Teradyne - 10-Q quarterly report FY2022 Q3

false0000097210Q3--12-31Includes $3.8 million and $3.8 million in 2022 and 2021, respectively, for leases of Teradyne’s systems recognized outside Accounting Standards Codification (“ASC”) 606 “Revenue from Contracts with Customers.”Includes $11.1 million and $11.1 million in 2022 and 2021, respectively, for leases of Teradyne’s systems recognized outside ASC 606 “Revenue from Contracts with Customers.”In the nine months ended October 3, 2021, the fair value of contingent consideration for the earn-outs in connection with the acquisition of AutoGuide was reduced to zero, which resulted in a benefit of $7.2 million, primarily due to a decrease in forecasted revenues and earnings before interest and taxes.Incremental shares from assumed conversion of the convertible notes were calculated using the difference between the average Teradyne stock price for the period and the conversion price, multiplied by the number of convertible notes 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, multiplied by the number of warrant 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.Included in Corporate and Eliminations are: legal and environmental fees, contingent consideration fair value adjustments, interest income, interest expense, severance charges, net foreign exchange gains (losses), acquisition related charges and compensation, pension, intercompany eliminations and for the three and nine months ended October 3, 2021, loss on convertible debt conversions. Included in income (loss) before taxes are charges and credits related to restructuring and other, inventory charges and, for the three and nine months ended October 3, 2021, loss on convertible debt conversions.Total assets are attributable to each segment. 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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 October 2, 2022

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

For the transition period from

Commission File

No. 001-06462

TERADYNE, INC.

(Exact name of registrant as specified in its charter)



Massachusetts		04-2272148
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

600 Riverpark Drive, North Reading, Massachusetts		01864
(Address of Principal Executive Offices)		(Zip Code)

978-370-2700

(Registrant’s Telephone Number, Including Area Code)

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


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.125 per share	TER	Nasdaq Stock Market LLC

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, a

non-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):




Large accelerated filer	☒	Accelerated filer	☐

Non-accelerated filer	☐	Emerging growth company	☐

Smaller reporting company	☐

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 ☒

The number of shares outstanding of the registrant’s only class of Common Stock as of October 31, 2022 was 155,756,146 shares.

TERADYNE, INC.

INDEX


		Page No.
	PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited):
	Condensed Consolidated Balance Sheets as of October 2, 2022 and December 31, 2021		1
	Condensed Consolidated Statements of Operations for the Three and Nine Months ended October 2, 2022 and October 3, 2021		2
	Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months ended October 2, 2022 and October 3, 2021		3
	Condensed Consolidated Statements of Convertible Common Shares and Shareholders’ Equity for the Three and Nine Months ended October 2, 2022 and October 3, 2021		4
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended October 2, 2022 and October 3, 2021		5
	Notes to Condensed Consolidated Financial Statements		6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		30
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		41
Item 4.	Controls and Procedures		42

	PART II. OTHER INFORMATION
Item 1.	Legal Proceedings		42
Item 1A.	Risk Factors		42
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		44
Item 4.	Mine Safety Disclosures		45
Item 6.	Exhibits		46

P60Y

PART I

Item 1:

Financial Statements

TERADYNE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)


	October 2, 2022			December 31, 2021
	(in thousands, except per share amount)

ASSETS
Current assets:
Cash and cash equivalents	$	710,746		$	1,122,199
Marketable securities		65,310			244,231
Accounts receivable, less allowance for credit losses of $1,865 and $2,012 at October 2, 2022 and December 31, 2021, respectively		530,349			550,749
Inventories, net		310,754			243,330
Prepayments		502,678			406,266
Other current assets		7,717			9,452

Total current assets		2,127,554			2,576,227
Property, plant and equipment, net		415,181			387,240
Operating lease right-of-use assets, net		61,430			68,807
Marketable securities		111,039			133,858
Deferred tax assets		130,207			102,428
Retirement plans assets		13,805			15,110
Other assets		29,311			24,096
Acquired intangible assets, net		55,580			75,635
Goodwill		375,799			426,024

Total assets	$	3,319,906		$	3,809,425


LIABILITIES
Current liabilities:
Accounts payable	$	167,975		$	153,133
Accrued employees’ compensation and withholdings		168,102			253,667
Deferred revenue and customer advances		143,591			146,185
Other accrued liabilities		126,457			124,187
Operating lease liabilities		17,079			19,977
Income taxes payable		64,141			88,789
Current debt		14,596			19,182

Total current liabilities		701,941			805,120
Retirement plans liabilities		137,317			151,141
Long-term deferred revenue and customer advances		48,488			54,921
Long-term other accrued liabilities		15,506			15,497
Deferred tax liabilities		1,327			6,327
Long-term operating lease liabilities		51,872			56,178
Long-term incomes taxes payable		59,135			67,041
Debt		50,195			89,244

Total liabilities		1,065,781			1,245,469

Commitments and contingencies (Note Q)
Mezzanine equity:
Convertible common shares		—			1,512

SHAREHOLDERS’ EQUITY
Common stock , $0.125 par value, 1,000,000 shares authorized; 155,782 and 162,251 shares issued and outstanding at October 2, 2022 and December 31, 2021, respectively		19,473			20,281
Additional paid-in capital		1,746,779			1,811,545
Accumulated other comprehensive loss		(84,779	)		(5,948	)
Retained earnings		572,652			736,566

Total shareholders’ equity		2,254,125			2,562,444

Total liabilities, convertible common shares and shareholders’ equity	$	3,319,906		$	3,809,425

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, 2021, are an integral part of the condensed consolidated financial statements.

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TERADYNE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


	For the Three Months Ended						For the Nine Months Ended
	October 2, 2022			October 3, 2021			October 2, 2022			October 3, 2021
	(in thousands, except per share amount)
Revenues:
Products	$	676,252		$	825,448		$	2,000,081		$	2,437,901
Services		150,821			125,053			423,128			379,934

Total revenues		827,073			950,501			2,423,209			2,817,835
Cost of revenues:
Cost of products		277,539			333,229			795,229			989,859
Cost of services		64,155			46,271			181,279			148,368

Total cost of revenues (exclusive of acquired intangible assets amortization shown separately below)		341,694			379,500			976,508			1,138,227

Gross profit		485,379			571,001			1,446,701			1,679,608
Operating expenses:
Selling and administrative		135,632			134,829			415,351			404,812
Engineering and development		111,715			107,220			331,781			317,644
Acquired intangible assets amortization		4,729			5,355			14,663			16,293
Restructuring and other		1,796			1,197			19,554			(3,426	)

Total operating expenses		253,872			248,601			781,349			735,323

Income from operations		231,507			322,400			665,352			944,285
Non-operating (income) expense:
Interest income		(1,318	)		(626	)		(2,972	)		(2,066	)
Interest expense		779			3,785			2,704			15,354
Other (income) expense, net		5,849			21,486			20,472			25,223

Income before income taxes		226,197			297,755			645,148			905,774
Income tax provision		42,712			41,037			101,948			115,225

Net income	$	183,485		$	256,718		$	543,200		$	790,549

Net income per common share:
Basic	$	1.17		$	1.56		$	3.41		$	4.77

Diluted	$	1.10		$	1.41		$	3.17		$	4.26

Weighted average common shares—basic		156,364			164,583			159,325			165,690

Weighted average common shares—diluted		166,733			181,987			171,156			185,492

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, 2021, are an integral part of the condensed

consolidated financial statements.

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TERADYNE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)


	For the Three Months Ended						For the Nine Months Ended
	October 2, 2022			October 3, 2021			October 2, 2022			October 3, 2021
	(in thousands)
Net income	$	183,485		$	256,718		$	543,200		$	790,549
Other comprehensive income, net of tax:
Foreign currency translation adjustment, net of tax of $0, $0, $0, $0, respectively		(28,951	)		(10,698	)		(66,258	)		(26,672	)
Available-for-sale marketable securities:
Unrealized losses arising during period, net of tax of $(997), $(44), $(3,570), $(516), respectively		(3,581	)		(176	)		(13,491	)		(1,952	)
Less: Reclassification adjustment for losses (gains) included in net income, net of tax of $(11), $(65), $48, $(186), respectively		177			(229	)		386			(670	)

		(3,404	)		(405	)		(13,105	)		(2,622	)
Cash flow hedges:
Unrealized gains arising during period, net of tax of $0, $0, $0, $0, respectively		537			—			537			—
Defined benefit post-retirement plan:
Amortization of prior service credit, net of tax of $0, $0, $(2), $(2), respectively		(2	)		(2	)		(5	)		(5	)

Other comprehensive loss		(31,820	)		(11,105	)		(78,831	)		(29,299	)

Comprehensive income	$	151,665		$	245,613		$	464,369		$	761,250

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, 2021, are an integral part of the condensed

consolidated financial statements.

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TERADYNE, INC.

CONDENSED STATEMENTS OF CONVERTIBLE COMMON SHARES

AND SHAREHOLDERS’ EQUITY

(Unaudited)


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

For the Three Months Ended October 2, 2022
Balance, July 3, 2022	$	—			157,880		$	19,735		$	1,721,586		$	(52,959	)	$	610,234		$	2,298,596
Net issuance of common stock under stock-based plans					169			21			12,031									12,052
Stock-based compensation expense											13,194									13,194
Repurchase of common stock					(2,267	)		(283	)								(203,918	)		(204,201	)
Cash dividends ($ 0.11 per share)																	(17,149	)		(17,149	)
Settlements of convertible notes					207			26			(58	)								(32	)
Exercise of convertible notes hedge call options					(207	)		(26	)		26									—
Net income																	183,485			183,485
Other comprehensive loss														(31,820	)					(31,820	)

Balance, October 2, 2022	$	—			155,782		$	19,473		$	1,746,779		$	(84,779	)	$	572,652		$	2,254,125

For the Three Months Ended October 3, 2021
Balance, July 4, 2021	$	21,386			165,444		$	20,680		$	1,772,302		$	15,322		$	684,952		$	2,493,256
Net issuance of common stock under stock-based plans					8			1			(259	)								(258	)
Stock-based compensation expense											10,042									10,042
Repurchase of common stock					(1,724	)		(215	)								(212,781	)		(212,996	)
Cash dividends ($0.10 per share)																	(16,452	)		(16,452	)
Settlements of convertible notes					5,589			699			636,798									637,497
Exercise of convertible notes hedge call options					(5,589	)		(699	)		(637,015	)								(637,714	)
Convertible common shares		(18,505	)								18,505									18,505
Net income																	256,718			256,718
Other comprehensive loss														(11,105	)					(11,105	)

Balance, October 3, 2021	$	2,881			163,728		$	20,466		$	1,800,373		$	4,217		$	712,437		$	2,537,493

For the Nine Months Ended October 2, 2022
Balance, December 31, 2021	$	1,512			162,251		$	20,281		$	1,811,545		$	(5,948	)	$	736,566		$	2,562,444
Net issuance of common stock under stock-based plans					754			95			(4,287	)								(4,192	)
Stock-based compensation expense											39,056									39,056
Repurchase of common stock					(7,223	)		(903	)								(749,097	)		(750,000	)
Cash dividends ($0.33 per share)																	(52,617	)		(52,617	)
Settlements of convertible notes					1,211			151			(364	)								(213	)
Exercise of convertible notes hedge call options					(1,211	)		(151	)		151									—
Convertible common shares		(1,512	)								1,512									1,512
Cumulative-effect of change in accounting principle related to convertible debt											(100,834	)					94,600			(6,234	)
Net income																	543,200			543,200
Other comprehensive loss														(78,831	)					(78,831	)

Balance, October 2, 2022	$	—			155,782		$	19,473		$	1,746,779		$	(84,779	)	$	572,652		$	2,254,125

For the Nine Months Ended October 3, 2021
Balance, December 31, 2020	$	3,787			166,123		$	20,765		$	1,765,323		$	33,516		$	387,414		$	2,207,018
Net issuance of common stock under stock-based plans					893			112			(48	)								64
Stock-based compensation expense											35,915									35,915
Repurchase of common stock					(3,288	)		(411	)								(415,769	)		(416,180	)
Cash dividends ($0.30 per share)																	(49,757	)		(49,757	)
Settlements of convertible notes					7,178			897			840,305									841,202
Exercise of convertible notes hedge call options					(7,178	)		(897	)		(842,028	)								(842,925	)
Convertible common shares		(906	)								906									906
Net income																	790,549			790,549
Other comprehensive loss														(29,299	)					(29,299	)

Balance, October 3, 2021	$	2,881			163,728		$	20,466		$	1,800,373		$	4,217		$	712,437		$	2,537,493

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, 2021, are an integral part of the condensed

consolidated financial statements.

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TERADYNE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	For the Nine Months Ended
	October 2, 2022			October 3, 2021
	(in thousands)
Cash flows from operating activities:
Net income	$	543,200		$	790,549
Adjustments to reconcile net income from operations to net cash provided by operating activities:
Depreciation		67,902			67,866
Stock-based compensation		37,420			34,649
Provision for excess and obsolete inventory		18,929			11,775
Amortization		15,012			27,626
Losses (gains) on investments		11,436			(4,750	)
Deferred taxes		(28,373	)		(10,732	)
Contingent consideration fair value adjustments		—			(7,227	)
Loss on convertible debt conversions		—			25,397
Retirement plans actuarial gains		—			(627	)
Other		740			243
Changes in operating assets and liabilities
Accounts receivable		4,248			(103,299	)
Inventories		(68,817	)		21,943
Prepayments and other assets		(94,331	)		(138,564	)
Accounts payable and other liabilities		(71,682	)		65,064
Deferred revenue and customer advances		(5,896	)		8,699
Retirement plans contributions		(3,897	)		(4,123	)
Income taxes		(31,370	)		(17,406	)

Net cash provided by operating activities		394,521			767,083

Cash flows from investing activities:
Purchases of property, plant and equipment		(128,672	)		(103,162	)
Purchases of marketable securities		(267,175	)		(509,470	)
Proceeds from sales of marketable securities		259,200			209,437
Proceeds from maturities of marketable securities		182,092			571,277
Purchase of investment		—			(12,000	)

Net cash provided by investing activities		45,445			156,082

Cash flows from financing activities:
Issuance of common stock under stock purchase and stock option plans		28,733			32,590
Repurchase of common stock		(750,000	)		(406,180	)
Payments of convertible debt principal		(52,005	)		(301,997	)
Dividend payments		(52,578	)		(49,711	)
Payments related to net settlement of employee stock compensation awards		(32,987	)		(32,045	)

Net cash used for financing activities		(858,837	)		(757,343	)

Effects of exchange rate changes on cash and cash equivalents		7,418			(489	)

(Decrease) increase in cash and cash equivalents		(411,453	)		165,333
Cash and cash equivalents at beginning of period		1,122,199			914,121

Cash and cash equivalents at end of period	$	710,746		$	1,079,454

Non-cash investing activities:
Capital expenditures incurred but not yet paid:	$	2,349		$	2,286

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, 2021, are an integral part of the condensed

consolidated financial statements.

