UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 001-06462
TERADYNE, INC.
(Exact name of registrant as specified in its charter)
(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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files) Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act (check one):
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on whichregistered
The number of shares outstanding of the registrant’s only class of Common Stock as of May 6, 2019 was 171,395,402 shares.
INDEX
Condensed Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018
Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2019 and April 1, 2018
Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2019 and April 1, 2018
Condensed Consolidated Statements of Shareholders’ Equity for the Three Months Ended March 31, 2019 and April 1, 2018
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and April 1, 2018
Notes to Condensed Consolidated Financial Statements
PART I
Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands,
except per share amount)
Current assets:
Cash and cash equivalents
Marketable securities
Accounts receivable, less allowance for doubtful accounts of $1,675 and $1,673 at March 31, 2019 and December 31, 2018, respectively
Inventories, net
Prepayments and other current assets
Total current assets
Property, plant and equipment, net
Operating leaseright-of-use assets, net
Deferred tax assets
Retirement plans assets
Other assets
Acquired intangible assets, net
Goodwill
Total assets
Current liabilities:
Accounts payable
Accrued employees’ compensation and withholdings
Deferred revenue and customer advances
Other accrued liabilities
Contingent consideration
Operating lease liabilities
Income taxes payable
Total current liabilities
Retirement plans liabilities
Long-term deferred revenue and customer advances
Deferred tax liabilities
Long-term other accrued liabilities
Long-term contingent consideration
Long-term operating lease liabilities
Long-term incomes taxes payable
Debt
Total liabilities
Commitments and contingencies (See Note S)
Common stock, $0.125 par value, 1,000,000 shares authorized; 172,353 and 175,522 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively
Additional paid-in capital
Accumulated other comprehensive loss
Accumulated deficit
Total shareholders’ equity
Total liabilities and shareholders’ equity
The accompanying notes, together with the Notes to Consolidated Financial Statements included in Teradyne’s Annual Report on Form 10-K for the year ended December 31, 2018, are an integral part of the condensed
consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Revenues:
Products
Services
Total 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:
Selling and administrative
Engineering and development
Acquired intangible assets amortization
Restructuring and other
Total operating expenses
Income from operations
Non-operating (income) expense:
Interest income
Interest expense
Other (income) expense, net
Income before income taxes
Income tax (benefit) provision
Net income
Net income per common share:
Basic
Diluted
Weighted average common shares—basic
Weighted average common shares—diluted
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, 2018, are an integral part of the condensed
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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Other comprehensive income, net of tax:
Foreign currency translation adjustment, net of tax of $0, $0, respectively
Available-for-salemarketable securities:
Unrealized gains (losses) on marketable securities arising during period, net of tax of $577, $(718), respectively
Less: Reclassification adjustment for (gains) losses included in net income, net of tax of $(20), $78, respectively
Defined benefit pension and post-retirement plans:
Amortization of prior service benefit included in net periodic pension and post-retirement benefit, net of tax of $(11), $(18), respectively
Other comprehensive (loss) income
Comprehensive income
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CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Balance, December 31, 2018
Issuance of common stock to employees under benefit plans, net of shares withheld for payroll tax of $14,318
Stock-based compensation expense
Repurchase of common stock
Cash dividends ($0.09 per share)
Foreign currency translation adjustment
Unrealized gains on marketable securities:
Unrealized gains on marketable securities, net of tax of $577
Less: reclassification adjustment for gains included in net income, net of tax $(20)
Amortization of prior service benefit, net of tax of $(11)
Balance, March 31, 2019
Balance, December 31, 2017
Issuance of common stock to employees under benefit plans, net of shares withheld for payroll tax of $19,629
Unrealized gains (losses) on marketable securities:
Unrealized losses on marketable securities, net of tax of $(718)
Less: reclassification adjustment for losses included in net income, net of tax $78
Reclassification of unrealized gains on equity securities, net of tax of $(902)
Amortization of prior service benefit, net of tax of $(18)
Reclassification of tax effects resulting from the Tax Reform Act, net of tax of $769
Cumulative effect of changes in accounting principle related to revenue recognition
Balance, April 1, 2018
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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
Deferred taxes
Provision for excess and obsolete inventory
Contingent consideration fair value adjustment
(Gains) losses on investments
Other
Changes in operating assets and liabilities, net of businesses acquired:
Accounts receivable
Inventories
Prepayments and other assets
Accounts payable and other liabilities
Retirement plans contributions
Income taxes
Net cash provided by (used for) operating activities
Cash flows from investing activities:
Purchases of property, plant and equipment
Purchases of marketable securities
Proceeds from sales of marketable securities
Proceeds from maturities of marketable securities
Proceeds from life insurance
Acquisition of businesses, net of cash acquired
Net cash (used for) provided by investing activities
Cash flows from financing activities:
Issuance of common stock under stock purchase and stock option plans
Dividend payments
Payments related to net settlement of employee stock compensation awards
Payments of contingent consideration
Net cash used for financing activities
Effects of exchange rate changes on cash and cash equivalents
(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. (“Teradyne”) is a leading global supplier of automation equipment for test and industrial applications. Teradyne designs, develops, manufactures and sells automatic test systems used to test semiconductors, wireless products, data storage and complex electronics systems in the consumer electronics, wireless, automotive, industrial, computing, communications, and aerospace and defense industries. Teradyne’s industrial automation products include collaborative robotic arms, autonomous mobile robots, and advanced robotic control software used by global manufacturing and light industrial customers to improve quality, increase manufacturing and material handling efficiency and decrease manufacturing costs. Teradyne’s automatic test equipment and industrial automation products and services include:
semiconductor test (“Semiconductor Test”) systems;
industrial automation (“Industrial Automation”) products;
defense/aerospace (“Defense/Aerospace”) test instrumentation and systems, storage test (“Storage Test”) systems, and circuit-board test and inspection (“Production Board Test”) systems (collectively these products represent “System Test”); and
wireless test (“Wireless Test”) systems.
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 statement of such interim financial statements. Certain prior year amounts were reclassified to conform to the current year presentation. The December 31, 2018 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 March 1, 2019, for the year ended December 31, 2018.
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.
Leases
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842)” (“Topic 842”), which requires a lessee to record a right-of-use(“ROU”) asset and a lease liability on the balance sheet for operating leases with terms longer than twelve months. Teradyne adopted this standard and the related amendments (collectively “ASC 842”) on January 1, 2019 and utilized the modified retrospective approach provided by ASU 2018-11, “Leases (Topic 842): Targeted
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Improvements,” that allowed for a cumulative effect adjustment in the period of adoption. Under this method of adoption, the comparative information in the consolidated financial statements has not been revised and continues to be reported under the previously applicable lease accounting guidance (ASC 840). Teradyne also utilized the package of practical expedients permitted under the transition guidance which included the carry-forward of historical lease classification. Adoption of ASC 842 resulted in recording ROU assets and lease liabilities of approximately $50.1 million and $54.3 million, respectively. Operating lease liabilities were calculated using the discount rate on January 1, 2019. The adoption of ASC 842 did not have a material impact on beginning retained earnings, the consolidated statement of operations, cash flows, or earnings per share.
Under ASC 842, a contract is or contains a lease when Teradyne has the right to control the use of an identified asset. Teradyne determines if an arrangement is a lease at inception of the contract, which is the date on which the terms of the contract are agreed to and the agreement creates enforceable rights and obligations. The commencement date of the lease is the date that the lessor makes an underlying asset available for use by Teradyne. As of March 31, 2019, Teradyne does not have material leases that have not yet commenced.
Teradyne determines if the lease is operating or finance at the lease commencement date based upon the terms of the lease and the nature of the asset. The lease term used to calculate the lease liability includes options to extend or terminate the lease when it is reasonably certain that the option will be exercised.
For leases commencing after January 1, 2019, the lease liability is measured at the present value of future lease payments, discounted using the discount rate for the lease at the commencement date. As Teradyne is typically unable to determine the implicit rate, Teradyne uses an incremental borrowing rate based on the lease term and economic environment at commencement date. Teradyne initially measures payments based on an index by using the applicable rate at lease commencement. Variable payments that do not depend on an index are not included in the lease liability and are recognized as they are incurred. The ROU asset is initially measured as the amount of lease liability, adjusted for any initial lease costs, prepaid lease payments, and reduced by any lease incentives.
Teradyne’s contracts often include non-lease components such as common area maintenance. Teradyne elected the practical expedient to account for the lease and non-lease components as a single lease component. For leases with a term of one year or less Teradyne has elected not to record the lease asset or liability. The lease payments are recognized in the consolidated statement of earnings on a straight-line basis over the lease term. Teradyne includes lease costs within cost of revenues and operating expenses. See Note: H: “Leases.”
C. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
On January 26, 2017, the FASB issued ASU 2017-04, “Intangibles—Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment.” The new guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Goodwill impairment will be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance will remain largely unchanged. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. The same one-step impairment test will be applied to goodwill at all reporting units, even those with zero or negative carrying amounts. Entities will be required to disclose the amount of goodwill at reporting units with zero or negative carrying amounts. The revised guidance will be applied prospectively, and is effective in 2020. Early adoption is permitted for any impairment tests performed after January 1, 2017. Teradyne is currently evaluating the impact of this ASU on its financial position, results of operations and statements of cash flows.
