September 28, 2014 and September 29, 2013, we scrapped $11.1 million and $13.9 million of inventory, respectively. During the three months ended September 28, 2014 and September 29, 2013, we sold $6.2 million and $4.1 million, respectively, of previously written-down inventory. As of September 28, 2014, we had inventory related reserves for inventory which had been written-down totaling $116.1 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 $3.1 million in engineering and development expenses was due primarily to increased spending in Semiconductor Test.
Selling and Administrative
Selling and administrative expenses were as follows:
The increase of $0.2 million in selling and administrative expenses was due primarily to increased sales and marketing spending in Semiconductor Test.
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Restructuring and Other
During the three months ended September 28, 2014, we recorded $0.2 million of severance charges related to headcount reductions of 2 people in System Test.
During the three months ended September 29, 2013, we recorded $1.3 million of severance charges related to headcount reductions of approximately 40 people, of which $1.0 million was in System Test and $0.3 million was in Semiconductor Test, and a $(0.4) million credit related to a change in the estimated exit costs related to a leased facility, in Corporate.
During the three months ended September 28, 2014, we recorded a $0.6 million fair value adjustment to decrease the ZTEC acquisition contingent consideration.
Income Taxes
The effective tax rate for each of these periods is lower than the 35% U.S. statutory federal tax rate primarily due to the geographic mix of income and profits earned by our international subsidiaries being taxed at rates lower than the U.S. statutory rate.
Nine Months of 2014 Compared to Nine Months of 2013
The increase in Semiconductor Test revenues of $255.2 million or 32% was primarily due to higher SOC product volume, driven by application processors and microcontrollers. The decrease in Wireless Test revenue of $81.4 million or 36% was primarily due to lower cellular and connectivity product volume. The increase in System Test revenue of $8.2 million or 8% was primarily due to higher product volume in Production Board Test and Storage Test systems, partially offset by lower Mil/Aero product sales.
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Percent of total revenues
Gross profit as a percent of revenue decreased by 2.6 percentage points due primarily to a decrease of 2.4 points related to product mix in SOC Semiconductor Test and lower Wireless Test sales, a decrease of 0.7 point due to higher excess and obsolete inventory provisions, partially offset by higher sales volume.
During the nine months ended September 28, 2014, we recorded an inventory provision of $21.5 million included in cost of revenues with $6.2 million related to product transition in Semiconductor Test and $15.3 million due to downward revisions to previously forecasted demand levels. Of the $21.5 million of total excess and obsolete provisions, $14.3 million was related to Semiconductor Test, $5.2 million was related to Wireless Test, and $2.0 million was related to System Test.
During the nine months ended September 29, 2013, we recorded an inventory provision of $9.6 million included in cost of revenues, due to the following factors:
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During the nine months ended September 28, 2014 and September 29, 2013, we scrapped $14.3 million and $16.8 million of inventory, respectively. During the nine months ended September 28, 2014 and September 29, 2013, we sold $9.8 million and $8.9 million of previously written-down or written-off inventory. As of September 28, 2014, we had inventory related reserves for inventory which had been written-down or written-off totaling $116.1 million. We have no pre-determined timeline to scrap the remaining inventory.
The increase of $13.1 million in engineering and development expenses was due primarily to increased spending in Semiconductor Test and Wireless Test and higher variable compensation.
The increase of $18.6 million in selling and administrative expenses was due primarily to a one-time $6.6 million stock-based compensation charge related to Michael Bradley’s (retired Chief Executive Officer) Retirement Agreement, increased sales and marketing spending in Semiconductor Test and Wireless Test, and higher variable compensation.
During the nine months ended September 28, 2014, we recorded $0.8 million of severance charges related to headcount reductions of approximately 30 people, primarily in Wireless Test.
During the nine months ended September 29, 2013, Teradyne recorded $1.5 million of severance charges related to headcount reductions of approximately 40 people, of which $1.4 million was in System Test and $0.4 million was in Semiconductor Test, and a $(0.4) million credit in Corporate for a change in the estimated exit costs related to a leased facility.
During the nine months ended September 28, 2014, we recorded a $0.6 million fair value adjustment to decrease the ZTEC acquisition contingent consideration.
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Contractual Obligations
The following table reflects our contractual obligations at September 28, 2014:
Purchase obligations
Retirement plan contributions
Operating lease obligations
Long-term other liabilities reflected on the Balance Sheet under GAAP(1)
Liquidity and Capital Resources
Our cash, cash equivalents and marketable securities balances decreased by $18.3 million in the nine months ended September 28, 2014, to $1,181 million. Cash activity for the nine months ended September 28, 2014 and September 29, 2013 was as follows:
Cash provided by operating activities:
Net income, adjusted for non-cash items
Change in operating assets and liabilities
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In the nine months ended September 28, 2014, changes in operating assets and liabilities used cash of $27.3 million. This was due to a $77.6 million increase in operating assets and a $50.3 million increase in operating liabilities.
The increase in operating assets was due to a $163.7 million increase in accounts receivable due to higher sales and increase in days sales outstanding (“DSO”). DSO for the three months ended September 28, 2014 was 61 days as compared to December 31, 2013 DSO of 50 days. The increase in accounts receivable was partially offset by a $47.8 million decrease in prepayments and other assets and a $38.3 million decrease in inventories due to higher sales. The increase in operating liabilities was due to a $52.2 million increase in other accrued liabilities, a $14.3 million increase in customer advance payments and deferred revenue and a $10.2 million increase in accrued income taxes, partially offset by a $16.2 million decrease in accrued employee compensation due primarily to variable compensation and employee stock award payroll tax payments, a $4.3 million convertible note interest payment, $3.3 million of retirement plan contributions and a $2.6 million decrease in accounts payable. Based on the new mortality tables released on October 27, 2014 and current discount rates, we estimate the funded status of our U.S. Qualified Pension Plan (the “Plan”) to be approximately 91%. During the fourth quarter of 2014, we plan to contribute approximately $30.0 million to the Plan to bring the Plan back to being fully funded.