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TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 many industries including 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, logistics and light industrial customers to improve quality, increase manufacturing and material handling efficiency and decrease manufacturing and logistics costs. Teradyne’s automatic test equipment and industrial automation products and services include:

•

semiconductor test (“Semiconductor Test”) systems;

•

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

•

wireless test (“Wireless Test”) systems; and

•

industrial automation (“Industrial Automation”) products.

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 may have been reclassified to conform to the current year presentation. The December 31, 2021 condensed consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by United States of America generally accepted accounting principles (“U.S. GAAP”) for complete financial statements. The accompanying financial information should be read in conjunction with the consolidated financial statements and notes thereto contained in Teradyne’s Annual Report on Form

10-K,

filed with the U.S. Securities and Exchange Commission (“SEC”) on February 23, 2022, for the year ended December 31, 2021.

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 of assets, liabilities, revenues and expenses, and related disclosures of contingent liabilities. On an

on-going

basis, management evaluates its estimates, including those related to inventories, investments, goodwill, intangible and other long-lived assets, accounts receivable, income taxes, deferred tax assets and liabilities, pensions, warranties, and loss contingencies. Management bases its estimates on historical experience and on appropriate and customary assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgements about the carrying values of assets and liabilities that are not readily apparent from other sources. Due to the

COVID-19

pandemic, there has been uncertainty and disruption in the global economy and our markets. Management is not aware of any specific event or circumstance that would require an update to its estimates or judgments or a revision of the carrying value of its assets or liabilities as of the date of issuance of this Quarterly Report on Form

10-Q.

These estimates may change, as new events occur and additional information is obtained. Actual results may differ significantly from these estimates under different assumptions or conditions.

Convertible Debt

Teradyne adopted Accounting Standards Update (“ASU”) ASU

2020-06

–

“Debt—Debt with Conversion and Other Options and Derivatives and Hedging—Contracts in Entity’s Own Equity,”

on January 1, 2022 using the modified retrospective method of adoption

Under ASU

2020-06,

Teradyne accounts for a convertible debt instrument as a single liability measured at its amortized cost, as long as no other features require bifurcation and recognition as derivatives. Unsettled shares are recorded in current debt, and there is no recognition of a debt discount, which was previously amortized to interest expense. Teradyne uses the

if-converted

method in the diluted earnings per share (“EPS”) calculation for convertible instruments. As a result of adoption, Teradyne recorded an increase of $1.4 million to current debt for unsettled shares, an increase of $6.6 million to long-term debt for unamortized debt discount, an increase of $1.8 million to deferred tax assets and an increase to retained earnings of $94.6 million for the reclassification of the equity component. Mezzanine equity representing unsettled shares value was reduced to zero and additional

paid-in

capital was reduced by $100.8 million.

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C. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

For the nine months ended October 2, 2022, there were

recently issued accounting pronouncements that had, or are expected to have, a material impact to Teradyne’s consolidated financial statements.

D. INVESTMENT IN OTHER COMPANY

On June 1, 2021, Teradyne invested $12.0 million in MachineMetrics, Inc. (“MachineMetrics”), a private company that develops and sells products to improve manufacturing performance through automated machine data collection, alerting, and analytics. Teradyne’s investment in MachineMetrics aligns with its strategy of providing and investing in leading edge products for automating industrial production processes in growing markets. The investment was recorded at cost and is evaluated for impairment or an indication of changes in fair value resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer on a quarterly basis. At October 2, 2022, the value of the investment was $12.0 million, and there were no changes during the three and nine months ended October 2, 2022.

E. REVENUE

Disaggregation of Revenue

The following table provides information about disaggregated revenue by timing of revenue recognition, primary geographical market, and major product lines. During the three months ended October 2, 2022 Teradyne combined Mobile Industrial Robots and AutoGuide into one business unit. Revenues for all periods shown below have been combined accordingly.


	Semiconductor Test						Industrial Automation
	System on-a-Chip		Memory		System Test		Universal Robots		Mobile Industrial Robots		Wireless Test		Corporate and Eliminations			Total
	(in thousands)
For the Three Months Ended October 2, 2022 (1)
Timing of Revenue Recognition
Point in Time	$	383,801	$	117,943	$	93,248	$	71,300	$	15,025	$	42,885	$	—		$	724,202
Over Time		66,614		7,346		22,906		2,062		680		3,263		—			102,871

Total	$	450,415	$	125,289	$	116,154	$	73,362	$	15,705	$	46,148	$	—		$	827,073

Geographical Market
Asia Pacific	$	399,323	$	122,839	$	73,768	$	18,850	$	2,917	$	34,420	$	—		$	652,117
Americas		31,719		2,129		35,865		26,515		8,877		9,481		—			114,586
Europe, Middle East and Africa		19,373		321		6,521		27,997		3,911		2,247		—			60,370

Total	$	450,415	$	125,289	$	116,154	$	73,362	$	15,705	$	46,148	$	—		$	827,073

For the Three Months Ended October 3, 2021 (1)
Timing of Revenue Recognition
Point in Time	$	508,747	$	105,454	$	88,155	$	76,008	$	12,577	$	65,409	$	(63	)	$	856,287
Over Time		66,270		7,761		14,450		1,742		687		3,304		—			94,214

Total	$	575,017	$	113,215	$	102,605	$	77,750	$	13,264	$	68,713	$	(63	)	$	950,501

Geographical Market
Asia Pacific	$	519,886	$	110,362	$	62,757	$	19,654	$	2,788	$	54,344	$	—		$	769,791
Americas		29,119		2,281		34,560		23,429		5,321		11,352		(63	)		105,999
Europe, Middle East and Africa		26,012		572		5,288		34,667		5,155		3,017		—			74,711

Total	$	575,017	$	113,215	$	102,605	$	77,750	$	13,264	$	68,713	$	(63	)	$	950,501

For the Nine Months Ended October 2, 2022 (2)
Timing of Revenue Recognition
Point in Time	$	1,102,467	$	281,456	$	317,230	$	234,352	$	49,570	$	152,079	$	—		$	2,137,154
Over Time		193,996		21,473		52,295		6,268		2,582		9,441		—			286,055

Total	$	1,296,463	$	302,929	$	369,525	$	240,620	$	52,152	$	161,520	$	—		$	2,423,209

Geographical Market
Asia Pacific	$	1,153,599	$	294,986	$	243,135	$	54,828	$	10,826	$	113,472	$	—		$	1,870,846
Americas		90,148		6,727		105,884		81,857		24,670		36,628		—			345,914
Europe, Middle East and Africa		52,716		1,216		20,506		103,935		16,656		11,420		—			206,449

Total	$	1,296,463	$	302,929	$	369,525	$	240,620	$	52,152	$	161,520	$	—		$	2,423,209

Table of Contents


	Semiconductor Test						Industrial Automation
	System on-a-Chip		Memory		System Test		Universal Robots		Mobile Industrial Robots		Wireless Test		Corporate and Eliminations			Total
	(in thousands)
For the Nine Months Ended October 3, 2021 (2)
Timing of Revenue Recognition
Point in Time	$	1,548,895	$	291,578	$	295,666	$	214,427	$	41,612	$	154,908	$	(352	)	$	2,546,734
Over Time		188,022		21,776		44,595		5,001		2,111		9,596		—			271,101

Total	$	1,736,917	$	313,354	$	340,261	$	219,428	$	43,723	$	164,504	$	(352	)	$	2,817,835

Geographical Market
Asia Pacific	$	1,618,117	$	301,562	$	223,507	$	55,531	$	8,674	$	133,678	$	—		$	2,341,069
Americas		71,562		9,373		98,475		66,390		17,799		24,228		(352	)		287,475
Europe, Middle East and Africa		47,238		2,419		18,279		97,507		17,250		6,598		—			189,291

Total	$	1,736,917	$	313,354	$	340,261	$	219,428	$	43,723	$	164,504	$	(352	)	$	2,817,835

(1)	Includes $1.8 million and $3.8 million in 2022 and 2021, respectively, for leases of Teradyne’s systems recognized outside Accounting Standards Codification (“ASC”) 606 “Revenue from Contracts with Customers.”

(2)	Includes $5.9 million and $11.1 million in 2022 and 2021, respectively, for leases of Teradyne’s systems recognized outside ASC 606 “Revenue from Contracts with Customers.”

Contract Balances

During the three and nine months ended October 2, 2022, Teradyne recognized $27.1 million and $87.3 million, respectively, that was previously included within the deferred revenue and customer advances balances at the beginning of the period. During the three and nine months ended October 3, 2021, Teradyne recognized $32.9 million and $82.5 million, respectively, that was previously included within the deferred revenue and customer advances balances. This revenue primarily relates to undelivered hardware, extended warranties, training, application support, and post contract support. Each of these represents a distinct performance obligation. As of October 2, 2022, Teradyne has $1,506 million of unsatisfied performance obligations. Teradyne expects to recognize 88% of the remaining performance obligations in the next 12 months and 12% in

1-3

years.

Deferred revenue and customer advances consist of the following at October 2, 2022 and December 31, 2021, and are included in short and long-term deferred revenue and customer advances on the balance sheet:


	October 2, 2022		December 31, 2021
	(in thousands)
Maintenance, service and training	$	76,310	$	81,826
Extended warranty		61,920		64,168
Customer advances, undelivered elements and other		53,849		55,112

Total deferred revenue and customer advances	$	192,079	$	201,106

Accounts Receivable

During the three and nine months ended October 2, 2022 and October 3, 2021, Teradyne sold certain trade accounts receivables on a

non-recourse

basis to third-party financial institutions pursuant to factoring agreements. During the three months ended October 2, 2022 and October 3, 2021, total trade accounts receivable sold under the factoring agreements were $15.9 million and $66.9 million, respectively. During the nine months ended October 2, 2022 and October 3, 2021, total trade accounts receivable sold under the factoring agreements were $73.0 million and $81.7 million, respectively. Factoring fees for the sales of receivables were recorded in interest expense and were not material. Teradyne accounted for these transactions as sales of receivables and presented cash proceeds as cash provided by operating activities in the consolidated statements of cash flows.

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F. INVENTORIES

Inventories, net consisted of the following at October 2, 2022 and December 31, 2021:


	October 2, 2022		December 31, 2021
	(in thousands)

Raw material	$	228,762	$	155,641
Work-in-process		42,093		37,740
Finished goods		39,899		49,949

	$	310,754	$	243,330

Inventory reserves at October 2, 2022 and December 31, 2021 were $124.8 million and $114.1 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 equity and debt mutual funds are classified as Level 1 and

available-for-sale

debt securities are classified as Level 2. 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 and nine months ended October 2, 2022 and October 3, 2021, there were no transfers in or out of Level 1, Level 2, or Level 3 financial instruments.

Realized gains recorded in the three and nine months ended October 2, 2022 were $0.1 million and $0.6 million, respectively. Realized gains recorded in the three and

nine months ended October 3, 2021 were $0.5 million and $2.6 million, respectively. Realized losses recorded in the three and nine months ended October 2, 2022 were $0.3 million and $0.9 million, respectively. No realized losses were recorded in the three and nine months ended October 3, 2021. Realized gains and losses are included in other (income) expense, net.

Unrealized losses on equity securities recorded in the three and nine months ended October 2, 2022 were $2.3 million and $11.1 million, respectively. No unrealized gains on equity securities were recorded in the three and nine months ended October 2, 2022. Unrealized gains on equity securities recorded in

the

nine months ended October 3, 2021 were $3.3 million. Unrealized losses on equity securities recorded in the three and nine months ended October 3, 2021 were $0.4 million and $1.1 million, respectively. Unrealized gains and losses on equity securities are included in other (income) expense, net.

Unrealized gains and losses on

available-for-sale

debt securities are included in accumulated other comprehensive income (loss).

The cost of securities sold is based on average cost.

The following table sets forth by fair value hierarchy Teradyne’s financial assets and liabilities that were measured at fair value on a recurring basis as of October 2, 2022 and December 31, 2021.