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D. ACQUISITIONS
Lemsys SA
On January 30, 2019, Teradyne acquired all of the issued and outstanding shares of Lemsys SA (“Lemsys”) for a total purchase price of approximately $9.1 million. Lemsys strengthens Teradyne’s position in the electrification trends of vehicles, solar, wind, and industrial applications. The Lemsys acquisition was accounted for as a business combination and, accordingly, the results have been included in Teradyne’s Semiconductor Test segment from the date of acquisition. As of the acquisition date, Teradyne’s preliminary purchase price allocation was goodwill of $1.2 million, which is not deductible for tax purposes, acquired intangible assets of $5.5 million with an average estimated useful life of 4.9 years, and $2.4 million of net tangible assets. The acquisition was not material to Teradyne’s condensed consolidated financial statements.
Mobile Industrial Robots
On April 25, 2018, Teradyne acquired all of the issued and outstanding shares of Mobile Industrial Robots Aps (“MiR”), a Danish limited liability company located in Odense, Denmark. MiR is the leading maker of collaborative autonomous mobile robots for industrial applications. MiR is part of Teradyne’s Industrial Automation segment.
The total purchase price of $197.8 million included $145.2 million of cash paid and $52.6 million of contingent consideration measured at fair value. The contingent consideration is payable in Euros upon the achievement of certain thresholds and targets for revenue and earnings before interest and taxes for periods from January 1, 2018 to December 31, 2018; January 1, 2018 to December 31, 2019; and January 1, 2018 to December 31, 2020. The contingent consideration related to revenue for the period from January 1, 2018 to December 31, 2018 in the amount of $30.8 million was paid in March 2019. The remaining maximum contingent consideration that could be paid is $83.2 million.
The valuation of the contingent consideration is dependent on the following assumptions: forecasted revenues, revenue volatility, earnings before interest and taxes, and discount rate. These assumptions were estimated based on a review of the historical and projected results.
The MiR acquisition was accounted for as a business combination and, accordingly, the results have been included in Teradyne’s consolidated results of operations from the date of acquisition. MiR’s products will help expand the Industrial Automation segment, which is a key component of Teradyne’s growth strategy. The allocation of the total purchase price to MiR’s net tangible liabilities and identifiable intangible assets was based on their estimated fair values as of the acquisition date. The excess of the purchase price over the identifiable intangible assets and net tangible liabilities in the amount of $136.0 million was allocated to goodwill, which is not deductible for tax purposes. MiR’s results have been included in Teradyne’s Industrial Automation segment from the date of acquisition.
The following table represents the final allocation of the purchase price:
Intangible assets
Tangible assets acquired and liabilities assumed:
Current assets
Non-current assets
Accounts payable and current liabilities
Long-term deferred tax liabilities
Other long-term liabilities
Total purchase price
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Teradyne estimated the fair value of intangible assets using the income and cost approaches. Acquired intangible assets are amortized on a straight-line basis over their estimated useful lives. Components of these intangible assets and their estimated useful lives at the acquisition date are as follows:
Developed technology
Trademarks and tradenames
Customer relationships
Backlog
Total intangible assets
The following unaudited pro forma information gives effect to the acquisition of MiR as if the acquisition occurred on January 1, 2017. The unaudited pro forma results are not necessarily indicative of what actually would have occurred had the acquisition been in effect for the periods presented:
Revenue
Pro forma results for the three months ended April 1, 2018 were adjusted to exclude $0.6 million of acquisition related costs.
Energid Technologies Corporation
On February 26, 2018, Teradyne acquired all of the issued and outstanding shares of Energid Technologies Corporation (“Energid”) for a total purchase price of approximately $27.6 million. Energid’s technology enables and simplifies the programming of complex robotic motions used in a wide variety of end markets, ranging from heavy industry to healthcare, utilizing both traditional robots and collaborative robots. The Energid acquisition was accounted for as a business combination and, accordingly, Energid’s results have been included in Teradyne’s Industrial Automation segment from the date of acquisition. As of the acquisition date, Teradyne’s purchase price allocation was goodwill of $14.4 million which is deductible for tax purposes, acquired intangible assets of $12.3 million with an average estimated useful life of 7.7 years, and $1.0 million of net tangible assets. The acquisition was not material to Teradyne’s condensed consolidated financial statements.
E. REVENUE
Revenue recognized in accordance with ASC 606: “Revenue from Contracts with Customers” was $492.4 million and $483.2 million for the three months ended March 31, 2019 and April 1, 2018, respectively.
For the three months ended March 31, 2019 and April 1, 2018, Teradyne also recognized $1.7 million and $4.3 million, respectively, of revenues from leases of Teradyne systems, which are accounted for outside of ASC 606.
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Disaggregation of Revenue
The following table provides information about disaggregated revenue by primary geographical market, major product line and timing of revenue recognition.
Americas
Point in time
Over time
Europe, Middle East and Africa
Asia Pacific
Lease Revenue
Total
Contract Balances
The amount of revenue recognized during the three months ended March 31, 2019 and April 1, 2018 that was previously included within the deferred revenue and customer advances balance was $19.5 million and $21.8 million, respectively, and primarily relates to extended warranties, training, application support, and post contract support. Each of these represents a distinct performance obligation. Teradyne expects to recognize 72% of the remaining performance obligation in the next 12 months, 22% in 1-3 years, and the remainder thereafter.
Accounts Receivable
Teradyne sells certain trade accounts receivables on a non-recourse basis to third-party financial institutions pursuant to factoring agreements. Teradyne accounts for these transactions as sales of receivables and presents cash proceeds as a cash provided by operating activities in the consolidated statements of cash flows. Total trade accounts receivable sold under the factoring agreements were $41.7 million and $3.5 million for the three months ended March 31, 2019 and April 1, 2018, respectively. Factoring fees for the sales of receivables were recorded in interest expense and were not material.
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F. INVENTORIES
Inventories, net consisted of the following at March 31, 2019 and December 31, 2018:
Raw material
Work-in-process
Finished goods
Inventory reserves at March 31, 2019 and December 31, 2018 were $100.9 million and $100.8 million, respectively.
G. FINANCIAL INSTRUMENTS
Cash Equivalents
Teradyne considers all highly liquid investments with maturities of three months or less at the date of acquisition to be cash equivalents.
Marketable Securities
Teradyne’s available-for-sale debt securities are classified as Level 2 and equity securities are classified as Level 1. Contingent consideration is classified as Level 3. The vast majority of Level 2 securities are fixed income securities 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.
During the three months ended March 31, 2019 and April 1, 2018, there were no transfers in or out of Level 1, Level 2, or Level 3 financial instruments.
Realized gains recorded in the three months ended March 31, 2019 and April 1, 2018 were $0.1 million and $0.3 million, respectively. Realized losses recorded in the three months ended March 31, 2019 and April 1, 2018 were $0.1 million and $1.5 million, respectively. Realized gains are included in interest income and realized losses are included in interest expense.
Unrealized gains and losses on available-for-sale debt securities are included in accumulated other comprehensive income (loss) on the balance sheet.
Unrealized gains on equity securities are included in interest income and unrealized losses are included in interest expense. Unrealized gains related to equity securities recognized in the three months ended March 31, 2019 were $2.8 million.
The cost of securities sold is based on the specific identification method.
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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, 2019 and December 31, 2018.
Assets
Cash
Cash equivalents
Available-for-salesecurities:
U.S. Treasury securities
Commercial paper
Corporate debt securities
Certificates of deposit and time deposits
U.S. government agency securities
Debt mutual funds
Non-U.S. government securities
Equity securities:
Mutual funds
Derivative assets
Liabilities
Derivative liabilities
Reported as follows:
Long-term marketable securities
Prepayments
Other current liabilities
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Changes in the fair value of Level 3 contingent consideration for the three months ended March 31, 2019 and April 1, 2018 were as follows:
Balance at beginning of period
Foreign currency impact
Payments (a)
Fair value adjustment (b)
Balance at end of period
In the three months ended March 31, 2019, Teradyne paid $30.8 million and $3.8 million of contingent consideration for the earn-outs in connection with the acquisition of MiR and Universal Robots A/S (“Universal Robots”), respectively. In the three months ended April 1, 2018, Teradyne paid $24.6 million of contingent consideration for the earn-out in connection with the acquisition of Universal Robots.
In the three months ended March 31, 2019, the fair value of contingent consideration for the earn-out in connection with the acquisition of MiR was increased by $3.0 million. In the three months ended April 1, 2018, the fair value of contingent consideration for theearn-out in connection with the acquisition of Universal Robots was decreased by $5.0 million, primarily due to a decrease in forecasted revenue.
The following table provides quantitative information associated with the fair value measurement of Teradyne’s Level 3 financial instruments:
Liability
Unobservable Inputs
(MiR)
Simulation
As of March 31, 2019, the significant unobservable inputs used in the Monte Carlo simulation to fair value the MiR contingent consideration include forecasted revenues, revenue volatility, earnings before interest and taxes, and discount rate. Increases or decreases in the inputs would result in a higher or lower fair value measurement. As of March 31, 2019, the maximum amount of contingent consideration that could be paid in connection with the acquisition of MiR is $83.2 million. The remaining earn-out periods end on December 31, 2019 and December 31, 2020.