Investing activities during the nine months ended September 28, 2014 used cash of $254.4 million, due to $844.1 million used for purchases of marketable securities and $146.4 million used for purchases of property, plant and equipment, partially offset by proceeds from maturities and sales of marketable securities that provided cash of $495.6 million and $236.1 million, respectively, and proceeds from life insurance of $4.4 million related to the cash surrender value from the cancellation of Teradyne owned life insurance policies on its retired chief executive officer. The increase in purchases of property, plant and equipment of $63.4 million compared to the nine months ended September 29, 2013 is primarily due to testers used for customer leases.
Financing activities during the nine months ended September 28, 2014 used cash of $192.6 million. $191.0 million of cash was used for payments on long-term debt related to the convertible note and the Japan loan and $24.4 million was used for dividend payments, partially offset by $21.0 million provided by the issuance of common stock under employee stock purchase and stock option plans and $1.7 million from the tax benefit related to stock options and restricted stock units.
In the nine months ended September 29, 2013, changes in operating assets and liabilities used cash of $47.2 million. This was due to a $48.1 million increase in operating assets and a $0.9 million increase in operating liabilities.
The increase in operating assets was due to a $56.0 million increase in accounts receivable and a $26.3 million increase in other assets primarily due to an increase in prepayments, partially offset by a $34.2 million decrease in inventories. The increase in operating liabilities was due to an $9.4 million increase in accounts payable, a $13.8 million increase in accrued income taxes and a $9.9 million increase in other accrued liabilities, partially offset by a $19.2 million decrease in accrued employee compensation due primarily to variable compensation and employee stock award payroll tax payments, a $9.2 million decrease in customer advance payments and deferred revenue, and $3.6 million of retirement plan contributions.
Investing activities during the nine months ended September 29, 2013 used cash of $6.6 million, due to $658.6 million used for purchases of marketable securities and $82.9 million used for purchases of property, plant and equipment, partially offset by proceeds from maturities and sales of marketable securities that provided cash of $401.9 million and $333.0 million, respectively.
Financing activities during the nine months ended September 29, 2013 provided cash of $16.1 million, of which $16.8 million was from the issuance of common stock under employee stock purchase and stock option plans and $0.8 million from the tax benefit related to stock options and restricted stock units, partially offset by $1.1 million of cash used for the payments on long-term debt related to the Japan loan and $0.4 million of cash used for payments related to LitePoint acquisition contingent consideration.
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Holders of our common stock are entitled to receive dividends if and when they are declared by our Board of Directors. In January 2014, our Board of Directors declared an initial quarterly cash dividend of $0.06 per share that was paid on June 2, 2014 to stockholders of record as of May 9, 2014. In August 2014, our Board of Directors declared a quarterly cash dividend of $0.06 per share that was paid on September 26, 2014 to stockholders of record as of September 5, 2014. Total dividend payments in the nine months ended September 28, 2014 were $24.4 million. Payment of future cash dividends will rest within the discretion of our Board of Directors and will depend, among other things, upon our earnings, capital requirements and financial condition.
In 2014, we deployed approximately $75 million of capital into testers for customer leases bringing our total forecasted 2014 capital additions to $169 million.
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 $460 million of cash, cash equivalents and marketable securities 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 O: “Stock Based Compensation” in our 2013 Form 10-K, we have a 1996 Employee Stock Purchase Plan and a 2006 Equity and Cash Compensation Incentive Plan (the “2006 Equity Plan”).
The purpose of the 1996 Employee Stock Purchase Plan is to encourage stock ownership by all eligible employees of Teradyne. The purpose of the 2006 Equity Plan is to provide equity ownership and compensation opportunities in Teradyne to our employees, officers, directors, consultants and/or advisors. Both plans were approved by our shareholders.
Recently Issued Accounting Pronouncements
On July 18, 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2013-11, “Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” Under this ASU, unrecognized tax benefits will be netted against all available same-jurisdiction loss or other tax carryforwards that would be utilized, rather than only against carryforwards that are created by unrecognized tax benefits. The provisions of this ASU are effective for interim and annual periods beginning on or after December 15, 2013. Our implementation of this ASU did not have a material impact on our financial position and results of operations.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” which will replace numerous requirements in U.S. GAAP, including industry-specific requirements, and provide companies with a single revenue recognition model for recognizing revenue from contracts with customers. The core principle of the new standard is that a company should recognize revenue to show the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The new standard will be effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. For Teradyne, the standard will be effective in the first quarter of 2017. The two permitted transition methods under the new standard are the full retrospective method, in which case the standard would be applied to each prior reporting period presented, or the modified retrospective method, in which case the cumulative effect of applying the standard would be recognized at the date of initial application. We have not yet selected a transition method. We are currently evaluating the impact of this ASU on our financial position and results of operations.
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For “Quantitative and Qualitative Disclosures about Market Risk” affecting Teradyne, see Item 7a, “Quantitative and Qualitative Disclosures about Market Risks,” in our Annual Report on Form 10-K filed with the SEC on February 28, 2014. 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, 2013.
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, 2013, 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. The cumulative repurchases under the new program as of September 28, 2014 totaled 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 September 28, 2014 (in thousands except per share price):
Period
June 30, 2014 – July 27, 2014
July 28, 2014 – August 24, 2014
August 25, 2014 – September 28, 2014
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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Exhibit
Number
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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