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	October 2, 2022
	Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
	(in thousands)
Assets
Cash	$	464,744	$	—	$	—	$	464,744
Cash equivalents		51,243		194,759		—		246,002
Available-for-sale securities:
U.S. Treasury securities		—		65,354		—		65,354
Corporate debt securities		—		45,864		—		45,864
Commercial paper		—		17,719		—		17,719
Debt mutual funds		6,441		—		—		6,441
U.S. government agency securities		—		4,681		—		4,681
Certificates of deposit and time deposits		—		1,205		—		1,205
Non-U.S. government securities		—		512		—		512
Equity securities:
Mutual funds		34,573		—		—		34,573

	$	557,001	$	330,094	$	—	$	887,095
Derivative assets		—		546		—		546

Total	$	557,001	$	330,640	$	—	$	887,641

Liabilities
Derivative liabilities	$	—	$	1,106	$	—	$	1,106

Total	$	—	$	1,106	$	—	$	1,106


Reported as follows:

	(Level 1)		(Level 2)		(Level 3)		Total
	(in thousands)
Assets
Cash and cash equivalents	$	515,987	$	194,759	$	—	$	710,746
Marketable securities		—		65,310		—		65,310
Long-term marketable securities		41,014		70,025		—		111,039
Prepayments and other current assets		—		546		—		546

Total	$	557,001	$	330,640	$	—	$	887,641

Liabilities		.
Other cur r ent liabilities	$	—	$	1,106	$	—	$	1,106

Total	$	—	$	1,106	$	—	$	1,106

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	December 31, 2021
	Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
	(in thousands)
Assets
Cash	$	628,740	$	—	$	—	$	628,740
Cash equivalents		412,212		81,247		—		493,459
Available-for-sale securities:								—
Commercial paper		—		189,620		—		189,620
U.S. Treasury securities		—		77,789		—		77,789
Corporate debt securities		—		56,901		—		56,901
Debt mutual funds		7,971		—		—		7,971
U.S. government agency securities		—		4,610		—		4,610
Certificates of deposit and time deposits		—		1,356		—		1,356
Non-U.S. government securities		—		589		—		589
Equity securities:
Mutual Funds		39,253		—		—		39,253

	$	1,088,176	$	412,112	$	—	$	1,500,288
Derivative assets		—		92		—		92

Total	$	1,088,176	$	412,204	$	—	$	1,500,380

Liabilities
Derivative liabilities		—		118		—		118

Total	$	—	$	118	$	—	$	118


Reported as follows:

	(Level 1)		(Level 2)		(Level 3)		Total
	(in thousands)
Assets
Cash and cash equivalents	$	1,040,952	$	81,247	$	—	$	1,122,199
Marketable securities		—		244,231		—		244,231
Long-term marketable securities		47,224		86,634		—		133,858
Prepayments and other current assets		—		92		—		92

Total	$	1,088,176	$	412,204	$	—	$	1,500,380

Liabilities
Other current liabilities	$	—	$	118	$	—	$	118

Total	$	—	$	118	$	—	$	118

Changes in the fair value of Level 3 contingent consideration for the nine months ended October 2, 2022, and October 3, 2021 were as follows:


	For the Three Months Ended				For the Nine Months Ended
	October 2, 2022		October 3, 2021		October 2, 2022		October 3, 2021
	(in thousands)


Balance at beginning of period	$	—	$	—	$	—	$	7,227
Fair value adjustment (a)		—		—		—		(7,227	)

Balance at end of period	$	—	$	—	$	—	$	—

(a)

In the nine months ended October 3, 2021, the fair value of contingent consideration for the earn-outs in connection with the acquisition of AutoGuide was reduced to zero, which resulted in a benefit of $7.2 million, primarily due to a decrease in forecasted revenues and earnings before interest and taxes.

On March 25, 2022, the arbitration claim filed by Industrial Automation LLC, sellers of AutoGuide, against Teradyne alleging

non-compliance

with the

earn-out

provisions of the Membership Interests Purchase Agreement, dated as of October 18, 2019, among Industrial Automation LLC, Teradyne and AutoGuide was settled for $26.7 million. As a result, Teradyne has no remaining

earn-out

obligations.

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The carrying amounts and fair values of Teradyne’s financial instruments at October 2, 2022 and December 31, 2021 were as follows:


	October 2, 2022				December 31, 2021
	Carrying Value		Fair Value		Carrying Value		Fair Value

	(in thousands)
Assets
Cash and cash equivalents	$	710,746	$	710,746	$	1,122,199	$	1,122,199
Marketable securities		176,349		176,349		378,089		378,089
Derivative assets		546		546		92		92
Liabilities
Derivative liabilities		1,106		1,106		118		118
Convertible debt		64,791		154,486		108,426		604,648

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 October 2, 2022:


	October 2, 2022
	Available-for-Sale
	Cost		Unrealized Gain		Unrealized (Loss)			Fair Market Value		Fair Market Value of Investments with Unrealized Losses
	(in thousands)
U.S. Treasury securities	$	69,598	$	—	$	(4,244	)	$	65,354	$	65,354
Corporate debt securities		52,926		1		(7,063	)		45,864		45,622
Commercial paper		17,691		35		(7	)		17,719		8,983
Debt mutual funds		6,897		—		(456	)		6,441		3,075
U.S. government agency securities		4,790		—		(109	)		4,681		4,681
Certificates of deposit and time deposits		1,205		—		—			1,205		—
Non-U.S. government securities		512		—		—			512		—

	$	153,619	$	36	$	(11,879	)	$	141,776	$	127,715

Reported as follows:


	Cost		Unrealized Gain		Unrealized (Loss)			Fair Market Value		Fair Market Value of Investments with Unrealized Losses
	(in thousands)
Marketable securities	$	65,744	$	35	$	(469	)	$	65,310	$	55,369
Long-term marketable securities		87,875		1		(11,410	)		76,466		72,346

	$	153,619	$	36	$	(11,879	)	$	141,776	$	127,715

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The following table summarizes the composition of

available-for-sale

marketable securities at December 31, 2021:


	December 31, 2021
	Available-for-Sale
	Cost		Unrealized Gain		Unrealized (Loss)			Fair Market Value		Fair Market Value of Investments with Unrealized Losses
	(in thousands)
Commercial paper	$	189,614	$	15	$	(9	)	$	189,620	$	22,784
U.S. Treasury securities		77,707		551		(470	)		77,789		46,435
Corporate debt securities		52,266		4,863		(227	)		56,901		19,422
Debt mutual funds		7,928		43		—			7,971		—
U.S. government agency securities		4,617		5		(12	)		4,610		3,296
Certificates of deposit and time deposits		1,356		—		—			1,356		—
Non-U.S. government securities		589		—		—			589		—

	$	334,077	$	5,477	$	(718	)	$	338,836	$	91,937

Reported as follows:


	Cost		Unrealized Gain		Unrealized (Loss)			Fair Market Value		Fair Market Value of Investments with Unrealized Losses
	(in thousands)
Marketable securities	$	244,213	$	64	$	(46	)	$	244,231	$	54,798
Long-term marketable securities		89,864		5,413		(672	)		94,605		37,139

	$	334,077	$	5,477	$	(718	)	$	338,836	$	91,937

As of October 2, 2022, the fair market value of investments with unrealized losses less than one year and greater than one year totaled $99.7 million and $28.0 million, respectively. As of December 31, 2021, the fair market value of investments with unrealized losses for less than one year and greater than one year totaled $85.4 million and $6.5 million, respectively.

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 October 2, 2022 and December 31, 2021 were not other than temporary.

The contractual maturities of investments in

available-for-sale

securities held at October 2, 2022 were as follows:


	October 2, 2022
	Cost		Fair Market Value
	(in thousands)

Due within one year	$	65,744	$	65,310
Due after 1 year through 5 years		35,934		34,116
Due after 5 years through 10 years		4,800		4,209
Due after 10 years		40,244		31,700

Total	$	146,722	$	135,335

Contractual maturities of investments in

available-for-sale

securities held at October 2, 2022 exclude debt mutual funds with a fair market value of $6.4 million, as they do not have a contractual maturity date.

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Derivatives

Teradyne conducts business in various foreign countries, with certain transactions denominated in local currencies. As a result, Teradyne is exposed to risks relating to changes in foreign currency exchange rates. Teradyne’s foreign currency risk management objective is to minimize the effect of exchange rate fluctuations associated with the remeasurement of monetary assets and liabilities denominated in foreign currencies, and changes in its cash inflows attributable to the forecasted cash flows from certain foreign currency denominated revenues.

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.

Teradyne also enters into foreign currency forward and option contracts designated as cash flow hedges to hedge the risk of changes in its cash inflows attributable to changes in foreign currency exchange rates. The cash flow hedges have maturities of less than six months and mature in the period of revenue recognition for certain products and services in b

cklog and forecasted to be recognized in a future period. Teradyne evaluates cash flow hedges for effectiveness at inception based on the critical terms match method. The hedges are not expected to incur any ineffectiveness however a quarterly qualitative assessment of effectiveness is done to determine if the critical terms match method remains appropriate to use. The change in fair value of the contracts is recorded in accumulated other comprehensive income (loss) and reclassified to earnings at maturity date.

Teradyne does not use derivative financial instruments for speculative purposes.

At October 2, 2022 and December 31, 2021, Teradyne had the following foreign currency forward contracts to buy and sell

non-U.S.

currencies for U.S. dollars and other

non-U.S.

currencies with the following notional amounts:


	October 2, 2022								December 31, 2021
	Buy Position			Sell Position		Net Total			Buy Position			Sell Position		Net Total
	(in millions)
Japanese Yen	$	(37.5	)	$	—	$	(37.5	)	$	(31.4	)	$	—	$	(31.4	)
Taiwan Dollar		(35.2	)		—		(35.2	)		(35.1	)		—		(35.1	)
Korean Won		(5.4	)		—		(5.4	)		(4.2	)		—		(4.2	)
British Pound Sterling		(1.1	)		—		(1.1	)		(1.8	)		—		(1.8	)
Danish Krone		(0.5	)		—		(0.5	)		—			—		—
Singapore Dollar		—			24.4		24.4			—			61.9		61.9
Euro		—			36.7		36.7			—			44.9		44.9
Philippine Peso		—			2.8		2.8			—			3.9		3.9
Chinese Yuan		—			2.4		2.4			—			2.8		2.8

Total	$	(79.7	)	$	66.3	$	(13.4	)	$	(72.5	)	$	113.5	$	41.0

The fair value of the outstanding

foreign currency forward

contracts was a loss of $1.1 million and $0.1 million, respectively, at October 2, 2022 and December 31, 2021.

Unrealized 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.

At October 2, 2022 and December 31, 2021, Teradyne had the following cash flow hedge contracts to buy and sell

non-U.S.

currencies for U.S. dollars with the following notional amounts:


	October 2, 2022							December 31, 2021
	Buy Position			Sell Position		Net Total		Buy Position		Sell Position		Net Total
	(in millions)
Japanese Yen	$	(5.4	)	$	26.6	$	21.2	$	—	$	—	$	—
Taiwan Dollar		(9.2	)		18.3		9.1		—		—		—

Total	$	(14.6	)	$	44.9	$	30.3	$	—	$	—	$	—

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The fair value of the outstanding cash flow hedge contracts was a gain of $0.5 million at October 2, 2022.

Unrealized gains and losses on foreign currency cash flow hedge contracts are included in accumulated other comprehensive income (loss). At maturity the gains or losses associated with cash flow hedge contracts are recorded to revenue.

The following table summarizes the fair value of derivative instruments as of October 2, 2022 and December 31, 2021:


	Balance Sheet Location		October 2, 2022			December 31, 2021
			(in thousands)
Derivatives not designated as hedging instruments:
Foreign currency forward contracts		Prepayments	$	9		$	92
Foreign currency forward contracts		Other current liabilities		(1,106	)		(118	)
Derivatives designated as hedging instruments:
Foreign currency option contracts		Prepayments		537			—
Total derivatives			$	(560	)	$	(26	)

The following table summarizes the effect of derivative instruments recognized in the statement of operations for the three and nine months ended October 2, 2022 and October 3, 2021:


	Location of Losses (Gains) Recognized in Statement of Operations	For the Three Months Ended				For the Nine Months Ended
		October 2, 2022		October 3, 2021		October 2, 2022			October 3, 2021
		(in thousands)


Derivatives not designated as hedging instruments:

Foreign currency forward contracts	Other (income) expense, net	$	1,246	$	2,288	$	(2,209	)	$	5,937
Derivatives designated as hedging instruments:
Foreign currency option contracts	Revenue		—		—		—			—

Total derivatives		$	1,246	$	2,288	$	(2,209	)	$	5,937

The above table does not reflect the corresponding gains and losses from the remeasurement of the monetary assets and liabilities denominated in foreign currencies. For the three and nine months ended October 2, 2022, net losses from the remeasurement of monetary assets and liabilities denominated in foreign currencies were $1.6 million and $9.5 million, respectively. For the three and nine months ended October 3, 2021, net gains from the remeasurement of monetary assets and liabilities denominated in foreign currencies were $1.0 million and $1.3 million, respectively.

See Note H: “Debt” regarding derivatives related to the convertible senior notes.

H. 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 at a rate of 1.25% per year payable semiannually in arrears on June 15 and December 15 of each year. 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

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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 future conversion obligation by paying cash for the principal amount of the Notes and paying or delivering cash, shares of its common stock or a combination of cash and shares of its common stock, at Teradyne’s election for the amount in excess of principal. As of October 2, 2022, the conversion price was approximately $31.47 per share of Teradyne’s common stock. The conversion rate is subject to adjustment under certain circumstances. As of November 4, 2022, one hundred and sixteen holders had exercised the option to convert $401.8 million worth of notes.

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 $31.47.

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 currently cover, subject to customary anti-dilution adjustments, approximately 14.6 million shares of common stock. As of October 2, 2022, the strike price of the warrants was approximately $39.50 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.

Originally, Teradyne allocated $100.8 million of the $460.0 million principal amount of the Notes to the equity component, which represented a discount to the debt and was amortized to interest expense using the effective interest method through December 2023. Effective January 1, 2022, Teradyne adopted ASC

2020-06

using the modified retrospective method of transition and accounts for the debt as a single liability measured at its amortized cost. As a result of the adoption, Teradyne recorded an increase of $1.4 million to current debt for unsettled shares, an increase of $1.8 million to deferred tax assets, an increase of $6.6 million to long-term debt for unamortized debt discount, and an increase to retained earnings of $94.6 million for the reclassification of the equity component. Mezzanine equity representing unsettled shares value was reduced to zero and additional

paid-in

capital was reduced by $100.8 million.

On November 4, 2021, Teradyne made an irrevocable election under the Indenture to require the principal portion of the remaining Notes to be settled in cash.

Debt issuance fees of approximately $0.2 million, at October 2, 2022, are being amortized to interest expense using the effective interest method over the seven-year term of the Notes.

The below tables represent the key components of Teradyne’s convertible senior notes:


	October 2, 2022		December 31, 2021
	(in thousands)
Debt principal	$	64,980	$	116,980
Unamortized debt issuance fees (1)		189		8,554

Net Carrying amount of convertible debt	$	64,791	$	108,426

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Reported as follows:


	October 2, 2022		December 31, 2021
	(in thousands)
Current debt	$	14,596	$	19,182
Long-term debt		50,195		89,244

Net carrying amount of convertible debt	$	64,791	$	108,426


	For the Three Months Ended				For the Nine Months Ended
	October 2, 2022		October 3, 2021		October 2, 2022		October 3, 2021
	(in thousands)				(in thousands)

Contractual interest expense on the coupon	$	159	$	355	$	592	$	2,666
Amortization of debt issuance fees recognized as interest expense (2)		43		2,424		173		9,771

Total interest expense on the convertible debt	$	202	$	2,779	$	765	$	12,437

(1)	Unamortized debt issuance fees as of December 31, 2021 include unamortized debt discount of $8.1 million, which was eliminated with the adoption of ASU 2020- 0 6 on January 1, 2022.