The carrying amounts and fair values of Teradyne’s financial instruments at March 31, 2019 and December 31, 2018 were as follows:
Convertible debt (1)
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The carrying value represents the bifurcated debt component only, while the fair value is based on quoted market prices for the convertible note, which includes the equity conversion features.
The fair values of accounts receivable, net and accounts payable approximate the carrying value due to the short-term nature of these instruments.
The following table summarizes the composition of available-for-sale marketable securities at March 31, 2019:
The following table summarizes the composition of available-for-sale marketable securities at December 31, 2018:
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As of March 31, 2019, the fair market value of investments in available-for-sale securities with unrealized losses totaled $120.0 million. Of this value, $32.9 million had unrealized losses of $1.3 million for greater than one year and $87.1 million had unrealized losses of $0.1 million for less than one year.
As of December 31, 2018, the fair market value of investments with unrealized losses totaled $192.0 million. Of this value, $28.5 million had unrealized losses of $1.6 million greater than one year and $163.5 million had unrealized losses of $1.4 million for 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 March 31, 2019 and December 31, 2018 were temporary.
The contractual maturities of investments inavailable-for-sale securities held at March 31, 2019 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 inavailable-for-sale securities held at March 31, 2019 exclude $3.3 million of debt mutual funds as they do not have a contractual maturity date.
Derivatives
Teradyne conducts business in a number of foreign countries, with certain transactions denominated in local currencies. The purpose of Teradyne’s foreign currency management is to minimize the effect of exchange rate fluctuations on certain foreign currency denominated monetary assets and liabilities. Teradyne does not use derivative financial instruments for trading or speculative purposes.
To minimize the effect of exchange rate fluctuations associated with the remeasurement of monetary assets and liabilities denominated in foreign currencies, Teradyne enters into foreign currency forward contracts. The change in fair value of these derivatives is recorded directly in earnings, and is used to offset the change in value of monetary assets and liabilities denominated in foreign currencies.
The notional amount of foreign currency forward contracts at March 31, 2019 and December 31, 2018 was $148.8 million and $163.1 million, respectively.
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Gains and losses on foreign currency forward contracts and foreign currency remeasurement gains and losses on monetary assets and liabilities are included in other (income) expense, net.
The following table summarizes the fair value of derivative instruments as of March 31, 2019 and December 31, 2018:
Derivatives not designated as hedging instruments:
Foreign exchange contracts
Total derivatives
The following table summarizes the effect of derivative instruments recognized in the statement of operations for the three months ended March 31, 2019 and April 1, 2018.
Location of Losses (Gains)
Recognized in
Statement of Operations
The table does not reflect the corresponding gains and losses from the remeasurement of monetary assets and liabilities denominated in foreign currencies.
For the three months ended March 31, 2019 and April 1, 2018, net gains from the remeasurement of monetary assets and liabilities denominated in foreign currencies were $3.2 million and $0.6 million, respectively.
See Note I: “Debt” regarding derivatives related to the convertible senior notes.
H. LEASES
On January 1, 2019, Teradyne adopted ASC 842 using the modified retrospective approach. Under this method of adoption, the comparative information in the consolidated financial statements has not been revised and continues to be reported under the previously applicable lease accounting guidance (ASC 840). Adoption of ASC 842 resulted in recording ROU assets and lease liabilities of approximately $50.1 million and $54.3 million, respectively. The adoption of ASC 842 did not have a material impact on beginning retained earnings, the consolidated statement of operations, cash flows, or earnings per share.
Teradyne has facility and auto leases, which are accounted for as operating leases. Teradyne’s facility leases are primarily used for administrative functions, research and development, manufacturing, and storage and distribution. Remaining lease terms range from less than one year to ten years.
Total lease expense for the three months ended March 31, 2019 was $7.2 million, and included $1.4 million of variable lease costs and $0.7 million of costs related to short terms leases which are not recorded on the consolidated balance sheets.
At March 31, 2019, the weighted average remaining lease term and weighted average discount rate for operating leases was 4.2 years and 5.1%, respectively.
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Supplemental cash flow information related to leases was as follows:
Cash paid for amounts included in the measurement of lease liabilities included in operating cash flows
Right-of-useassets obtained in exchange for new lease obligations
Maturities of lease liabilities as of March 31, 2019 were as follows:
2019
2020
2021
2022
2023
Thereafter
Total lease payments
Less imputed interest
Total lease liabilities
As of December 31, 2018, future non-cancelable rent obligations as determined under ASC 840 were as follows:
I. DEBT
Convertible Senior Notes
On December 12, 2016, Teradyne completed a private offering of $460.0 million aggregate principal amount of 1.25% convertible senior unsecured notes (the “Notes”) due December 15, 2023 and received net proceeds, after issuance costs, of approximately $450.8 million, $33.0 million of which was used to pay the net cost of the convertible note hedge transactions and $50.1 million of which was used to repurchase 2.0 million shares of Teradyne’s common stock under its existing stock repurchase program from purchasers of the Notes in privately negotiated transactions effected through one of the initial purchasers or its affiliates conducted concurrently with the pricing of the Note offering. The Notes will mature on December 15, 2023, unless earlier repurchased or converted. The Notes bear interest from December 12, 2016 at a rate of 1.25% per year payable
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semiannually in arrears on June 15 and December 15 of each year, beginning on June 15, 2017. The Notes will be convertible at the option of the noteholders at any time prior to the close of business on the business day immediately preceding September 15, 2023, only under the following circumstances: (1) during any calendar quarter beginning after March 31, 2017 (and only during such calendar quarter), if the closing sale price of Teradyne’s common stock, for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than 130% of the conversion price on each applicable trading day; (2) during the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price (as defined in the Indenture) per $1,000 principal amount of Notes for each trading day of the measurement period was less than 98% of the product of the closing sale price of the Teradyne’s common stock and the conversion rate on each such trading day; and (3) upon the occurrence of specified corporate events. On or after September 15, 2023 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their Notes at any time, regardless of the foregoing circumstances. Teradyne may satisfy its conversion obligation by paying or delivering cash, shares of its common stock or a combination of cash and shares of its common stock, at Teradyne’s election. As of December 31, 2018, the conversion price was approximately $31.70 per share of Teradyne’s common stock. The conversion rate is subject to adjustment under certain circumstances.
Concurrent with the offering of the Notes, Teradyne entered into convertible note hedge transactions (the “Note Hedge Transactions”) with the initial purchasers or their affiliates (the “Option Counterparties”). The Note Hedge Transactions cover, subject to customary anti-dilution adjustments, the number of shares of the common stock that underlie the Notes, with a strike price equal to the conversion price of the Notes of $31.70. The Note Hedge Transactions cover, subject to customary anti-dilution adjustments, approximately 14.5 million shares of Teradyne’s common stock.
Separately and concurrent with the pricing of the Notes, Teradyne entered into warrant transactions with the Option Counterparties (the “Warrant Transactions”) in which it sold net-share-settled (or, at its election subject to certain conditions, cash-settled) warrants to the Option Counterparties. The Warrant Transactions cover, subject to customary anti-dilution adjustments, approximately 14.5 million shares of common stock. As of March 31, 2019, the strike price of the warrants was approximately $39.78 per share. The strike price is subject to adjustment under certain circumstances. The Warrant Transactions could have a dilutive effect to Teradyne’s common stock to the extent that the market price per share of Teradyne’s common stock, as measured under the terms of the Warrant Transactions, exceeds the applicable strike price of the warrants.
The Note Hedge Transactions are expected to reduce the potential dilution to Teradyne’s common stock upon any conversion of the Notes. However, the Warrant Transactions could separately have a dilutive effect to the extent that the market value per share of Teradyne’s common stock exceeds the applicable strike price of the warrant. The net cost of the Note Hedge Transactions, after being partially offset by the proceeds from the sale of the warrants, was approximately $33.0 million.
In connection with establishing their initial hedge of these convertible note hedge and warrant transactions, the Option Counterparties have entered into various derivative transactions with respect to Teradyne’s common stock and/or purchased shares of Teradyne’s common stock or other securities, including the Notes, concurrent with, or shortly after, the pricing of the Notes. In addition, the Option Counterparties may modify their hedge positions by entering into or unwinding various derivative transactions with respect to Teradyne’s common stock or by selling Teradyne’s common stock or other securities, including the Notes, in secondary market transactions (and may do so during any observation period related to the conversion of the Notes). These activities could adversely affect the value of Teradyne’s common stock and the Notes.
Teradyne considered the guidance of ASC 815-40, “Derivatives and Hedging—Contracts in Entity’s Own Equity,” and concluded that the convertible note hedge is both indexed to Teradyne’s common stock and should be classified in stockholders’ equity in its statements of financial position. The convertible note hedge is
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considered indexed to Teradyne’s common stock as the terms of the Note Hedge Transactions do not contain an exercise contingency and the settlement amount equals the difference between the fair value of a fixed number of Teradyne’s shares and a fixed strike price. Because the only variable that can affect the settlement amount is Teradyne’s stock price, which is an input to the fair value of afixed-for-fixed option contract, the convertible note hedge is considered indexed to Teradyne’s common stock.
Teradyne assessed whether the convertible note hedge should be classified as equity under ASC 815-40.In the Note Hedge Transactions contract the settlement terms permit net cash settlement or net share settlement, at the option of Teradyne. Therefore, the criteria as set forth in ASC 815-40 were evaluated by Teradyne. In reviewing the criteria, Teradyne noted the following: (1) the convertible note hedge does not require Teradyne to issue shares; (2) there is no requirement to net cash settle the convertible note hedge for failure to make timely filings with the SEC; (3) in the case of termination, the convertible note hedge is settled in the same consideration as the holders of the underlying stock; (4) the counterparty does not have rights that rank higher than those of a shareholder of the stock underlying the convertible note hedge; and (5) there is no requirement to post collateral. Based on its analysis of those criteria, Teradyne concluded that the convertible note hedge should be recorded in equity and no further adjustment should be made in future periods to adjust the value of the convertible note hedge.
Teradyne analyzed the Warrant Transactions under ASC 815-40, “Derivatives and Hedging—Contracts in Entity’s Own Equity,” and other relevant literature, and determined that it met the criteria for classification as an equity transaction and is considered indexed to Teradyne’s common stock. As a result, Teradyne recorded the proceeds from the warrants as an increase to additional paid-in capital. Teradyne does not recognize subsequent changes in fair value of the warrants in its financial statements.
The provisions of ASC 470-20, “Debt with Conversion and Other Options,” are applicable to the Notes. ASC 470-20 requires Teradyne to separately account for the liability (debt) and equity (conversion feature) components of the Notes in a manner that reflects Teradyne’s nonconvertible debt borrowing rate at the date of issuance when interest cost is recognized in subsequent periods. Teradyne allocated $100.8 million of the $460.0 million principal amount of the Notes to the equity component, which represents a discount to the debt and will be amortized to interest expense using the effective interest method through December 2023. Accordingly, Teradyne’s effective annual interest rate on the Notes will be approximately 5.0%. The Notes are classified as long-term debt in the balance sheet based on their December 15, 2023 maturity date. Debt issuance costs of approximately $7.2 million are being amortized to interest expense using the effective interest method over the seven year term of the Notes. As of March 31, 2019, debt issuance costs were approximately $5.1 million.
The below tables represent the key components of Teradyne’s convertible senior notes:
Debt Principal
Unamortized discount
Net Carrying amount of convertible debt
Contractual interest expense on the coupon
Amortization of the discount component recognized as interest expense
Total interest expense on the convertible debt
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As of March 31, 2019, the remaining unamortized discount was $76.4 million, which will be amortized over 4.7 years using the effective interest rate method. The carrying amount of the equity component was $100.8 million. As of March 31, 2019, the if-converted value of the Notes was $578.1 million.
Revolving Credit Facility
On April 27, 2015, Teradyne entered into a Credit Agreement (the “Credit Agreement”) with Barclays Bank PLC, as administrative agent and collateral agent, and the lenders party thereto. The Credit Agreement provides for a five-year, senior secured revolving credit facility of up to $350 million (the “Credit Facility”). The Credit Agreement further provides that, subject to customary conditions, Teradyne may seek to obtain from existing or new lenders incremental commitments under the Credit Facility in an aggregate principal amount not to exceed $150 million.
Proceeds from the Credit Facility may be used for general corporate purposes and working capital. Teradyne incurred $2.3 million in costs related to the revolving credit facility. These costs are being amortized over the five-year term of the revolving credit facility and are included in interest expense in the statements of operations. As of May 10, 2019, Teradyne has not borrowed any funds under the Credit Facility.
The interest rates applicable to loans under the Credit Facility are, at Teradyne’s option, equal to either a base rate plus a margin ranging from 0.00% to 1.00% per annum or LIBOR plus a margin ranging from 1.00% to 2.00% per annum, based on the Consolidated Leverage Ratio of Teradyne and its Restricted Subsidiaries. In addition, Teradyne will pay a commitment fee on the unused portion of the commitments under the Credit Facility ranging from 0.125% to 0.350% per annum, based on the then applicable Consolidated Leverage Ratio.
Teradyne is not required to repay any loans under the Credit Facility prior to maturity, subject to certain customary exceptions. Teradyne is permitted to prepay all or any portion of the loans under the Credit Facility prior to maturity without premium or penalty, other than customary LIBOR breakage costs.
The Credit Agreement contains customary events of default, representations, warranties and affirmative and negative covenants that, among other things, limit Teradyne’s and its Restricted Subsidiaries’ ability to sell assets, grant liens on assets, incur other secured indebtedness and make certain investments and restricted payments, all subject to exceptions set forth in the Credit Agreement. The Credit Agreement also requires Teradyne to satisfy two financial ratios measured as of the end of each fiscal quarter: a consolidated leverage ratio and an interest coverage ratio. As of May 10, 2019, Teradyne was in compliance with all covenants.
The Credit Facility is guaranteed by certain of Teradyne’s domestic subsidiaries and collateralized by assets of Teradyne and such subsidiaries, including a pledge of 65% of the capital stock of certain foreign subsidiaries.
J. PREPAYMENTS
Prepayments consist of the following and are included in prepayments and other assets on the balance sheet:
Contract manufacturer and supplier prepayments
Prepaid taxes
Prepaid maintenance and other services
Other prepayments
Total prepayments
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K. 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:
Maintenance and training
Extended warranty
Customer advances, undelivered performance obligations and other
Total deferred revenue and customer advances
L. PRODUCT WARRANTY
Teradyne generally provides a one-year warranty on its products, commencing upon installation, acceptance, delivery 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.
Acquisition
Accruals for warranties issued during the period
Accruals related to pre-existing warranties
Settlements made during the period
When Teradyne receives revenue for extended warranties, beyond one year, it is deferred and recognized on a straight-line basis over the contract period. Related costs are expensed as incurred. The balance below is included in 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
M. STOCK-BASED COMPENSATION
Under Teradyne’s stock compensation plans, Teradyne grants stock options, restricted stock units and performance-based restricted stock units, and employees are eligible to purchase Teradyne’s common stock through its Employee Stock Purchase Plan (“ESPP”).
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Time-based restricted stock unit awards granted to employees vest in equal annual installments over four years. Restricted stock unit awards granted to non-employee directors vest after a one year period, with 100% of the award vesting on the earlier of (a) the first anniversary of the grant date or (b) the date of the following year’s Annual Meeting of Shareholders. Teradyne expenses the cost of the restricted stock unit awards subject to time-based vesting, which is determined to be the fair market value of the shares at the date of grant, ratably over the period during which the restrictions lapse.
Teradyne grants performance-based restricted stock units (“PRSUs”) to its executive officers with a performance metric based on relative total shareholder return (“TSR”). Teradyne’s three-year TSR performance is measured against the New York Stock Exchange (“NYSE”) Composite Index. The final number of TSR PRSUs that vest will vary based upon the level of performance achieved from 200% to 0% of the target shares capped at four times the grant date value. The TSR PRSUs will vest upon the three-year anniversary of the grant date. 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 shorter of the three-year service period or the period from the grant to the date described in the retirement provisions below. Compensation expense for employees meeting the retirement provisions prior to the grant date will be recognized in full on the date of the grant. Compensation expense is recognized regardless of the eventual number of units that are earned based upon the market condition, provided the executive officer remains an employee at the end of the three-year period. Compensation expense is reversed if at any time during the three-year service period the executive officer is no longer an employee, subject to the retirement and termination eligibility provisions noted below.
In January 2019 and 2018, Teradyne granted PRSUs to its executive officers with a performance metric based on three-year cumulative non-GAAP profit before interest and tax (“PBIT”) as a percent of Teradyne’s revenue. Non-GAAP PBIT is a financial measure equal to GAAP income from operations less restructuring and other, net; amortization of acquired intangible assets; acquisition and divestiture related charges or credits; pension actuarial gains and losses; non-cashconvertible debt interest expense; and other non-recurring gains and charges. The final number of PBIT PRSUs that vest will vary based upon the level of performance achieved from 200% to 0% of the target shares. The PBIT PRSUs will vest upon the three-year anniversary of the grant date. Compensation expense is recognized on a straight-line basis over the shorter of the three year service period or the period from the grant date to the date described in the retirement provisions below. Compensation expense for employees meeting the retirement provisions prior to the grant date will be recognized in full on the date of grant. Compensation expense is recognized based on the number of units that are earned based upon the three-year Teradyne PBIT as a percent of Teradyne’s revenue, provided the executive officer remains an employee at the end of the three-year period subject to the retirement and termination eligibility provisions noted below.
If a PRSU recipient’s employment ends prior to the determination of the performance percentage due to (1) permanent disability or death or (2) retirement or termination other than for cause, after attaining both at least age sixty and at least ten years of service, then all or a portion of the recipient’s PRSUs (based on the actual performance percentage achieved on the determination date) will vest on the date the performance percentage is determined. Except as set forth in the preceding sentence, no PRSUs will vest if the executive officer is no longer an employee at the end of the three-year period.
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During the three months ended March 31, 2019 and April 1, 2018, Teradyne granted 0.1 million and 0.1 million TSR PRSUs, respectively, with a grant date fair value of $48.47 and $54.85, respectively. The fair value was estimated using the Monte Carlo simulation model with the following assumptions:
Risk-free interest rate
Teradyne volatility-historical
NYSE Composite Index volatility-historical
Dividend yield
Expected volatility was based on the historical volatility of Teradyne’s stock and the NYSE Composite Index for the 2019 and 2018 grant 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 $0.36 per share for 2019 grants and 2018 grants, divided by Teradyne’s stock price on the grant date of $36.75 for the 2019 grant and $47.70 for the 2018 grant.