(2)	Three and nine months ended October 3, 2021 includes the amortization of debt discount component, which was eliminated with the adoption of ASU 2020-06 on January 1, 2022.

As of October 2, 2022, the conversion price was approximately $31.47 per share and the

if-converted

value of the notes was $155.2 million.

During the nine months ended October 2, 2022, thirty-three debt holders elected to convert $52.0 million of debt principal. The conversion of the debt was settled in cash for principal amount and in shares for the excess of conversion value over principal amount. The 1.2 million shares issued to the debt holders were received from exercising the convertible notes hedge call options.

Additional conversions of approximately $14.6 million of debt principal will occur in the fourth quarter of 2022 and the liability is included in current debt.

Teradyne expects to make contractual interest payme

nts of $0.6 million in the next 12 months and $0.3 million thereafter.

Revolving Credit Facility

On May 1, 2020, Teradyne entered into a credit agreement (the “Credit Agreement”) with Truist Bank, as administrative agent and collateral agent, and the lenders party thereto. The Credit Agreement provided for a three-year, senior secured revolving credit facility of $400.0 million (the “Credit Facility”).

On December 10, 2021, the Credit Agreement was amended to extend the maturity date of the Credit Facility to December 10, 2026. On October 5, 2022, the Credit Agreement was amended to increase the amount of the Credit Facility to $750.0 million from $400.0 million.

The Credit Agreement provides that, subject to customary conditions, Teradyne may seek to obtain from existing or new lenders the available incremental amount under the Credit Facility, not to exceed the greater

of $

200.0

million or

% of consolidated EBIDTA.

The interest rate 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 0.75% per annum or SOFR plus a margin ranging from 1.10% to 1.85% per annum, based on the consolidated leverage ratio of Teradyne. In addition, Teradyne will pay a commitment fee on the unused portion of the commitments under the Credit Facility ranging from 0.15% to 0.25% 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 SOFR breakage costs.

The Credit Agreement contains customary events of default, representations, warranties and affirmative and negative covenants that, among other things, limit Teradyne’s 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.

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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.

As of November 4, 2022, Teradyne has not borrowed any funds under the credit facility and was in compliance with all covenants.

See Note U: “Subsequent Event” regarding an increase in the amount of the Credit Facility.

I. PREPAYMENTS

Prepayments consist of the following:


	October 2, 2022		December 31, 2021
	(in thousands)
Contract manufacturer and supplier prepayments	$	466,648	$	364,478
Prepaid maintenance and other services		13,760		13,660
Prepaid taxes		12,531		15,090
Other prepayments		9,739		13,038

Total prepayments	$	502,678	$	406,266

J. PRODUCT WARRANTY

Teradyne generally provides a

one-year

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


	For the Three Months Ended						For the Nine Months Ended
	October 2, 2022			October 3, 2021			October 2, 2022			October 3, 2021
	(in thousands)
Balance at beginning of period	$	16,036		$	25,676		$	24,577		$	16,633
Accruals for warranties issued during the period		4,930			6,641			15,460			28,719
Accruals related to pre-existing warranties		(654	)		(963	)		(5,024	)		(3,966	)
Settlements made during the period		(6,181	)		(5,233	)		(20,882	)		(15,265	)

Balance at end of period	$	14,131		$	26,121		$	14,131		$	26,121

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.


	For the Three Months Ended						For the Nine Months Ended
	October 2, 2022			October 3, 2021			October 2, 2022			October 3, 2021
	(in thousands)
Balance at beginning of period	$	65,791		$	63,525		$	64,168		$	51,929
Deferral of new extended warranty revenue		6,987			12,728			28,550			36,533
Recognition of extended warranty deferred revenue		(10,858	)		(8,771	)		(30,798	)		(20,980	)

Balance at end of period	$	61,920		$	67,482		$	61,920		$	67,482

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K. STOCK-BASED COMPENSATION

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

Service-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 service-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.

Performance-based restricted stock units (“PRSUs”) granted to Teradyne’s executive officers may have 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 0% to 200% of the target shares. 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 executive officers meeting the retirement provisions prior to the grant date is recognized during the year following 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.

PRSUs granted to Teradyne’s executive officers may also have 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, amortization of acquired intangible assets; acquisition and divestiture related charges or credits; pension actuarial gains and losses; 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 0% to 200% 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 executive officers meeting the retirement provisions prior to the grant date is recognized during the year following the 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.

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.

During the nine months ended October 2, 2022 and October 3, 2021, Teradyne granted 0.4 million and 0.3 million of service-based restricted stock unit awards to employees at a weighted average grant date fair value of $110.34 and $113.76, respectively, and $0.1 million of service-based restricted stock unit awards to

non-employee

directors at a weighted average grant date fair value of $106.91 and $127.77, respectively.

During the nine months ended October 2, 2022 and October 3, 2021, Teradyne granted 0.1 million of PBIT PRSUs with a grant date fair value of $110.84 and $113.65,

respectively.

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Duri

ng the nine months ended October 2, 2022 and October 3, 2021, Teradyne granted 0.1 million of TSR PRSUs, with a grant date fair value of $101.06 and $125.02, respectively. The fair value was estimated using the Monte Carlo simulation model with the following assumptions:

	For the Nine Months Ended
	October 2, 2022			October 3, 2021

Risk-free interest rate		1.4	%		0.2	%
Teradyne volatility-historical		47.1	%		43.9	%
NYSE Composite Index volatility-historical		22.7	%		22.9	%
Dividend yield		0.4	%		0.4	%

Expected volatility was based on the historical volatility of Teradyne’s stock and the NYSE Composite Index over the most recent three-year period. The risk-free interest rate was determined using the U.S. Treasury yield curve in effect at the time of grant. Dividend yield was based upon an estimated annual dividend amount of $0.44 per share divided by Teradyne’s stock price on the grant date of $112.12 for the 2022 grant and an estimated annual dividend amount of $0.40 per share divided by Teradyne’s stock price on the grant date of $113.48 for the 2021 grant.

During the nine months ended October 2, 2022 and October 3, 2021, Teradyne granted 0.1 million of service-based stock options to executive officers at a weighted average grant date fair value of $39.01 and $36.60, respectively.

The fair value of stock options was estimated using the Black-Scholes option-pricing model with the following assumptions:


	For the Nine Months Ended
	October 2, 2022			October 3, 2021
Expected life (years)		4.0			5.0
Risk-free interest rate		1.6	%		0.4	%
Volatility-historical		43.7	%		37.8	%
Dividend yield		0.4	%		0.4	%

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 $0.44 per share divided by Teradyne’s stock price on the grant date of $112.12 for the 2022 grant and an estimated annual dividend amount of $0.40 per share divided by Teradyne’s stock price on the grant date of $113.48 for the 2021 grant.

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L. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

Changes in accumulated other comprehensive income (loss), which are presented net of tax, consist of the following:


	Foreign Currency Translation Adjustment			Unrealized Gains (Losses) on Marketable Securities			Unrealized Gains on Cash Flow Hedges		Retirement Plans Prior Service Credit			Total
	(in thousands)
Nine Months Ended October 2, 2022

Balance at December 31, 2021, net of tax of $0, $1,055, $0, $(1,128), respectively	$	(10,818	)	$	3,704		$	—	$	1,166		$	(5,948	)
Other comprehensive (loss) gain before reclassifications, net of tax of $0, $(3,570), $0, $0, respectively		(66,258	)		(13,491	)		537		—			(79,212	)
Amounts reclassified from accumulated other comprehensive income, net of tax of $0, $48, $0, $(2), respectively		—			386			—		(5	)		381

Net current period other comprehensive (loss) gain, net of tax of $0, $(3,522), $0, $(2), respectively		(66,258	)		(13,105	)		537		(5	)		(78,831	)

Balance at October 2, 2022, net of tax of $0, $(2,467), $0, $(1,130), respectively	$	(77,076	)	$	(9,401	)	$	537	$	1,161		$	(84,779	)

Nine Months Ended October 3, 2021
Balance at December 31, 2020, net of tax of $0, $1,910, $0, $(1,126), respectively	$	25,389		$	6,954		$	—	$	1,173		$	33,516
Other comprehensive loss before reclassifications, net of tax of $0, $(516), $0, $0, respectively		(26,672	)		(1,952	)		—		—			(28,624	)
Amounts reclassified from accumulated other comprehensive income, net of tax of $0, $(186), $0, $(2), respectively		—			(670	)		—		(5	)		(675	)

Net current period other comprehensive loss, net of tax of $0, $(702), $0, $(2), respectively		(26,672	)		(2,622	)		—		(5	)		(29,299	)

Balance at October 3, 2021, net of tax of $0, $1,208, $0, $(1,128), respectively	$	(1,283	)	$	4,332		$	—	$	1,168		$	4,217

Reclassifications out of accumulated other comprehensive income (loss) to the statement of operations for the three and nine months ended October 2, 2022 and October 3, 2021 were as follows:


Details about Accumulated Other Comprehensive Income (Loss) Components	For the Three Months Ended					For the Nine Months Ended					Affected Line Item in the Statements of Operations
	October 2, 2022			October 3, 2021		October 2, 2022			October 3, 2021
	(in thousands)
Available-for-sale marketable securities:
Unrealized (losses) gains, net of tax of $11, $65, $(48 ) , $186, respectively	$	(177	)	$	229	$	(386	)	$	670		Other (income) expense, net
Defined benefit postretirement plan:
Amortization of prior service credit, net of tax of $0, $0, $2, $2, respectively		2			2		5			5			(a)

Total reclassifications, net of tax of $11, $65, $46, $188, respectively	$	(175	)	$	231	$	(381	)	$	675		Net income

(a)	The amortization of prior service credit is included in the computation of net periodic postretirement benefit cost. See Note P: “Retirement Plans.”

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M. GOODWILL AND ACQUIRED INTANGIBLE ASSETS

Goodwill

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. In the nine months ended October 2, 2022, there were no interim indicators of impairment. 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 nine months ended October 2, 2022, were as follows:


	Industrial Automation			Wireless Test			Semiconductor Test			System Test			Total
	(in thousands)
Balance at December 31, 2021

Goodwill	$	405,971		$	361,819		$	262,101		$	158,699		$	1,188,590
Accumulated impairment losses		—			(353,843	)		(260,540	)		(148,183	)		(762,566	)

Total Goodwill		405,971			7,976			1,561			10,516			426,024

Foreign currency translation adjustment		(50,126	)		—			(99	)		—			(50,225	)

Balance at October 2, 2022
Goodwill		355,845			361,819			262,002			158,699			1,138,365
Accumulated impairment losses		—			(353,843	)		(260,540	)		(148,183	)		(762,566	)

Total Goodwill	$	355,845		$	7,976		$	1,462		$	10,516		$	375,799

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.

Amortizable intangible assets consist of the following and are included in intangible assets, net on the balance sheet:


	Gross Carrying Amount		Accumulated Amortization			Foreign Currency Translation Adjustment			Net Carrying Amount
	(in thousands)
Balance at October 2, 2022

Developed technology	$	272,547	$	(232,802	)	$	(7,620	)	$	32,125
Customer relationships		57,739		(50,623	)		126			7,242
Tradenames and trademarks		59,387		(40,809	)		(2,365	)		16,213

Total intangible assets	$	389,673	$	(324,234	)	$	(9,859	)	$	55,580

Balance, December 31, 2021
Developed technology	$	272,547	$	(223,413	)	$	(4,093	)	$	45,041
Customer relationships		57,739		(48,921	)		209			9,027
Tradenames and trademarks		59,387		(37,237	)		(583	)		21,567

Total intangible assets	$	389,673	$	(309,571	)	$	(4,467	)	$	75,635

Aggregate

intangible asset amortization expense was $4.7 million and $14.7 million, respectively, for the three and nine months ended October 2, 2022 and $5.4 million and $16.3 million, respectively, for the three and nine months ended October 3, 2021.

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Estimated intangible asset amortization expense for each of the five succeeding fiscal years and thereafter is as follows:


Year	Amortization Expense
	(in thousands)
2022	$	4,592
2023		17,922
2024		17,617
2025		10,855
2026		2,262
Thereafter		2,332

N. NET INCOME PER COMMON SHARE

The following table sets forth the computation of basic and diluted net income per common share:


	For the Three Months Ended				For the Nine Months Ended
	October 2, 2022		October 3, 2021		October 2, 2022		October 3, 2021
	(in thousands, except per share amounts)
Net income for basic and diluted net income per share	$	183,485	$	256,718	$	543,200	$	790,549

Weighted average common shares-basic		156,364		164,583		159,325		165,690
Effect of dilutive potential common shares:
Convertible note hedge warrant shares (1)		8,284		9,819		9,114		9,774
Incremental shares from assumed conversion of convertible notes (2)		1,453		6,464		1,965		8,784
Restricted stock units		564		1,035		673		1,147
Stock options		45		73		56		87
Employee stock purchase plan		23		13		23		10

Dilutive potential common shares		10,369		17,404		11,831		19,802

Weighted average common shares-diluted		166,733		181,987		171,156		185,492

Net income per common share-basic	$	1.17	$	1.56	$	3.41	$	4.77

Net income per common share-diluted	$	1.10	$	1.41	$	3.17	$	4.26

(1)

Convertible notes hedge warrant shares were calculated using the difference between the average Teradyne stock price for the period and the warrant price, multiplied by the number of warrant 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.

(2)

Incremental shares from assumed conversion of the convertible notes were calculated using the difference between the average Teradyne stock price for the period and the conversion price, multiplied by the number of convertible notes 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.

The computation of diluted net income per common share for the three and nine months ended October 2, 2022 excludes the effect of the potential vesting of 0.7 million and 0.9 million, respectively, of restricted stock units because the effect would have been anti-dilutive.