During the three months ended March 31, 2019 and April 1, 2018, Teradyne granted 0.1 million and 0.1 million, respectively, of PBIT PRSUs with a grant date fair value of $35.67 and $46.62, respectively.
During the three months ended March 31, 2019, Teradyne granted 0.6 million of service-based restricted stock unit awards to employees at a weighted average grant date fair value of $35.88 and 0.1 million of service-based stock options to executive officers at a weighted average grant date fair value of $10.26.
During the three months ended April 1, 2018, Teradyne granted 0.5 million of service-based restricted stock unit awards to employees at a weighted average grant date fair value of $46.58 and 0.1 million of service-based stock options to executive officers at a weighted average grant date fair value of $12.17.
Restricted stock unit awards granted to employees vest in equal annual installments over four years. Stock options to purchase Teradyne’s common stock at 100% of the fair market value on the grant date vest in equal annual installments over four years from the grant date and have a maximum term of seven years.
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 $0.36 per share for 2019 and 2018 grants divided by Teradyne’s stock price on the grant date of $36.75 for the 2019 grant and $47.70 for the 2018 grant.
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N. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Changes in accumulated other comprehensive income (loss), which are presented net of tax, consist of the following:
Three Months Ended March 31, 2019
Balance at December 31, 2018, net of tax of $0, $(521), $(1,081), respectively
Other comprehensive income before reclassifications, net of tax of $0, $577, $0, respectively
Amounts reclassified from accumulated other comprehensive income, net of tax of $0, $(20), $(11), respectively
Net current period other comprehensive income (loss), net of tax of $0, $557, $(11), respectively
Balance at March 31, 2019, net of tax of $0, $36, $(1,092), respectively
Three Months Ended April 1, 2018
Balance at December 31, 2017, net of tax of $0, $1,815, $(932), respectively
Other comprehensive income (loss) before reclassifications, net of tax of $0, $(718), $0, respectively
Amounts reclassified from accumulated other comprehensive income, net of tax of $0, $78, $(18), respectively
Net current period other comprehensive income (loss), net of tax of $0, $(640), $(18), respectively
Reclassification of income tax effects from the Tax Reform Act, net of tax of $0, $(691), $(78), respectively (a)
Reclassification of unrealized gains on equity securities, net of tax of $0, $(902), $0, respectively (b)
Balance as April 1, 2018, net of tax of $0, $(418), $(1,028), respectively
In the three months ended April 1, 2018, Teradyne early adopted the ASU2018-02, “Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” As a result, the stranded tax effects resulting from the Tax Reform Act enacted in December 2017 were reclassified from accumulated other comprehensive income to retained earnings.
In the three months ended April 1, 2018, Teradyne adopted the ASU2016-01, “Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.”
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Reclassifications out of accumulated other comprehensive income (loss) to the statement of operations for the three months ended March 31, 2019 and April 1, 2018 were as follows:
Details about Accumulated Other Comprehensive Income Components
Affected Line Item
in the Statements
of Operations
Unrealized gains (losses), net of tax of $20, $(78), respectively
Defined benefit pension and postretirement plans:
Amortization of prior service benefit, net of tax of $11, $18, respectively
Total reclassifications, net of tax of $31, $(60), respectively
The amortization of prior service benefit is included in the computation of net periodic pension cost and postretirement benefit. See Note R: “Retirement Plans.”
O. GOODWILL AND ACQUIRED INTANGIBLE ASSETS
Teradyne performs its annual goodwill impairment test as required under the provisions of ASC 350-10, “Intangibles—Goodwill and Other” on December 31 of each fiscal year unless interim indicators of impairment exist. Goodwill is considered impaired when the net book value of a reporting unit exceeds its estimated fair value.
The changes in the carrying amount of goodwill by reportable segments for the three months ended March 31, 2019, were as follows:
Balance at December 31, 2018
Accumulated impairment losses
Lemsys acquisition
Balance at March 31, 2019
Intangible Assets
Teradyne reviews long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of these assets are no longer appropriate.
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Amortizable intangible assets consist of the following and are included in intangible assets, net on the balance sheet:
Tradenames and trademarks
Non-compete agreement
Includes $5.5 million of intangible assets from Lemsys acquisition.
Aggregate intangible asset amortization expense was $10.6 million and $7.7 million, for the three months ended March 31, 2019 and April 1, 2018, respectively.
Estimated intangible asset amortization expense for each of the five succeeding fiscal years is as follows:
Year
2019 (remainder)
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P. 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 plan
Dilutive potential common shares
Weighted average common shares-diluted
Net income per common share-basic
Net income per common share-diluted
Incremental shares from assumed conversion of the convertible notes was calculated using the difference between the average Teradyne stock price for the period and the conversion price of $31.70, multiplied by 14.5 million shares. The result of this calculation, representing the total intrinsic value of the convertible debt, was divided by the average Teradyne stock price for the period.
Convertible notes hedge warrant shares were calculated using the difference between the average Teradyne stock price for the period and the warrant price of $39.78, multiplied by 14.5 million shares. The result of this calculation, representing the total intrinsic value of the warrant, was divided by the average Teradyne stock price for the period.
The computation of diluted net income per common share for the three months ended March 31, 2019 excludes the effect of the potential vesting of 0.6 million of restricted stock units because the effect would have been anti-dilutive.
The computation of diluted net income per common share for the three months ended April 1, 2018 excludes the effect of the potential vesting of 0.4 million shares of restricted stock units because the effect would have been anti-dilutive.
Q. RESTRUCTURING AND OTHER
During the three months ended March 31, 2019, Teradyne recorded an expense of $3.0 million for the increase in the fair value of the MiR contingent consideration liability, $1.3 million of acquisition related compensation and expenses, and $0.8 million of severance charges related to headcount reductions primarily in Semiconductor Test.
During the three months ended April 1, 2018, Teradyne recorded a $5.0 million credit for the decrease in the fair value of the Universal Robots contingent consideration liability, partially offset by $3.9 million recorded for employee severance charges, primarily in Semiconductor Test, and $0.8 million of acquisition related expenses.
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R. RETIREMENT PLANS
ASC 715, “Compensation—Retirement Benefits” requires an employer with a defined benefit plan or other postretirement benefit plan to recognize an asset or a liability on its balance sheet for the overfunded or underfunded status of the plan. The pension asset or liability represents a difference between the fair value of the pension plan’s assets and the projected benefit obligation.
Defined Benefit Pension Plans
Teradyne has defined benefit pension plans covering a portion of domestic employees and employees of certainnon-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 the U.S. qualified pension plan consist primarily of fixed income and equity securities. In addition, Teradyne has unfunded qualified foreign plans as well as 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”).
In the three months ended March 31, 2019, Teradyne contributed $0.7 million to the U.S. supplemental executive defined benefit pension plan and $0.2 million to certain qualified pension plans for non-U.S. subsidiaries.
For the three months ended March 31, 2019 and April 1, 2018, Teradyne’s net periodic pension cost was comprised of the following:
Service cost
Interest cost
Expected return on plan assets
Amortization of prior service cost
Total net periodic pension cost
Postretirement Benefit Plan
In addition to receiving pension benefits, Teradyne employees in the United States who meet early retirement eligibility requirements as of their termination dates may participate in Teradyne’s Welfare Plan, which includes 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.
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For the three months ended March 31, 2019 and April 1, 2018, Teradyne’s net periodic postretirement benefit cost was comprised of the following:
Amortization of prior service credit
Special termination benefits
Total net periodic postretirement benefit cost
S. COMMITMENTS AND CONTINGENCIES
Purchase Commitments
As of March 31, 2019, Teradyne had entered into purchase commitments for certain components and materials. The purchase commitments covered by the agreements aggregate to approximately $263.0 million, of which $255.3 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.
T. INCOME TAXES
The effective tax rate for the three months ended March 31, 2019 and April 1, 2018 was (16.1)% and 9.2%, respectively.
The decrease in the effective tax rate from the three months ended April 1, 2018 to the three months ended March 31, 2019 resulted from discrete tax benefits from the release of reserves for uncertain tax positions, increases in benefits related to the U.S. foreign derived intangible income deduction and U.S. research and development tax credits, a decrease in expense related to the uncertain tax positions for transfer pricing and a reduction in discrete tax expense associated with remeasurement of deferred tax assets as a result of reductions in tax rates. These reductions were partially offset by a projected shift in the geographic distribution of income, which increases the income subject to taxation in higher tax rate jurisdictions relative to lower tax rate jurisdictions, an increase in the U.S. global intangible low-taxed income inclusion and a reduction in the discrete benefit from stock based compensation.
The effective tax rate for the three months ended March 31, 2019 and April 1, 2018 was lower than the expected federal statutory rate because of the favorable effect of statutory rates applicable to income earned outside the United States, the benefit from U.S. research and development tax credits, the benefit from stock based compensation deductions, and the benefit of the U.S. foreign derived intangible income deduction partially offset by the U.S. global intangible low-taxed income inclusion. The effective tax rate for the three months ended March 31, 2019 was also reduced by discrete tax benefits from the release of reserves for uncertain tax positions. The effective rate for the three months ended April 1, 2018 was also increased by additions to the uncertain tax positions for transfer pricing.
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Discrete tax items recorded in the three months ended March 31, 2019 amounted to $30.2 million of net benefit. The $30.2 million of discrete tax benefit consisted of $28.8 million of benefit resulting from the release of reserves for uncertain tax positions, $3.8 million of benefit from stock based compensation, $2.9 million of expense from an increase in U.S. state valuation allowances and $0.5 million of other discrete tax benefit. The release of reserves for uncertain tax positions and the increase in U.S. state valuation allowances were associated with the conclusion of the U.S. Federal income tax audit for the year ended December 31, 2015.
Discrete tax items recorded in the three months ended April 1, 2018 amounted to $6.0 million of net benefit. The $6.0 million of discrete tax benefit consisted of $7.6 million of benefit from stock based compensation, $1.7 million of expense from the write down of deferred tax assets as a result of reductions in tax rates, $0.7 million of other discrete tax benefits and $0.6 million of other discrete tax expenses.
On a quarterly basis, Teradyne evaluates the realizability of the deferred tax assets by jurisdiction and assesses the need for a valuation allowance. As of March 31, 2019, Teradyne believes that it will ultimately realize the deferred tax assets recorded on the condensed consolidated balance sheet. However, should Teradyne believe that it ismore-likely-than-not that the deferred tax assets would not be realized, the tax provision would increase in the period in which Teradyne determined that the realizability was not likely. Teradyne considers the probability of future taxable income and historical profitability, among other factors, in assessing the realizability of the deferred tax assets.
As of March 31, 2019 and December 31, 2018, Teradyne had $13.5 million and $43.4 million, respectively, of reserves for uncertain tax positions. The $29.9 million net decrease in reserves for uncertain tax positions is composed of reductions in uncertain tax positions amounting to $22.4 million related to transfer pricing and $7.4 million associated with U.S. research and development tax credits. These reductions resulted from the conclusion of the U.S. Federal income tax audit for the year ended December 31, 2015.
As of March 31, 2019, Teradyne estimates that it is reasonably possible that the balance of unrecognized tax benefits may decrease approximately $0.2 million in the next twelve months, as a result of a lapse of statutes of limitation. The estimated decrease is composed of reserves relating to local tax incentives.
Teradyne recognizes interest and penalties related to income tax matters in income tax expense. As of March 31, 2019 and December 31, 2018, $0.6 million and $0.3 million, respectively, of interest and penalties were accrued for uncertain tax positions. For the three months ended March 31, 2019 and April 1, 2018, expense of $0.3 million and $0.1 million, respectively, was recorded for interest and penalties related to income tax items.
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 three months ended March 31, 2019 was $2.1 million, or $0.01 per diluted share. The tax savings due to the tax holiday for the three months ended April 1, 2018 was $3.0 million, or $0.01 per diluted share. The tax holiday is scheduled to expire on December 31, 2020.
U. SEGMENT INFORMATION
Teradyne has four reportable segments (Semiconductor Test, System Test, Industrial Automation and Wireless Test). Each of the Semiconductor Test, System Test, and Wireless Test segments is also an individual operating segment. The Industrial Automation reportable segment consists of operating segments with discrete financial information, which have been combined into one reportable segment as they share similar economic characteristics, types of products, production processes, distribution channels, and currency risks. The Semiconductor Test segment includes operations related to the design, manufacturing and marketing of semiconductor test products and services. The System Test segment includes operations related to the design, manufacturing and marketing of products and services for defense/aerospace instrumentation test, storage test and circuit-board test. The Industrial Automation segment includes operations related to the design,
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manufacturing and marketing of collaborative robotic arms, autonomous mobile robots and advanced robotic control software. The Wireless Test segment includes operations related to the design, manufacturing and marketing of wireless test products and services.
Teradyne evaluates performance based on several factors, of which the primary financial measure is business segment income (loss) before income taxes. The accounting policies of the business segments in effect are described in Note B: “Accounting Policies” in Teradyne’s Annual Report on Form 10-K for the year ended December 31, 2018.
Segment information for the three months ended March 31, 2019 and April 1, 2018 is as follows:
Revenues
Income (loss) before income taxes (1)(2)
Total assets (3)
Income before income taxes (1)(2)
Included in Corporate and Other are: contingent consideration adjustments, severance charges, interest income, interest expense, net foreign exchange gains (losses), intercompany eliminations and acquisition related charges.
Included in the income (loss) before income taxes for each of the segments are charges and credits related to restructuring and other and inventory charges.
Total business assets are directly attributable to each business. Corporate assets consist of cash and cash equivalents, marketable securities and certain other assets.
Included in the Semiconductor Test segment are charges in the following line items in the statements of operations:
Cost of revenues—inventory charge
Restructuring and other—employee severance
Included in the Industrial Automation segment are charges in the following line items in the statements of operations:
Restructuring and other—acquisition related expenses and compensation
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Included in the System Test segment are charges in the following line item in the statements of operations:
Included in the Wireless Test segment are charges in the following line items in the statements of operations:
Included in Corporate and Other are charges and credits in the following line items in the statements of operations:
Restructuring and other—MiR contingent consideration adjustment
Restructuring and other—Universal Robots contingent consideration adjustment
Restructuring and other—acquisition related expenses
V. SHAREHOLDERS’ EQUITY
Stock Repurchase Program
In January 2018, Teradyne’s Board of Directors cancelled the December 2016 stock repurchase program and authorized a new stock repurchase program for up to $1.5 billion of common stock. Teradyne intends to repurchase $500 million in 2019.
During the three months ended March 31, 2019, Teradyne repurchased 4.5 million shares of common stock for $156.5 million at an average price of $35.12 per share. The cumulative repurchases under the $1.5 billion stock repurchase program as of March 31, 2019 totaled 26.1 million shares of common stock for $979.9 million at an average price per share of $37.55.
During the three months ended April 1, 2018, Teradyne repurchased 2.9 million shares of common stock for $134.3 million at an average price of $45.69 per share.
The total price includes commissions and is recorded as a reduction to retained earnings.
Dividend
Holders of Teradyne’s common stock are entitled to receive dividends when they are declared by Teradyne’s Board of Directors.
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In January 2019, Teradyne’s Board of Directors declared a quarterly cash dividend of $0.09 per share. Dividend payments for the three months ended March 31, 2019 were $15.6 million.
In January 2018, Teradyne’s Board of Directors declared a quarterly cash dividend of $0.09 per share. Dividend payments for the three months ended April 1, 2018 were $17.6 million.
While Teradyne declared a quarterly cash dividend and authorized a share repurchase program, it may reduce or eliminate the cash dividend or share repurchase program in the future. Future cash dividends and stock repurchases are subject to the discretion of Teradyne’s Board of Directors, which will consider, among other things, Teradyne’s earnings, capital requirements and financial condition.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Statements in this Quarterly Report on Form 10-Q which are not historical facts, so called “forward-looking statements,” are made pursuant to the safe harbor provisions of Section 21E of the Securities Exchange Act of 1934, as amended. Investors are cautioned that all forward-looking statements involve risks and uncertainties, including those detailed in our filings with the Securities and Exchange Commission. See also Part II, Item 1A of this Quarterly Report on Form 10-Q and Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018. 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 automation equipment for test and industrial applications. We design, develop, manufacture and sell automatic test systems used to test semiconductors, wireless products, data storage and complex electronics systems in the consumer electronics, wireless, automotive, industrial, computing, communications, and aerospace and defense industries. Our industrial automation products include collaborative robotic arms, autonomous mobile robots and advanced robotic control software used by global manufacturing and light industrial customers to improve quality, increase manufacturing and material handling efficiency and decrease manufacturing costs. Our automatic test equipment and industrial automation products and services include:
We have a customer base which includes integrated device manufacturers (“IDMs”), outsourced semiconductor assembly and test providers (“OSATs”), original equipment manufacturers (“OEMs”), wafer foundries, fabless companies that design, but contract with others for the manufacture of integrated circuits (“ICs”), developers of wireless devices and consumer electronics, manufacturers of circuit boards, automotive suppliers, wireless product manufacturers, storage device manufacturers, aerospace and military contractors, and distributors that sell collaborative robots, autonomous mobile robots and wireless test systems.
The market for our test products is concentrated with a limited number of significant customers accounting for a substantial portion of the purchases of test equipment. One customer drives significant demand for our products both through direct sales and sales to the customer’s supply partners. We expect that sales of our test products will continue to be concentrated with a limited number of significant customers for the foreseeable future.
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The sales of our products and services are dependent, to a large degree, on customers who are subject to cyclical trends in the demand for their products. These cyclical periods have had, and will continue to have, a significant effect on our business 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.
On February 26, 2018, we acquired Energid Technologies Corporation (“Energid”) for a total purchase price of approximately $27.6 million. Energid’s technology enables and simplifies the programming of complex robotic motions used in a wide variety of end markets, ranging from heavy industry to healthcare, utilizing both traditional robots and collaborative robots.
On April 25, 2018, we acquired Mobile Industrial Robots ApS (“MiR”), a Danish limited liability company. MiR is the leading maker of collaborative autonomous mobile robots for industrial applications. The total purchase price was approximately $198 million, which included cash paid of approximately $145 million and $53 million in fair value of contingent consideration payable upon achievement of certain thresholds and targets for revenue and earnings before interest and taxes through 2020. Contingent consideration for 2018 was $31 million and was paid in March 2019. The maximum payment for the remaining MiR contingent consideration that could be paid is $83.2 million.