The computation of diluted net income per common share for the three and nine months ended October 3, 2021 excludes the effect of the potential vesting of 0.1 million and 0.1 million, respectively, of restricted stock units because the effect would have been anti-dilutive.

O. RESTRUCTURING AND OTHER

During the three months ended October 2, 2022, Teradyne recorded $1.2 million of severance charges primarily in Industrial Automation and $0.7 million for an increase in legal liabilities.

During the three months ended October 3, 2021, Teradyne recorded $0.6 million of severance charges primarily in Industrial Automation.

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During the nine months ended October 2, 2022, Teradyne recorded a charge of $14.7 million related to the arbitration claim filed against Teradyne and AutoGuide related to an

earn-out

dispute, which was settled on March 25, 2022 for $26.7 million, a charge of $2.7 million for an increase in environmental and legal liabilities, and $2.1 million of severance charges primarily in Industrial Automation. Previously, in the three months ended December 31, 2021, Teradyne recorded a charge of $12.0 million related to this

earn-out

dispute.

During the nine months ended October 3, 2021, Teradyne recorded a gain of $7.2 million for the decrease in the fair value of the AutoGuide contingent consideration liability, partially offset by a charge of $1.7 million for an increase in environmental and legal liabilities, and $1.2 million of severance charges primarily in Industrial Automation.

P. RETIREMENT PLANS

ASC 715, “Compensation—Retirement Benefits,” requires an employer with defined benefit plans or other postretirement benefit plans to recognize an asset or a liability on its balance sheet for the overfunded or underfunded status of the plans as defined by ASC 715. The pension asset or liability represents a difference between the fair value of the pension plan’s assets and the projected benefit obligation at December 31. Teradyne uses a December 31 measurement date for all its plans.

Defined Benefit Pension Plans

Teradyne has defined benefit pension plans covering a portion of domestic employees and employees of certain

non-U.S.

subsidiaries. Benefits under these plans are based on employees’ years of service and compensation. Teradyne’s funding policy is to make contributions to these plans in accordance with local laws and to the extent that such contributions are tax deductible. The assets of the U.S. qualified pension plan consist primarily of fixed income and equity securities. In addition, Teradyne has an unfunded supplemental executive defined benefit plan in the United States to provide retirement benefits in excess of levels allowed by the Employment Retirement Income Security Act (“ERISA”) and the Internal Revenue Code (the “IRC”), as well as unfunded qualified foreign plans.

In the nine months ended October 2, 2022 and October 3, 2021, Teradyne contributed $2.5 million and $2.5 million, respectively, to the U.S. supplemental executive defined benefit pension plan, and $0.7 million and $0.8 million, respectively, to certain qualified pension plans for

non-U.S.

subsidiaries.

For the three and nine months ended October 2, 2022 and October 3, 2021, Teradyne’s net periodic pension cost was comprised of the following:


	For the Three Months Ended
	October 2, 2022						October 3, 2021
	United States			Foreign			United States			Foreign
	(in thousands)
Service cost	$	397		$	153		$	452		$	240
Interest cost		1,222			96			1,098			86
Expected return on plan assets		(732	)		(16	)		(936	)		(17	)

Total net periodic pension cost	$	887		$	233		$	614		$	309


	For the Nine Months Ended
	October 2, 2022						October 3, 2021
	United States			Foreign			United States			Foreign
	(in thousands)
Service cost	$	1,191		$	539		$	1,357		$	720
Interest cost		3,665			333			3,295			257
Expected return on plan assets		(2,195	)		(54	)		(2,809	)		(50	)
Net actuarial gain		(45	)		—			(400	)		—

Total net periodic pension cost	$	2,616		$	818		$	1,443		$	927

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 and nine months ended October 2, 2022 and October 3, 2021, Teradyne’s net periodic postretirement benefit cost (credit) was comprised of the following:


	For the Three Months Ended						For the Nine Months Ended
	October 2, 2022			October 3, 2021			October 2, 2022			October 3, 2021
	(in thousands)
Service cost	$	16		$	16		$	48		$	48
Interest cost		44			43			132			128
Amortization of prior service credit		(2	)		(2	)		(7	)		(7	)
Net actuarial loss (gain)		—			—			54			(228	)

Total net periodic postretirement benefit cost (credit)	$	58		$	57		$	227		$	(59	)

Q. COMMITMENTS AND CONTINGENCIES

Purchase Commitments

As of October 2, 2022, Teradyne had entered into purchase commitments for certain components and materials. The purchase commitments covered by the agreements aggregate to approximately $887.1 million, of which $808.3 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 such as, but not limited to, patent, employment, commercial and environmental matters. Teradyne believes that it has meritorious defenses against all pending claims and intends to vigorously contest them. While it is not possible to predict or determine the outcomes of any pending claims or to provide possible ranges of losses that may arise, Teradyne believes the potential losses associated with all of these actions are unlikely to have a material adverse effect on its business, financial position or results of operations.

On March 8, 2021, Industrial Automation LLC, sellers of AutoGuide, submitted a demand for arbitration against Teradyne and AutoGuide in Wilmington, Delaware alleging that Teradyne and AutoGuide breached certain provisions of the Membership Interests Purchase Agreement (the “Purchase Agreement”), dated as of October 18, 2019, among Industrial Automation LLC, Teradyne and AutoGuide. The arbitration demand sought full acceleration of the maximum

earn-out

amount payable under the Purchase Agreement, or $106.9 million, for the alleged breach of the

earn-out

provisions of the Purchase Agreement. On March 25, 2022, the arbitration claim was settled for $26.7 million. As a result, Teradyne has no remaining

earn-out

obligations.

Guarantees and Indemnification Obligations

Teradyne provides indemnification, to the extent permitted by law, to its officers, directors, employees and agents for liabilities arising from certain events or occurrences, while the officer, director, employee, or agent, is or was serving, at Teradyne’s request in such capacity. Teradyne may enter into indemnification agreements with certain of its officers and directors. With respect to acquisitions, Teradyne provides indemnifications to or assumes indemnification obligations for the current and former directors, officers and employees of the acquired companies in accordance with the acquired companies’

by-laws

and charters. As a matter of practice, Teradyne has maintained directors’ and officers’ liability insurance coverage, including coverage for directors and officers of acquired companies.

Teradyne enters into agreements in the ordinary course of business with customers, resellers, distributors, integrators and suppliers. Most of these agreements require Teradyne to defend and/or indemnify the other party against intellectual property infringement claims brought by a third party with respect to Teradyne’s products. From time to time, Teradyne also indemnifies customers and business partners for damages, losses and liabilities they may suffer or incur relating to personal injury, personal property damage, product liability, breach of confidentiality obligations and environmental claims relating to the use of Teradyne’s products and services or resulting from the acts or omissions of Teradyne, its employees, authorized agents or subcontractors. On occasion, Teradyne has also provided guarantees to customers regarding the delivery and performance of its products, in addition to the warranty described below.

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As a matter of ordinary course of business, Teradyne warrants that its products will substantially perform in accordance with its standard published specifications in effect at the time of delivery. Most warranties have a

one-year

duration commencing from installation. A provision is recorded upon revenue recognition to cost of revenues for estimated warranty expense based upon historical experience. When Teradyne receives revenue for extended warranties beyond the standard duration, the revenue is deferred and recognized on a straight-line basis over the contract period. Related costs are expensed as incurred. As of October 2, 2022 and December 31, 2021, Teradyne had a product warranty accrual of $14.1 million and $24.6 million, respectively, included in other accrued liabilities, and revenue deferrals related to extended warranties of $61.9 million and $64.2 million, respectively, included in short and long-term deferred revenue and customer advances.

In addition, in the ordinary course of business, Teradyne provides minimum purchase guarantees to certain vendors to ensure continuity of supply against the market demand. Although some of these guarantees provide penalties for cancellations and/or modifications to the purchase commitments as the market demand decreases, most of the guarantees do not. Therefore, as the market demand decreases, Teradyne

re-evaluates

these guarantees and determines what charges, if any, should be recorded.

With respect to its agreements covering product, business or entity divestitures and acquisitions, Teradyne provides certain representations, warranties and covenants to purchasers and agrees to indemnify and hold such purchasers harmless against breaches of such representations, warranties and covenants. Many of the indemnification claims have a definite expiration date while some remain in force indefinitely. With respect to its acquisitions, Teradyne may, from time to time, assume the liability for certain events or occurrences that took place prior to the date of acquisition.

As a matter of ordinary course of business, Teradyne occasionally guarantees certain indebtedness obligations of its subsidiary companies, limited to the borrowings from financial institutions, purchase commitments to certain vendors, and lease commitments to landlords.

Based on historical experience and information known as of October 2, 2022 and December 31, 2021, except for product warranty, Teradyne has not recorded any liabilities for these guarantees and obligations because the amount would be immaterial.

R. INCOME TAXES

A reconciliation of the United States federal statutory corporate tax rate to Teradyne’s effective tax rate was as follows:


	For the Three Months Ended						For the Nine Months Ended
	October 2, 2022			October 3, 2021			October 2, 2022			October 3, 2021

U.S. statutory federal tax rate		21.0	%		21.0	%		21.0	%		21.0	%
Non-deductible officers’ compensation		1.8			0.8			1.4			0.8
Foreign taxes		(0.7	)		(4.4	)		(2.4	)		(4.4	)
Tax credits		(2.1	)		(1.9	)		(1.9	)		(1.4	)
International provisions of the U.S. Tax Cuts and Jobs Act of 2017		(1.4	)		(1.5	)		(1.2	)		(1.6	)
Discrete benefit related to equity compensation		(0.1	)		(0.1	)		(1.9	)		(1.6	)
Other, net		0.4			(0.1	)		0.8			(0.1	)

Effective tax rate		18.9	%		13.8	%		15.8	%		12.7	%

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 October 2, 2022, Teradyne believes that it will ultimately realize the deferred tax assets recorded on the condensed consolidated balance sheet. However, should Teradyne believe that it is

more-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 October 2, 2022 and December 31, 2021, Teradyne had $14.8 million and $14.5 million, respectively, of reserves for uncertain tax positions. The $0.3 million net increase in reserves for uncertain tax positions consists of an increase related to U.S. federal research and development credits generated in the current year partially offset by the release of reserves related to

prior year loss carryforwards.

As of October 2, 2022, Teradyne does not anticipate a material change in the balance of unrecognized tax benefits during the next twelve months.

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Teradyne

recognizes interest and penalties related to income tax matters in income tax expense. As of October 2, 2022 and December 31, 2021, $0.4 million and $0.3 million, respectively, of interest and penalties were accrued for uncertain tax positions. For the nine months ended October 2, 2022 and October 3, 2021, expense

of $0.1 million and $0.3 million, respectively, w

ere

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 nine months ended October 2, 2022 was $9.7 million, or $0.05 per diluted share. The tax savings due to the tax holiday for the nine months ended October 3, 2021 was $23.9 million, or $0.13 per diluted share. In November 2020, Teradyne entered into an agreement with the Singapore Economic Development Board which extended its Singapore tax holiday under substantially similar terms to the agreement which expired on December 31, 2020. The new tax holiday is scheduled to expire on December 31, 2025.

S. SEGMENT INFORMATION

Teradyne has four reportable segments (Semiconductor Test, System Test, Industrial Automation and Wireless Test). Each of the reportable segments is also an individual operating segment.

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 and system level test, and circuit-board test. The Industrial Automation segment includes operations related to the design, 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. Each operating segment has a segment manager who is accountable to and maintains regular contact with Teradyne’s chief operating decision maker (Teradyne’s chief executive officer) to discuss operating activities, financial results, forecasts, and plans for the segment.

Teradyne evaluates performance based on several factors, of which the primary financial measure is business segment income (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, 2021.

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Segment information for the three and nine months ended October 2, 2022 and October 3, 2021 is as follows:


	Semiconductor Test		System Test		Industrial Automation			Wireless Test		Corporate and Eliminations			Consolidated
	(in thousands)
Three Months Ended October 2, 2022

Revenues	$	575,704	$	116,154	$	89,067		$	46,148	$	—		$	827,073
Income (loss) before income taxes (1)(2)		182,625		40,201		(3,992	)		12,647		(5,284	)		226,197
Total assets (3)		1,366,478		192,684		614,558			110,484		1,035,702			3,319,906
Three Months Ended October 3, 2021
Revenues	$	688,232	$	102,605	$	91,014		$	68,713	$	(63	)	$	950,501
Income (loss) before income taxes (1)(2)		265,017		31,773		(4,226	)		31,726		(26,535	)		297,755
Total assets (3)		1,251,549		147,970		696,792			119,568		1,546,303			3,762,182
Nine Months Ended October 2, 2022
Revenues	$	1,599,392	$	369,525	$	292,772		$	161,520	$	—		$	2,423,209
Income (loss) before income taxes (1)(2)		510,112		135,566		(15,496	)		56,659		(41,693	)		645,148
Total assets (3)		1,366,478		192,684		614,558			110,484		1,035,702			3,319,906
Nine Months Ended October 3, 2021
Revenues	$	2,050,271	$	340,261	$	263,151		$	164,504	$	(352	)	$	2,817,835
Income (loss) before income taxes (1)(2)		778,687		116,788		(14,586	)		63,810		(38,925	)		905,774
Total assets (3)		1,251,549		147,970		696,792			119,568		1,546,303			3,762,182

(1)

Included in Corporate and Eliminations are: legal and environmental fees, contingent consideration fair value adjustments, interest income, interest expense, severance charges, net foreign exchange gains (losses), acquisition related charges and compensation, pension, intercompany eliminations and for the three and nine months ended October 3, 2021, loss on convertible debt conversions.

(2)	Included in income (loss) before taxes are charges and credits related to restructuring and other, inventory charges and, for the three and nine months ended October 3, 2021, loss on convertible debt conversions.

(3)	Total assets are attributable to each segment. Corporate assets consist of cash and cash equivalents, marketable securities, and certain other assets.

Included in each segment are charges and credits in the following line items in the statements of operations:


	For the Three Months Ended				For the Nine Months Ended
	October 2, 2022		October 3, 2021		October 2, 2022		October 3, 2021
	(in thousands)
Semiconductor Test:
Cost of revenues—inventory charge	$	10,829	$	3,725	$	13,144	$	4,959
Industrial Automation:
Restructuring and other—employee severance	$	1,074	$	—	$	1,616	$	965
Cost of revenues—inventory charge		—		3,656		1,411		4,941
Restructuring and other—acquisition related expenses and compensation		—		—		—		825
Wireless:
Cost of revenues—inventory charge	$	966	$	679	$	3,942	$	1,351
System Test:
Cost of revenues—inventory charge	$	—	$	—	$	—	$	524
Corporate and Eliminations:
Restructuring and other—other	$	700	$	—	$	2,700	$	1,846
Restructuring and other—legal settlement charge		—		—		14,700		—
Other (income) expense, net—loss on convertible debt conversions		—		20,153		—		25,397
Restructuring and other—AutoGuide contingent consideration adjustment		—		—		—		(7,227	)
Restructuring and other—acquisition related expenses and compensation		—		—		—		(513	)

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T. SHAREHOLDERS’ EQUITY

Stock Repurchase Program

In January 2021, Teradyne’s Board of Directors approved a new repurchase program for up to $2.0 billion of common stock.

During the nine months ended October 2, 2022, Teradyne repurchased 7.2 million shares of common stock for $750.0 million at an average price of $103.83 per share. During the nine months ended October 3, 2021, Teradyne repurchased 3.3 million shares of common stock for $406.2 million at an average price of $123.53 per share. The cumulative repurchases under the $2.0 billion common stock repurchase program as of October 2, 2022 were 12.0 million shares of common stock for $1,350.0 million at an average price per share of $112.55.

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.

In January 2022, May 2022 and August 2022, Teradyne’s Board of Directors declared a quarterly cash dividend of $0.11 per share. Dividend payments for the three and nine months ended October 2, 2022 were $17.1 million and $52.6 million, respectively.

In January 2021, May 2021 and August 2021, Teradyne’s Board of Directors declared a quarterly cash dividend of $0.10 per share. Dividend payments for the three and nine months ended October 3, 2021 were $16.4 million and $49.7 million, respectively.

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.

U. SUBSEQUENT EVENT

On October 5, 2022, Teradyne amended its existing credit agreement to increase the amount of its senior secured revolving credit facility to $750 million from $400 million.

Item 2:

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, 2021. 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 many industries including the consumer electronics, wireless, automotive, industrial, computing, communications, and aerospace and defense industries. Our industrial automation products include collaborative robotic arms, autonomous mobile robots (“AMRs”) and advanced robotic control software used by global manufacturing, logistics and light industrial customers to improve quality, increase manufacturing and material handling efficiency and decrease manufacturing and logistics costs. Our automatic test equipment and industrial automation products and services include:

•

semiconductor test (“Semiconductor Test”) systems;

•

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

•

wireless test (“Wireless Test”) systems; and

•

industrial automation (“Industrial Automation”) products.

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. A few customers drive significant demand for our test products both through direct sales and sales to the customers’ 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. In 2022, we expect lower demand in the mobility and compute segments of our Semiconductor Test business due to end market slowdown in these segments as well as slower technology transition in one of our largest end-markets. While there is uncertainty if end markets will recover in 2023, the ramp of 3 nanometer starting in 2023 followed by gate-all-around and increasing multichip packaging remain drivers of growth. We expect Semiconductor Test demand in the automotive and industrial segments to remain strong in 2022.

Our Industrial Automation segment consists of Universal Robots A/S (“UR”), a leading supplier of collaborative robotic arms and Mobile Industrial Robots A/S (“MiR”), a leading maker of AMRs for industrial automation. The market for our Industrial Automation segment products is dependent on the adoption of new automation technologies by large manufacturers as well as small and medium enterprises (SMEs) throughout the world.

Both our test and industrial automation businesses may continue to be impacted by supply constraints, which will in turn impact our revenue and is expected to increase costs in 2022. Through the third quarter of 2022, inflation has not had a material impact on our results. In the third quarter 2022, we were unable to supply approximately $10 million of revenue in our test businesses for which we had customer demand. Our fourth quarter 2022 forecast excludes approximately $15 million of revenue, primarily in our test businesses, due to these continued supply chain constraints.

Our financial statements are denominated in U.S. dollars. While the majority of our revenues are in U.S. dollars, approximately 70 percent of our Industrial Automation revenue is denominated in foreign currencies. In the third quarter of 2022, the strengthening of the U.S. dollar was a factor in lower than forecasted revenues in our Industrial Automation segment. Continued strengthening of the dollar may adversely impact revenue growth in the fourth quarter of 2022.

Our corporate strategy continues to focus on profitably gaining market share in our test businesses through the introduction of differentiated products that target expanding segments and accelerating growth through continued investment in our Industrial Automation businesses. We plan to execute on our strategy while balancing capital allocations between returning capital to our shareholders through stock repurchases and dividends and using capital for opportunistic acquisitions.

Impact of the COVID-19 Pandemic on our Business

The novel coronavirus (COVID-19) pandemic resulted in government authorities implementing numerous measures in an effort to contain the spread of the virus, such as travel bans and restrictions, limitations on gatherings or social distancing requirements, quarantines, shelter-in-place orders, vaccination and testing mandates, and business limitations and shutdowns. These measures have impacted our day-to-day operations and disrupted our business, workforce and operations, as well as the operations of our customers, contract manufacturers and suppliers. We are continuing to monitor the rapidly evolving situation regarding the COVID-19 pandemic, particularly in China, and the availability and impact of vaccinations globally. However, we are unable to accurately predict the full impact of COVID-19, which will depend on future developments that are highly uncertain and cannot be predicted with accuracy, including, but not limited to, any new surges or new strains or variants of the virus in areas where we do business, the availability and use of vaccinations, any further government actions to contain the virus or treat its impact, continuing shutdowns in China, and how quickly and to what extent normal economic and operating conditions can resume.

Due to the COVID-19 pandemic, there has been uncertainty and disruption in the global economy and our markets. We are not aware of any specific event or circumstance that would require an update to our estimates or judgments or a revision of the carrying value of our assets or liabilities as of November 4, 2022, the date of issuance of this Quarterly Report on Form 10-Q.

Health and Safety

In response to the COVID-19 pandemic, we have taken proactive, aggressive action to protect the health and safety of our employees, customers, contract manufacturers and suppliers, and we have complied with all government orders around the globe. The spread of COVID-19 has caused us to modify our business practices, which includes implementing social distancing protocols, limiting employee travel and requiring employees to work remotely. We may take further actions as may be required or recommended by government authorities or that we determine are in the best interests of our employees, customers, contract manufacturers and suppliers.

Operations

We believe the COVID-19 pandemic, and the numerous measures implemented by authorities in response, has adversely impacted our results of operations, including by increasing costs, but we cannot accurately estimate the amount of the impact to our third quarter of 2022 financial results or to our future financial results. In addition, the pandemic has disrupted our contract manufacturers and suppliers, and has resulted in supply constraints and short-term cost increases to meet customer demand. While the duration and severity of the pandemic may further impact our workforce and operations, as well as those of our customers, contract manufacturers and suppliers, we expect that our manufacturing facilities will remain operational, at sufficient capacity to support production based on demand and the availability of supply. We are monitoring our operations closely in an effort to avoid any potential productivity losses caused by responses to the COVID-19 pandemic.

Demand

The COVID-19 pandemic significantly increased economic uncertainty in our markets. Demand for our Test products in China and other countries was strong throughout 2021, but the COVID-19 pandemic could cause further economic disruption that could cause demand for our products to decline, which would adversely affect our business.

Liquidity

Although there is continued uncertainty related to the impact of the COVID-19 pandemic on our future results, we believe our business model and our current cash reserves leave us well-positioned to manage our business through this crisis. We have a strong balance sheet, as well as an operating model that we believe is capable of flexing up and down with extreme demand swings while still remaining profitable. Based on our analysis, we believe our existing balances of cash and cash equivalents and our currently anticipated operating cash flows will be sufficient to meet our working capital needs and other capital and liquidity requirements for the next twelve months. However, due to the uncertainty related to the future impact of the COVID-19 pandemic, in order to bolster our liquidity position, on May 1, 2020 we entered into a credit agreement providing for a three-year, senior secured revolving credit facility of $400 million. On December 10, 2021, we amended the credit agreement to extend its maturity to December 10, 2026 as further described in Note H: “Debt.” As described in Note U: “Subsequent Event”, the credit facility was increased to $750 million on October 5, 2022. As of November 4, 2022, we have not borrowed any funds under the credit facility.

We are continuing to monitor the evolving situation regarding the COVID-19 pandemic, the availability of vaccinations where we do business and guidance from government authorities around the world. In these circumstances, there may be developments outside our control requiring us to adjust our operating plan. As a result, given the uncertain nature of this situation, we are not able to accurately predict the full extent of the impact of COVID-19 on our business, financial condition, results of operations, liquidity, or cash flows in the future.

Supply Chain Constraints and Inflationary Pressures

The global supply shortage of electrical components, including semiconductor chips, continued to impact our supply chain in the third quarter of 2022. As a result, we experienced, and expect to continue to experience, increases in our lead times and costs for certain components for certain of our products. In addition, while not material, inflationary pressures contributed to increased costs for product components and wage inflation, impacting our cost of products, gross margin and profit for the quarter. Our supply chain team, and our suppliers, continue to manage numerous supply, production, and logistics obstacles. While not material through the third quarter of 2022, in an effort to mitigate these risks, in some cases, we have incurred higher costs due to investment in supply chain resiliency and to secure available inventory or have extended or placed non-cancellable purchase commitments with semiconductor suppliers, which introduces inventory risk if our forecasts and assumptions prove inaccurate. We have also sourced components from additional suppliers and multi-sourced and pre-ordered components and finished goods inventory in some cases in an effort to reduce the impact of the adverse supply chain conditions we have experienced. There is no assurance that these efforts will be successful. In the third quarter 2022, we were unable to supply approximately $10 million of revenue in our test businesses for which we had customer demand. Our fourth quarter 2022 forecast excludes approximately $15 million of revenue, primarily in our test businesses, due to these continued supply chain constraints.

Impact of Russia’s invasion of Ukraine on our Business

Russia’s invasion of Ukraine, in February 2022, did not have a significant impact on our business as we have minimal business in Russia and Ukraine, both directly and indirectly. However, following the invasion, the U.S. and other countries imposed significant sanctions against the Russian government and many Russian companies and individuals. Although we do not have significant operations in Russia, the sanctions and Russia’s response to the sanctions, have impacted our business in other countries and could have a negative impact on our future revenue and supply chain, either of which could adversely affect our business and financial results. In addition, the global economic uncertainty following the invasion, sanctions and Russia’s response to the sanctions could impact demand for our products.

Impact of October 7, 2022 U.S. Department of Commerce Regulations on our Business

On October 7, 2022, the U.S. Department of Commerce published new regulations restricting the export to China of advanced semiconductors, supercomputer technology, equipment for the manufacturing of advanced semiconductors and components and technology for the manufacturing in China of certain semiconductor manufacturing equipment. The new restrictions are lengthy and complex. We continue to assess the impact of these regulations on our business. We have determined that restrictions on the sale of semiconductor testers in China to test certain advanced semiconductors will impact our sales to certain companies in China. Several multinational companies manufacturing these advanced semiconductors in China have obtained one-year licenses allowing suppliers such as Teradyne to continue to provide testers to the facilities operated by these companies. We expect that other companies manufacturing advanced semiconductors in China will not receive licenses, thereby restricting our ability to provide testers to the facilities operated by these companies that do not receive a license. We also are assessing the filing of license requests to sell to and support certain customers in China for certain end uses that, if granted, may reduce the impact of these restrictions on our business. At this time, we do not know the impact these end user and end use restrictions will have on our business in China or on future revenues. In addition to the specific restrictions impacting our business, the regulations may have an adverse impact on certain actual or potential customers and on the global semiconductor industry. To the extent the regulations impact actual and potential customers or disrupt the global semiconductor industry, our business and revenues will be adversely impacted. We also have determined that the restrictions on the export of certain US origin components and technology for use in the development and production in China of certain semiconductor manufacturing equipment impact our manufacturing and development operations in China. We have received a temporary authorization from the U.S. Department of Commerce allowing us to continue our manufacturing and development operations in China until the U.S. Department of Commerce issues a license to replace this temporary authorization. We will file an application with the U.S. Department of Commerce for a license to replace the temporary authorization by November 17, 2022. We cannot assess the likelihood or timing of receiving this license. In addition to requesting a license, we are implementing procedures for minimizing the impact of these new regulations on our operations in China, but there is no assurance that these procedures will succeed.

See Part II—Item 1A, “Risk Factors,” included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 for our risk factors regarding risks associated with both the COVID-19 pandemic and international conflicts.

Critical Accounting Policies and Estimates

We have identified the policies which are critical to understanding our business and our results of operations. There have been no significant changes during the nine months ended October 2, 2022 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, 2021, except as noted below.

Critical accounting estimates are complex and may require significant judgment by management. Changes to the underlying assumptions may have a material impact on our financial condition and results of operations. These estimates may change, as new events occur, and additional information is obtained. Actual results could differ significantly from these estimates under different assumptions or conditions.

Convertible Debt

We adopted Accounting Standards Update (“ASU”) ASU 2020-06 – “Debt—Debt with Conversion and Other Options and Derivatives and Hedging—Contracts in Entity’s Own Equity,” on January 1, 2022 using the modified retrospective method of adoption. Under ASU 2020-06, we account for a convertible debt instrument as a single liability measured at its amortized cost, as long as no other features require bifurcation and recognition as derivatives. Unsettled shares are recorded in current debt, and there is no recognition of a debt discount, which was previously amortized to interest expense. We use the if-converted method in the diluted EPS calculation for convertible instruments. As a result of adoption, we recorded an increase of $1.4 million to current debt for unsettled shares, an increase of $1.8 million to deferred tax assets, an increase of $6.6 million to long-term debt for unamortized debt discount, and an increase to retained earnings of $94.6 million for the reclassification of the equity component. Mezzanine equity representing unsettled shares value was reduced to zero and additional paid-in capital was reduced by $100.8 million.