MiR and Energid are included in our Industrial Automation segment.
On January 30, 2019, we acquired all of the issued and outstanding shares of Lemsys SA (“Lemsys”) for a total purchase price of approximately $9.1 million. Lemsys strengthens our position in the electrification trends of vehicles, solar, wind, and industrial applications. Lemsys is included in our Semiconductor Test segment.
We believe our recent acquisitions have enhanced our opportunities for growth. We intend to continue to invest in our business, grow market share in our markets and expand further our addressable markets while tightly managing our costs.
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, 2019 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, 2018, except as noted below.
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842)” (“Topic 842”), which requires a lessee to record a right-of-use (“ROU”) asset and a lease liability on the balance sheet for operating leases with terms longer than twelve months. We adopted this standard and the related amendments (collectively “ASC 842”) on January 1, 2019 and utilized the modified retrospective approach provided by ASU 2018-11, “Leases (Topic 842): Targeted Improvements,” that allowed for a cumulative effect adjustment in the period of adoption. Under this method of adoption, the comparative information in the consolidated financial statements has not been revised and continues to be reported under the previously applicable lease accounting guidance (ASC 840). We also utilized the package of practical expedients permitted under the transition guidance which included the carry-forward of historical lease classification. Adoption of ASC 842 resulted in recording ROU assets and lease liabilities of approximately $50.1 million and $54.3 million, respectively. Operating lease liabilities were calculated using the discount rate on January 1, 2019. The adoption of ASC 842 did not have a material impact on beginning retained earnings, the consolidated statement of operations, cash flows, or earnings per share.
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Under ASC 842, a contract is or contains a lease when we have the right to control the use of an identified asset. We determine if an arrangement is a lease at inception of the contract, which is the date on which the terms of the contract are agreed to and the agreement creates enforceable rights and obligations. The commencement date of the lease is the date that the lessor makes an underlying asset available for use. As of March 31, 2019, we do not have material leases that have not yet commenced.
We determine if the lease is operating or finance at the lease commencement date based upon the terms of the lease and the nature of the asset. The lease term used to calculate the lease liability includes options to extend or terminate the lease when it is reasonably certain that the option will be exercised.
For leases commencing after January 1, 2019, the lease liability is measured at the present value of future lease payments, discounted using the discount rate for the lease at the commencement date. As we are typically unable to determine the implicit rate, we use an incremental borrowing rate based on the lease term and economic environment at commencement date. We initially measure payments based on an index by using the applicable rate at lease commencement. Variable payments that do not depend on an index are not included in the lease liability and are recognized as they are incurred. The ROU asset is initially measured as the amount of lease liability, adjusted for any initial lease costs, prepaid lease payments, and reduced by any lease incentives.
Our contracts often include non-lease components such as common area maintenance. We elected the practical expedient to account for the lease and non-lease components as a single lease component. For leases with a term of one year or less we elected not to record the lease asset or liability. The lease payments are recognized in the consolidated statement of earnings on a straight-line basis over the lease term. We include lease costs within cost of revenues and operating expenses
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SELECTED RELATIONSHIPS WITHIN THE CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
Percentage of revenues:
Income tax provision
Results of Operations
First Quarter 2019 Compared to First Quarter 2018
Revenues by our four reportable segments were as follows:
Semiconductor Test
Industrial Automation
System Test
Wireless Test
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The decrease in Semiconductor Test revenues of $32.4 million, or 8.7%, was driven primarily by a decrease in memory test sales and lower mobility test sales, partially offset by higher image sensor test sales. The increase in Industrial Automation revenues of $17.3 million, or 35.5%, was due to higher demand for collaborative robotic arms and the acquisition of MiR, which was acquired in April 2018. MiR added $9.1 million of revenue in the three months ended March 31, 2019.
The increase in System Test revenues of $15.2 million, or 35.3%, was primarily due to higher sales in Storage Test of 3.5” hard disk drive and higher sales in Production Board Test. The increase in Wireless Test revenues of $6.5 million, or 28.9%, was primarily due to higher demand for millimeter wave and cellular test products.
Revenues by country as a percentage of total revenues were as follows (1):
Taiwan
China
United States
Japan
Europe
Korea
Singapore
Philippines
Thailand
Malaysia
Rest of World
Revenues attributable to a country are based on location of customer site.
Gross Profit
Our gross profit was as follows:
Percent of total revenues
Gross profit as a percent of revenue increased by 2.8 points, primarily due to favorable product mix.
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 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 for our Semiconductor Test, System Test and Industrial Automation segments and the next four quarters for our Wireless Test segment, is written-down to estimated net realizable value.
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During the three months ended March 31, 2019, we recorded an inventory provision of $2.4 million included in cost of revenues primarily due to downward revisions to previously forecasted demand levels, of which $1.2 million was related to Semiconductor Test and $0.5 million was related to System Test.
During the three months ended April 1, 2018, we recorded an inventory provision of $3.5 million included in cost of revenues primarily due to downward revisions to previously forecasted demand levels of which $2.2 million was related to Semiconductor Test, $0.8 million was related to Wireless Test, $0.3 million was related to System Test, and $0.2 million was related to Industrial Automation.
During the three months ended March 31, 2019 and April 1, 2018, we scrapped $0.4 million and $0.3 million of inventory, respectively. During the three months ended March 31, 2019 and April 1, 2018, we sold $0.8 million and $2.2 million of previously written-down or written-off inventory, respectively. As of March 31, 2019, we had inventory related reserves for inventory, which had been written-down or written-off totaling $100.9 million. We have no pre-determined timeline to scrap the remaining inventory.
Selling and Administrative
Selling and administrative expenses were as follows:
The increase of $11.5 million in selling and administrative expenses was due primarily to higher spending in Industrial Automation due to higher sales and marketing spending in Universal Robots and due to the acquisitions of MiR and Energid in 2018.
Engineering and Development
Engineering and development expenses were as follows:
The increase of $2.4 million in engineering and development expenses was primarily due to higher spending in Industrial Automation and Wireless Test, partially offset by lower spending in Semiconductor Test.
Acquired Intangible Assets Amortization
Acquired intangible assets amortization expense was as follows:
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Acquired intangible assets amortization expense increased primarily due to Industrial Automation acquisitions of MiR and Energid in 2018 and the Semiconductor Test acquisition of Lemsys in 2019.
Restructuring and Other
During the three months ended March 31, 2019, we recorded an expense of $3.0 million for the increase in the fair value of the MiR contingent consideration liability, $1.3 million of acquisition related compensation and expenses, and $0.8 million of severance charges related to headcount reductions primarily in Semiconductor Test.
During the three months ended April 1, 2018, we recorded a $5.0 million credit for the decrease in the fair value of the Universal Robots contingent consideration liability, partially offset by $3.9 million recorded for employee severance charges, primarily in Semiconductor Test, and $0.8 million of acquisition related expenses.
Interest and Other
Interest income increased by $2.1 million due primarily to unrealized gains on equity marketable securities in 2019. Interest expense decreased by $1.2 million due primarily to lower realized losses on sales of marketable securities in 2019.
Income (Loss) Before Income Taxes
Corporate and Other (1)
Included in Corporate and Other are: contingent consideration adjustments, employee severance, interest income, interest expense, net foreign exchange gains and losses, intercompany eliminations, and acquisition related expenses.
The decrease in income before income taxes in Semiconductor Test was driven primarily by a decrease in memory test sales and lower mobility test sales partially offset by higher image sensor test sales. The increase in income before income taxes in System Test was primarily due to higher sales in Storage Test of 3.5” hard disk drive and higher sales in Production Board Test. The increase in income before income taxes in Wireless Test was primarily due to higher demand for millimeter wave and cellular test products. The decrease in income before income taxes in Industrial Automation was primarily due to increased intangible assets amortization expense from the acquisitions of MiR and Energid in 2018.
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Income Taxes
The effective tax rate for the three months ended March 31, 2019 and April 1, 2018 was (16.1)% and 9.2%, respectively. The decrease in the effective tax rate from the three months ended April 1, 2018 to the three months ended March 31, 2019 resulted from discrete tax benefit from the release of reserves for uncertain tax positions, increases in benefits related to the U.S. foreign derived intangible income deduction and U.S. research and development tax credits, a decrease in expense related to the uncertain tax positions for transfer pricing and a reduction in discrete tax expense associated with remeasurement of deferred tax assets as a result of reductions in tax rates. These reductions were partially offset by a projected shift in the geographic distribution of income, which increases the income subject to taxation in higher tax rate jurisdictions relative to lower tax rate jurisdictions, an increase in the U.S. global intangible low-taxed income inclusion and a reduction in the discrete benefit from stock based compensation.
Contractual Obligations
The following table reflects our contractual obligations as of March 31, 2019:
Convertible debt
Purchase obligations
Transition tax payable (1)
Operating lease obligations
Fair value of contingent consideration
Interest on long-term debt
Other long-term liabilities reflected on the balance sheet under GAAP (2)
Represents our estimate of a provisional tax amount for the transition tax liability associated with our accumulated foreign earnings as a result of the enactment of the Tax Reform Act on December 22, 2017.
Included in other long-term liabilities are liabilities for customer advances, extended warranty, uncertain tax positions, deferred tax liabilities and other obligations. For certain long-term obligations, we are unable to provide a reasonably reliable estimate of the timing of future payments relating to these obligations and therefore we included these amounts in the column marked “Other.”
Liquidity and Capital Resources
Our cash, cash equivalents, and marketable securities balances decreased by $207.8 million in the three months ended March 31, 2019 to $996.7 million.
Operating activities during the three months ended March 31, 2019 provided cash of $18.0 million. Changes in operating assets and liabilities used cash of $134.2 million. This was due to a $63.3 million increase in operating assets and a $70.9 million decrease in operating liabilities.
The increase in operating assets was primarily due to a $41.7 million increase in accounts receivable due to increased sales, a $18.6 million increase in prepayments and other assets, and a $2.9 million increase in inventories.
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The decrease in operating liabilities was due to a $59.5 million decrease in accrued employee compensation due primarily to first quarter payments related to variable compensation, a $22.8 million decrease in income taxes, an $11.5 million decrease in other accrued liabilities, and $1.2 million of retirement plan contributions, partially offset by a $17.7 million increase in accounts payable, and a $6.5 million increase in deferred revenue and customer advance payments.
Investing activities during the three months ended March 31, 2019 used cash of $261.0 million, due to $375.2 million used for purchases of marketable securities, $25.7 million used for purchases of property, plant and equipment, and $7.0 million, net of cash acquired, used for the acquisition of Lemsys, partially offset by $141.2 million and $5.4 million in proceeds from maturities and sales of marketable securities, respectively, and proceeds from life insurance of $0.3 million related to the cash surrender value from the cancellation of a Teradyne owned life insurance policy.
Financing activities during the three months ended March 31, 2019 used cash of $199.8 million, due to $156.5 million used for the repurchase of 4.5 million shares of common stock at an average price of $35.12 per share, $27.6 million used for a payment related to MiR and Universal Robots acquisition contingent consideration, $15.6 million used for dividend payments, and $14.3 million used for payments related to net settlements of employee stock compensation awards, partially offset by $14.3 million from the issuance of common stock under employee stock purchase and stock option plans.
Operating activities during the three months ended April 1, 2018 used cash of $81.9 million. Changes in operating assets and liabilities used cash of $212.6 million. This was due to a $162.4 million increase in operating assets and a $50.2 million decrease in operating liabilities.
The increase in operating assets was primarily due to a $140.7 million increase in accounts receivable due to an increase in shipments during the last month of the quarter and the impact of the new revenue recognition standard, a $21.0 million increase in inventories, and a $0.7 million increase in prepayments and other assets.
The decrease in operating liabilities was due to a $56.3 million decrease in accrued employee compensation due primarily to first quarter payments related to variable compensation, a $12.1 million decrease in income taxes, a $7.5 million decrease in other accrued liabilities, and $1.0 million of retirement plan contributions, partially offset by a $17.1 million increase in accounts payable and a $9.6 million increase in deferred revenue and customer advance payments.
Investing activities during the three months ended April 1, 2018 provided cash of $462.9 million, due to $800.7 million and $212.7 million in proceeds from sales and maturities of marketable securities, respectively, partially offset by $490.3 million used for purchases of marketable securities, $34.8 million used for purchases of property, plant and equipment and $25.4 million used for the acquisition of Energid.
Financing activities during the three months ended April 1, 2018 used cash of $174.4 million, due to $134.3 million used for the repurchase of 2.9 million shares of common stock at an average price of $45.69 per share, $19.6 million used for payment related to net settlement of employee stock compensation awards, $17.6 million used for dividend payments, and $13.6 million used for a payment related to Universal Robots acquisition contingent consideration, partially offset by $10.7 million from the issuance of common stock under employee stock purchase and stock option plans.
In January 2019, our Board of Directors declared a quarterly cash dividend of $0.09 per share. Dividend payments for the three months ended March 31, 2019 were $15.6 million.
In January 2018, our Board of Directors declared a quarterly cash dividend of $0.09 per share. Dividend payments for the three months ended April 1, 2018 were $17.6 million.
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In January 2018, our Board of Directors cancelled the December 2016 stock repurchase program and authorized a new stock repurchase program for up to $1.5 billion of common stock. We intend to repurchase $500 million in 2019. During the three months ended March 31, 2019, we repurchased 4.5 million shares of common stock for $156.5 million at an average price of $35.12 per share. During the three months ended April 1, 2018, we repurchased 2.9 million shares of common stock for $134.3 million at an average price of $45.69 per share. The cumulative repurchases under the $1.5 billion stock repurchase program as of March 31, 2019 totaled 26.1 million shares of common stock for $979.9 million at an average price per share of $37.55.
While we declared a quarterly cash dividend and authorized a share repurchase program, we may reduce or eliminate the cash dividend or share repurchase program in the future. Future cash dividends and stock repurchases are subject to the discretion of our Board of Directors, which will consider, among other things, our earnings, capital requirements and financial condition.
We believe our cash, cash equivalents and marketable securities balance will be sufficient to pay our quarterly dividend, execute our authorized share repurchase program and meet our working capital and expenditure needs for at least the next twelve months. Inflation has not had a significant long-term impact on earnings.
Equity Compensation Plans
As discussed in Note O: “Stock Based Compensation” in our 2018 Annual Report on 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 January 26, 2017, the FASB issued ASU 2017-04, “Intangibles—Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment.” The new guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Goodwill impairment will be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance will remain largely unchanged. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. The same one-step impairment test will be applied to goodwill at all reporting units, even those with zero or negative carrying amounts. Entities will be required to disclose the amount of goodwill at reporting units with zero or negative carrying amounts. The revised guidance will be applied prospectively, and is effective in 2020. Early adoption is permitted for any impairment tests performed after January 1, 2017. We are currently evaluating the impact of this ASU on our financial position, results of operations and statements of cash flows.
Quantitative and Qualitative Disclosures about Market Risks
For “Quantitative and Qualitative Disclosures about Market Risk” affecting Teradyne, see Part 2 Item 7a, “Quantitative and Qualitative Disclosures about Market Risks,” in our Annual Report on Form 10-K filed with the SEC on March 1, 2018. There were no material changes in our exposure to market risk from those set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.
In addition to market risks described in our Annual Report on Form 10-K, we have an equity price risk related to the fair value of our convertible senior unsecured notes issued in December 2016. In December 2016,
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Teradyne issued $460 million aggregate principal amount of 1.25% convertible senior unsecured notes (the “Notes”) due December 15, 2023. As of March 31, 2019, the Notes had a fair value of $644.6 million. The table below provides a sensitivity analysis of hypothetical 10% changes of Teradyne’s stock price as of the end of the first quarter of 2019 and the estimated impact on the fair value of the Notes. The selected scenarios are not predictions of future events, but rather are intended to illustrate the effect such event may have on the fair value of the Notes. The fair value of the Notes is subject to equity price risk due to the convertible feature. The fair value of the Notes will generally increase as Teradyne’s common stock price increases and will generally decrease as the common stock price declines in value. The change in stock price affects the fair value of the convertible senior notes, but does not impact Teradyne’s financial position, cash flows or results of operations due to the fixed nature of the debt obligation. Additionally, we carry the Notes at face value less unamortized discount on our balance sheet, and we present the fair value for required disclosure purposes only. In connection with the offering of the Notes we also sold warrants to the option counterparties. These transactions have been accounted for as an adjustment to our shareholders’ equity. The convertible note hedge transactions are expected to reduce the potential equity dilution upon conversion of the Notes. The warrants along with any shares issuable upon conversion of the Notes will have a dilutive effect on our earnings per share to the extent that the average market price of our common stock for a given reporting period exceeds the applicable strike price or conversion price of the warrants or Notes, respectively.
Hypothetical Change in Teradyne Stock Price
10% Increase
No Change
10% Decrease
See Note I: “Debt” for further information.
Controls and Procedures
As of the end of the period covered by this report, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15(b) or Rule 15d-15(f) promulgated under the Exchange Act. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective in ensuring that material information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, including ensuring that such material information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
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PART II. OTHER INFORMATION
Legal Proceedings
We are subject to various legal proceedings and claims, which have arisen, in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on our results of operations, financial condition or cash flows.
Risk Factors
In addition to other information set forth in this Form 10-Q, you should carefully consider the factors discussed in Part I, “Item 1A: Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018, 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.
Unregistered Sales of Equity Securities and Use of Proceeds
The following table includes information with respect to repurchases we made of our common stock during the three months ended March 31, 2019 (in thousands except per share price):
Period
January 1, 2019 – January 27, 2019
January 28, 2019 – February 24, 2019
February 25, 2019 – March 31, 2019
Includes three hundred ninety one thousand shares at an average price of $36.60 withheld from employees for the payment of taxes.
We satisfy U.S. federal and state minimum withholding tax obligations due upon the vesting and the conversion of restricted stock units into shares of our common stock, by automatically withholding from the shares being issued, a number of shares with an aggregate fair market value on the date of such vesting and conversion that would satisfy the minimum withholding amount due.
Mine Safety Disclosures
Not Applicable
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Exhibits
Exhibit
Number
Description
Mangement Contract and Compensatory Plan
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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/ SANJAY MEHTA
Sanjay Mehta
Vice President,
Chief Financial Officer and Treasurer
(Duly Authorized Officer
and Principal Financial Officer)
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