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 under different assumptions or conditions.

SELECTED RELATIONSHIPS WITHIN THE CONDENSED CONSOLIDATED

STATEMENTS OF OPERATIONS


	For the Three Months Ended						For the Nine Months Ended
	October 2, 2022			October 3, 2021			October 2, 2022			October 3, 2021
Percentage of revenues:
Revenues:
Products		82	%		87	%		83	%		87	%
Services		18			13			17			13

Total revenues		100			100			100			100
Cost of revenues:
Cost of products		34			35			33			35
Cost of services		8			5			7			5

Total cost of revenues (exclusive of acquired intangible assets amortization shown separately below)		41			40			40			40

Gross profit		59			60			60			60
Operating expenses:
Selling and administrative		16			14			17			14
Engineering and development		14			11			14			11
Acquired intangible assets amortization		1			1			1			1
Restructuring and other		—			—			1			—

Total operating expenses		31			26			32			26

Income from operations		28			34			27			34
Non-operating (income) expense:
Interest income		—			—			—			—
Interest expense		—			—			—			1
Other (income) expense, net		1			2			1			1

Income before income taxes		27			31			27			32
Income tax provision		5			4			4			4

Net income		22	%		27	%		22	%		28	%

Results of Operations

Third Quarter 2022 Compared to Third Quarter 2021

Revenues

Revenues by our reportable segments were as follows:


	For the Three Months Ended
	October 2, 2022		October 3, 2021			Dollar Change

	(in millions)
Semiconductor Test	$	575.7	$	688.2		$	(112.5	)
System Test		116.2		102.6			13.6
Industrial Automation		89.1		91.0			(1.9	)
Wireless Test		46.1		68.7			(22.6	)
Corporate and Eliminations		—		(0.1	)		0.1

	$	827.1	$	950.5		$	(123.4	)

The decrease in Semiconductor Test revenues of $112.5 million, or 16.3%, was driven primarily by lower tester sales in mobile applications, partially offset by higher memory test sales. The increase in System Test revenues of $13.6 million, or 13.3%, was primarily due to higher sales in Storage Test of hard disk drive testers. The decrease in Industrial Automation revenues of $1.9 million, or 2.1%, was driven primarily by changes in foreign exchange rates. The decrease in Wireless Test revenues of $22.6 million, or 32.9%, was primarily due to a decrease in connectivity and cellular test product sales.

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


	For the Three Months Ended
	October 2, 2022			October 3, 2021
Taiwan		23	%		27	%
Korea		18			8
China		16			19
United States		14			11
Europe		7			8
Philippines		5			5
Thailand		4			3
Malaysia		4			6
Japan		4			5
Singapore		3			5
Rest of World		2			3

		100	%		100	%

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

Gross Profit

Our gross profit was as follows:


	For the Three Months Ended
	October 2, 2022			October 3, 2021			Dollar/Point Change

	(in millions)
Gross profit	$	485.4		$	571.0		$	(85.6	)
Percent of total revenues		58.7	%		60.1	%		(1.4	)

Gross profit as a percent of revenue decreased by 1.4 points, primarily due to lower volume and product mix in Semiconductor Test and higher inventory reserves.

Selling and Administrative

Selling and administrative expenses were as follows:


	For the Three Months Ended
	October 2, 2022			October 3, 2021			Dollar Change

	(in millions)
Selling and administrative	$	135.6		$	134.8		$	0.8
Percent of total revenues		16.4	%		14.2	%

The increase of $0.8 million in selling and administrative expenses was primarily driven by Semiconductor Test and Industrial Automation increase in headcount and greater spending, partially offset by lower variable compensation.

Engineering and Development

Engineering and development expenses were as follows:


	For the Three Months Ended
	October 2, 2022			October 3, 2021			Dollar Change

	(in millions)
Engineering and development	$	111.7		$	107.2		$	4.5
Percent of total revenues		13.5	%		11.3	%

The increase of $4.5 million in engineering and development expenses was primarily driven by Semiconductor Test and Industrial Automation increase in headcount and greater spending, partially offset by lower variable compensation.

Restructuring and Other

During the three months ended October 2, 2022, we recorded $1.2 million of severance charges primarily in Industrial Automation, and a charge of $0.7 million for an increase in legal liabilities.

During the three months ended October 3, 2021, we recorded $0.6 million of severance charges primarily in Industrial Automation.

Interest and Other


	For the Three Months Ended
	October 2, 2022			October 3, 2021			Dollar Change

	(in millions)
Interest income	$	(1.3	)	$	(0.6	)	$	(0.7	)
Interest expense		0.8			3.8			(3.0	)
Other (income) expense, net		5.8			21.5			(15.7	)

Interest expense decreased by $3.0 million primarily due to the January 1, 2022 adoption of ASU 2020-06 which eliminated the amortization of the debt discount which was $2.3 million in the three months ended October 3, 2021. Other (income) expense, net decreased by $15.7 million primarily due to lower losses on convertible debt conversions partially offset by changes in unrealized losses on equity securities, from a $0.4 million loss in 2021 to a $2.2 million loss in 2022.

Income (Loss) Before Income Taxes


	For the Three Months Ended
	October 2, 2022			October 3, 2021			Dollar Change

	(in millions)
Semiconductor Test	$	182.6		$	265.0		$	(82.4	)
System Test		40.2			31.8			8.4
Wireless Test		12.6			31.7			(19.1	)
Industrial Automation		(4.0	)		(4.2	)		0.2
Corporate and Eliminations (1)		(5.3	)		(26.5	)		21.2

	$	226.2		$	297.8		$	(71.6	)

(1)

Included in Corporate and Eliminations are legal and environmental fees, interest income, interest expense, net foreign exchange gains (losses), pension, intercompany eliminations, acquisition related charges and compensation and for the three months ended October 3, 2021, loss on convertible debt conversions.

The decrease in income before income taxes in Semiconductor Test was driven primarily by lower revenues in mobile applications, partially offset by higher memory test sales. The increase in income before income taxes in System Test was primarily due to higher sales in Storage Test of hard disk drive testers. The decrease in income before taxes in Wireless Test was driven primarily by a decrease in sales of connectivity and cellular test product sales.

Income Taxes

The effective tax rate for the three months ended October 2, 2022 and October 3, 2021 was 18.9% and 13.8%, respectively. The increase in the effective tax rate from the three months ended October 3, 2021 to the three months ended October 2, 2022 was primarily attributable to a 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 non-deductible officers’ compensation and a reduction in the benefit related to the international provisions of the U.S. Tax Cuts and Jobs Act of 2017. These increases were partially offset by an increase in benefit from tax credits.

Nine Months 2022 Compared to Nine Months 2021

Revenues

Revenues by our reportable segments were as follows:


	For the Nine Months Ended
	October 2, 2022		October 3, 2021			Dollar Change

	(in millions)
Semiconductor Test	$	1,599.4	$	2,050.3		$	(450.9	)
System Test		369.5		340.3			29.2
Industrial Automation		292.8		263.2			29.6
Wireless Test		161.5		164.5			(3.0	)
Corporate and Eliminations		—		(0.4	)		0.4

	$	2,423.2	$	2,817.8		$	(394.6	)

The decrease in Semiconductor Test revenues of $450.9 million, or 22.0%, was driven primarily by lower tester sales in high performance compute processor and mobile applications. The increase in System Test revenues of $29.2 million, or 8.6%, was primarily due to higher sales in Storage Test of hard disk drive testers, and higher sales in Defense/Aerospace and in Production Board Test. The rise in Industrial Automation revenues of $29.6 million, or 11.2%, was driven primarily by higher demand for UR’s collaborative robotic arms and MiR’s autonomous mobile robots, partially offset by changes in foreign exchange rates. The decrease in Wireless Test revenues of $3.0 million, or 1.8%, was primarily due to a decrease in cellular test product sales, partially offset by an increase in connectivity test product sales.

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


	For the Nine Months Ended
	October 2, 2022			October 3, 2021
Taiwan		22	%		36	%
China		16			18
Korea		16			8
United States		14			10
Europe		8			7
Japan		5			4
Thailand		5			4
Malaysia		5			4
Philippines		3			5
Singapore		3			3
Rest of World		3			1

		100	%		100	%

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

Gross Profit

Our gross profit was as follows:


	For the Nine Months Ended
	October 2, 2022			October 3, 2021			Dollar/Point Change

	(in millions)
Gross profit	$	1,446.7		$	1,679.6		$	(232.9	)
Percent of total revenues		59.7	%		59.6	%		0.1

Gross profit as a percent of revenue increased by 0.1 points, primarily due to product mix in Semiconductor Test partially offset by lower volume.

Selling and Administrative

Selling and administrative expenses were as follows:


	For the Nine Months Ended
	October 2, 2022			October 3, 2021			Dollar Change

	(in millions)
Selling and administrative	$	415.4		$	404.8		$	10.6
Percent of total revenues		17.1	%		14.4	%

The increase of $10.6 million in selling and administrative expenses was primarily driven by Semiconductor Test and Industrial Automation increase in headcount and greater spending, partially offset by lower variable compensation.

Engineering and Development

Engineering and development expenses were as follows:


	For the Nine Months Ended
	October 2, 2022			October 3, 2021			Dollar Change

	(in millions)
Engineering and development	$	331.8		$	317.6		$	14.2
Percent of total revenues		13.7	%		11.3	%

The increase of $14.2 million in engineering and development expenses was primarily driven by Semiconductor Test and Industrial Automation increase in headcount and greater spending, partially offset by lower variable compensation.

Restructuring and Other

During the nine months ended October 2, 2022, we recorded a charge of $14.7 million related to the arbitration claim filed against Teradyne and AutoGuide related to an earn-out dispute, which was settled on March 25, 2022 for $26.7 million, a charge of $2.7 million for an increase in environmental and legal liabilities, and $2.1 million of severance charges primarily in Industrial Automation. Previously, in the three months ended December 31, 2021, we recorded a charge of $12.0 million related to this earn-out dispute.

During the nine months ended October 3, 2021, we recorded a gain of $7.2 million for the decrease in the fair value of the AutoGuide contingent consideration liability, partially offset by a charge of $1.7 million for an increase in environmental and legal liabilities, and $1.2 million of severance charges primarily in Industrial Automation.

Interest and Other


	For the Nine Months Ended
	October 2, 2022			October 3, 2021			Dollar Change

	(in millions)
Interest income	$	(3.0	)	$	(2.1	)	$	(0.9	)
Interest expense		2.7			15.4			(12.7	)
Other (income) expense, net		20.5			25.2			(4.7	)

Interest expense decreased by $12.7 million primarily due to the January 1, 2022 adoption of ASU 2020-06 which eliminated the amortization of the debt discount which was $9.1 million in the nine months ended October 3, 2021. Other (income) expense, net decreased by $4.7 million primarily due to changes in unrealized gains/losses on equity securities, from a $2.2 million gain in 2021 to an $11.0 million loss in 2022, partially offset by lower losses on convertible debt conversions.

Income (Loss) Before Income Taxes


	For the Nine Months Ended
	October 2, 2022			October 3, 2021			Dollar Change

	(in millions)
Semiconductor Test	$	510.1		$	778.7		$	(268.6	)
System Test		135.6			116.8			18.8
Wireless Test		56.7			63.8			(7.1	)
Industrial Automation		(15.5	)		(14.6	)		(0.9	)
Corporate and Eliminations (1)		(41.7	)		(38.9	)		(2.8	)

	$	645.1		$	905.8		$	(260.7	)

(1)

Included in Corporate and Eliminations are legal and environmental fees, contingent consideration adjustments, interest income, interest expense, net foreign exchange gains (losses), pension, intercompany eliminations, acquisition related charges and compensation and for the nine months ended October 3, 2021, loss on convertible debt conversions.

The decrease in income before income taxes in Semiconductor Test was driven primarily by lower revenues in high performance compute processor and mobile applications. The increase in income before income taxes in System Test was primarily due to higher sales in Storage Test of system level and hard disk drive testers, and elevated sales in Defense/Aerospace and in Production Board Test. The decrease in income before taxes in Wireless Test was driven primarily by lower sales in cellular test products partially offset by elevated sales in connectivity test products. The loss before income taxes in Corporate and Eliminations was primarily due to legal settlement charges related to litigation for the earn-out dispute in connection with the AutoGuide acquisition.

Income Taxes

The effective tax rate for the nine months ended October 2, 2022 and October 3, 2021 was 15.8% and 12.7%, respectively. The increase in the effective tax rate from the nine months ended October 3, 2021 to the nine months ended October 2, 2022 was primarily attributable to a 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 non-deductible officers’ compensation and a reduction in the benefit related to the international provisions of the U.S. Tax Cuts and Jobs Act of 2017. These increases in expense were partially offset by increases in benefit from tax credits and discrete benefit related to equity compensation.

Contractual Obligations

There have been no changes outside of the ordinary course of business to our contractual obligations as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021.

Liquidity and Capital Resources

Our cash, cash equivalents, and marketable securities balances decreased by $613.2 million in the nine months ended October 2, 2022 to $887.1 million.

Operating activities during the nine months ended October 2, 2022 provided cash of $394.5 million. Changes in operating assets and liabilities used cash of $271.7 million. This was due to a $158.9 million increase in operating assets and a $112.8 million decrease in operating liabilities.

The increase in operating assets was due to a $94.3 million increase in prepayments and other assets due to prepayments to our contract manufacturers, a $68.8 million increase in inventories, partially offset by a $4.2 million decrease in accounts receivable.

The decrease in operating liabilities was due to a $82.9 million decrease in accrued employee compensation, a $31.4 million decrease in income taxes, a $7.5 million decrease in other accrued liabilities, a $5.9 million decrease in deferred revenue and customer advance payments and $3.9 million of retirement plan contributions, partially offset by an $18.7 million increase in accounts payable.

Investing activities during the nine months ended October 2, 2022 provided cash of $45.4 million due to $259.2 million and $182.1 million in proceeds from sales and maturities of marketable securities, respectively, partially offset by $267.2 million used for purchases of marketable securities, and $128.7 million used for purchases of property, plant and equipment.

Financing activities during the nine months ended October 2, 2022 used cash of $858.8 million due to $750.0 million used for the repurchase of 7.2 million shares of common stock at an average price of $103.83 per share, $52.6 million used for dividend payments, $52.0 million used for payments of convertible debt principal, and $33.0 million used for payment related to net settlements of employee stock compensation awards, partially offset by $28.7 million from the issuance of common stock under employee stock purchase and stock option plans.

Operating activities during the nine months ended October 3, 2021 provided cash of $767.1 million. Changes in operating assets and liabilities used cash of $167.7 million. This was due to a $219.9 million increase in operating assets and a $52.2 million increase in operating liabilities.

The increase in operating assets was due to a $138.6 million increase in prepayments and other assets due to prepayments to our contract manufacturers, a $103.3 million increase in accounts receivable due to greater sales, partially offset by a $21.9 million decrease in inventories.

The change in operating liabilities was due to increases of $63.5 million in other accrued liabilities, $23.8 million in accounts payable, and $8.7 million in deferred revenue and customer advance payments, partially offset by a $17.4 million decrease in income taxes, a $22.3 million decrease in accrued employee compensation, and $4.1 million of retirement plan contributions.

Investing activities during the nine months ended October 3, 2021 provided cash of $156.1 million due to $571.3 million and $209.4 million in proceeds from maturities and sales of marketable securities, partially offset by $509.5 million used for purchases of marketable securities, $103.2 million used for purchases of property, plant and equipment and $12.0 million used for an investment in MachineMetrics, Inc.(“MachineMetrics”).

Financing activities during the nine months ended October 3, 2021 used cash of $757.3 million due to $406.2 million used for the repurchase of 3.3 million shares of common stock at an average price of $123.53 per share, $302.0 million used for payments of convertible debt principal, $49.7 million used for dividend payments, and $32.0 million used for payments related to net settlements of employee stock compensation awards, partially offset by $32.6 million from the issuance of common stock under employee stock purchase and stock option plans.

In January 2022, May 2022 and August 2022, our Board of Directors declared a quarterly cash dividend of $0.11 per share. Dividend payments for the three and nine months ended October 2, 2022 were $17.1 million and $52.6 million, respectively.

In January 2021, May 2021 and August 2021, our Board of Directors declared a quarterly cash dividend of $0.10 per share. Dividend payments for the three and nine months ended October 3, 2021were $16.4 million and $49.7 million, respectively.

In January 2021, our Board of Directors approved a new repurchase program for up to $2.0 billion of common stock. Unless terminated by resolution of our Board of Directors, the repurchase program will expire when we have repurchased all shares authorized for repurchase under the share repurchase program.

During the nine months ended October 2, 2022, we repurchased 7.2 million shares of common stock for $750.0 million at an average price of $103.83 per share. During the nine months ended October 3, 2021, we repurchased 3.3 million shares of common stock for $406.2 million at an average price of $123.53 per share. The cumulative repurchases under the $2.0 billion common stock repurchase program as of October 2, 2022 were 12.0 million shares of common stock for $1,350.0 million at an average price per share of $112.55.

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.

On May 1, 2020, we entered into a credit agreement providing a three-year, senior secured revolving credit facility of $400 million. On December 10, 2021, the credit agreement was amended to extend the senior secured revolving credit facility to December 10, 2026. On October 5, 2022, the credit agreement was amended to increase the amount of the credit facility to $750.0 million from $400.0 million. As of November 4, 2022, we have not borrowed any funds under the credit facility.

We believe our cash, cash equivalents and marketable securities balance will be sufficient to pay our quarterly dividend and meet our working capital and expenditure needs for at least the next twelve months. At this time, the COVID-19 pandemic has not had an impact on our liquidity, but there is no assurance that continued impacts resulting from the pandemic will not have an adverse effect in the future.

Equity Compensation Plans

As discussed in Note Q: “Stock-Based Compensation” in our 2021 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

For the nine months ended October 2, 2022, there were no recently issued accounting pronouncements that had, or are expected to have, a material impact to our consolidated financial statements.

Item 3:

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 February 23, 2022. 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, 2021.

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, Teradyne issued $460 million aggregate principal amount of 1.25% convertible senior unsecured notes (the “Notes”) due December 15, 2023. As of October 2, 2022, $65.0 million of principal remained outstanding and the Notes had a fair value of $154.5 million. The table below provides a sensitivity analysis of hypothetical 10% changes of Teradyne’s stock price as of the end of the third quarter of 2022 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 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	Fair Value		Estimated change in fair value			Hypothetical percentage increase (decrease) in fair value
10% Increase	$	170,003	$	15,517			10.0	%
No Change		154,486		—			—
10% Decrease		138,990		(15,496	)		(10.0	)

Item 4:

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.

There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended October 2, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1:

Legal Proceedings

We are subject to various legal proceedings and claims which have arisen in the ordinary course of business such as, but not limited to, patent, employment, commercial and environmental matters. Teradyne believes that it has meritorious defenses against all pending claims and intends to vigorously contest them. While it is not possible to predict or determine the outcomes of any pending claims or to provide possible ranges of losses that may arise, Teradyne believes the potential losses associated with all of these actions are unlikely to have a material adverse effect on its business, financial position or results of operations.

On March 8, 2021, Industrial Automation LLC submitted a demand for arbitration against Teradyne and AutoGuide in Wilmington, Delaware alleging that Teradyne and AutoGuide breached certain provisions of the Membership Interests Purchase Agreement (the “Purchase Agreement”), dated as of October 18, 2019, among Industrial Automation LLC, Teradyne and AutoGuide. The arbitration demand sought full acceleration of the maximum earn-out amount payable under the Purchase Agreement, or $106.9 million, for the alleged breach of the earn-out provisions of the Purchase Agreement. On March 25, 2022, the arbitration claim was settled for $26.7 million. As a result, Teradyne has no remaining earn-out obligations.

Item 1A:

Risk Factors

In addition to other information set forth in this Form 10-Q, including the risk discussed below, 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, 2021, 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 and many of these risks could be further increased due to the COVID-19 pandemic.

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.

The global supply shortage of electrical components and inflationary cost increases has impacted our ability to meet customer demand and could adversely affect our business and financial results.

During 2022, there has been a global supply shortage of electrical components, including semiconductor chips. As a result, we have experienced, and expect to continue to experience, increases in our lead times and costs for certain components for certain products and delays in the delivery of some orders placed by our customers. While not material, year to date 2022, in an effort to mitigate these risks, in some cases, we have incurred higher costs due to investment in supply chain resiliency and to secure available inventory or have extended or placed non-cancellable purchase commitments with semiconductor suppliers, which introduces inventory risk if our forecasts and assumptions prove inaccurate. We have also sourced components from additional suppliers and multi-sourced and pre-ordered components and finished goods inventory in some cases in an effort to reduce the impact of the adverse supply chain conditions we have experienced. However, if we are unable to secure manufacturing capacities from our current or new suppliers and contract manufacturers, on acceptable terms or at all, or successfully manage our purchase commitments and inventory for components, our ability to deliver our products to our customers in the desired quantities, at competitive prices or in a timely manner may be negatively impacted for the remainder of 2022 and into 2023. In the third quarter 2022, we were unable to supply approximately $10 million of revenue in our test businesses for which we had customer demand. Our fourth quarter 2022 forecast excludes approximately $15 million of revenue, primarily in our test businesses, due to these continued supply chain constraints. Also, our suppliers and contract manufacturers have increased their prices, which increased our cost of products. We have been and may continue to be, affected by wage inflation. We have, and may continue to attempt to, offset the effect of these inflationary pressures by increasing the prices of our products. However, we may not be fully able to pass additional costs on to our customers, which could have a negative impact on our results of operations and financial condition.

Trade regulations and restrictions impact our ability to manufacture certain products and to sell products to and support certain customers, which may materially adversely affect our sales and results of operations.

We are subject to U.S. laws and regulations that limit and restrict the export of some of our products and services and may restrict our transactions with certain customers, business partners and other persons. In certain circumstances, export control and economic sanctions regulations prohibit the export of certain products, services and technologies, and in other circumstances are required to obtain an export license before exporting the controlled item. We must also comply with export restrictions and laws imposed by other countries affecting trade and investments. We maintain an export compliance program but there are risks that the compliance controls could be circumvented, exposing us to legal liabilities. Compliance with these laws has not significantly limited our sales but could significantly limit them in the future. Changes in, and responses to, U.S. trade policy could reduce the competitiveness of our products and cause our sales to drop, which could have a material adverse effect on our business, financial condition or results of operations.

The U.S. government from time to time has issued export restrictions that prohibit U.S. companies from exporting U.S. manufactured products, foreign manufactured products with more than 25% controlled U.S. content, as well as U.S. origin technology. For example, the U.S. Department of Commerce has restricted the access of U.S. origin technologies to certain Chinese companies by adding those companies to the Entity List under U.S. Export Administration Regulations (“EAR”).

On May 16, 2019, Huawei and 68 of its affiliates, including HiSilicon, were added to the U.S. Department of Commerce Entity List under the EAR. This action by the U.S. Department of Commerce imposed new export licensing requirements on exports, re-exports, and in-country transfers of all U.S. regulated products, software and technology to the designated Huawei entities. On August 17, 2020, the U.S. Department of Commerce published final regulations expanding the scope of the U.S. EAR to include additional products that would become subject to export restrictions relating to Huawei entities including HiSilicon. These new regulations restrict the sale to Huawei and the designated Huawei entities of certain non-U.S. made items, such as semiconductor devices, manufactured for or sold to Huawei entities including HiSilicon under specific, detailed conditions set forth in the new regulations. These new regulations have impacted our sales to Huawei, HiSilicon and their suppliers. We are taking appropriate actions, including filing license applications and obtaining licenses from the U.S. Department of Commerce. However, we do not expect these actions will mitigate the impact of the regulations on our sales to Huawei, HiSilicon and other suppliers. As a result, the regulations will continue to have an adverse impact on our business and financial results. It is uncertain the extent these new regulations and any additional regulations that may be implemented by the U.S. Department of Commerce or other government agency may have on our business with other customers or potential customers. Also, our controls related to Entity List compliance could be circumvented, exposing us to legal liabilities.

On April 28, 2020, the U.S. Department of Commerce published new export control regulations for certain U.S. products and technology sold to military end users or for military end-use in China, Russia and Venezuela. The definition of military end user is broad. The regulations went into effect on June 29, 2020. In December 2020, the U.S. Department of Commerce issued a list of companies in China and other countries that it considered to be military end users. Compliance with the new export controls has impacted our ability to sell products to certain customers in China. In addition, while we maintain an export compliance program, our compliance controls could be circumvented, exposing us to legal liabilities. We will continue to assess the impact of the new export controls on our business and operations and take appropriate actions, including filing for licenses with the U.S. Department of Commerce, to minimize any disruption. However, we cannot be certain that the actions we take will mitigate all the risks associated with the export controls that may impact our business.

In response to the regulations issued by the U.S. Department of Commerce, the Chinese government has passed new laws, including blocking legislation, which may impact our business activities in China. The Company is assessing the potential impact of these new Chinese laws and monitoring relevant laws and regulations issued by the Chinese government. The impact of these new Chinese laws on our business activities in China remains uncertain at this time.

Foreign currency exchange rates and fluctuations in those rates may affect the Company’s ability to realize projected growth rates in its sales and earnings.

Our financial statements are denominated in U.S. dollars. While the majority of our revenues are in U.S. dollars, approximately 70 percent of our Industrial Automation revenue is denominated in foreign currencies. Correspondingly, our results of operations and our ability to realize projected growth rates in sales and earnings could be adversely affected if the U.S. dollar strengthens significantly against foreign currencies.

Item 2:

Unregistered Sales of Equity Securities and Use of Proceeds

In January 2021, Teradyne’s Board of Directors approved a new repurchase program for up to $2.0 billion of common stock. During the nine months ended October 2, 2022, we repurchased 7.2 million shares of common stock for $750.0 million at an average price of $103.83 per share. During the nine months ended October 3, 2021, we repurchased 3.3 million shares of common stock for $406.2 million at an average price of $123.53 per share. The cumulative repurchases under the $2.0 billion common stock repurchase program as of October 2, 2022 were 12.0 million shares of common stock for $1,350.0 million at an average price per share of $112.55.

The following table includes information with respect to repurchases we made of our common stock during the three months ended October 2, 2022 (in thousands except per share price):


Period	(a) Total Number of Shares (or Units) Purchased			(b) Average Price Paid per Share (or Unit)			(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs		(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that may Yet Be Purchased Under the Plans or Programs
July 4, 2022 - July 31, 2022		1,296		$	93.00			1,296	$	746,702,775
August 1, 2022 – August 28, 2022		972		$	99.56			971	$	650,000,254
August 29, 2022 – October 2, 2022		1		$	82.86			—	$	650,000,254

		2,269	(1)	$	95.81	(1)		2,267

(1)	Includes approximately two thousand shares at an average price of $89.37 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.

Item 4:

Mine Safety Disclosures

Not Applicable

Item 6:

Exhibits


Exhibit Number		Description

3.1		Amended and Restated Bylaws of Teradyne, Inc. effective September 6, 2022 filed as Exhibit 3.1 to Teradyne’s Current Report on Form 8-K filed on September 6, 2022.

10.1		Second Amendment to Credit Agreement dated December 10, 2021 among Teradyne, Inc., Truist Bank, as the administrative agent, issuing bank and swingline lender, and other lenders party thereto (filed herewith)

31.1		Certification of Principal Executive Officer, pursuant to Rule 13a-14(a) of Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)

31.2		Certification of Principal Financial Officer, pursuant to Rule 13a-14(a) of Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)

32.1		Certification of Principal Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)

32.2		Certification of Principal Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)

101.INS		Inline XBRL Instance Document

101.SCH		Inline XBRL Taxonomy Extension Schema Document

101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document

104		Cover Page Interactive Data File (formatted as Inline XBRL, and contained in Exhibit 101)

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.

TERADYNE, INC.

Registrant

/s/ SANJAY MEHTA

Sanjay Mehta

Vice President,

Chief Financial Officer and Treasurer

(Duly Authorized Officer

and Principal Financial Officer)

November 4, 2022

Teradyne - 10-Q quarterly report FY2022 Q3

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

What is the market capitalization of a company?

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