filings.toolsItem 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
67K characters. Original on sec.gov · Markdown
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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Overview
We are a leading global supplier of automatic test equipment. We design, develop, manufacture and sell automatic test systems and solutions used to test semiconductors, wireless products, hard disk drives, solid state disks and circuit boards in the consumer electronics, wireless, automotive, industrial, computing, communications and aerospace and defense industries. Our automatic test equipment products and services include:
| • | semiconductor test (“Semiconductor Test”) systems; |
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| • | wireless test (“Wireless Test”) systems; and |
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| • | defense/aerospace (“Defense/Aerospace”) test instrumentation and systems, storage test (“Storage Test”) systems, and circuit-board test and inspection (“Production Board Test”) systems (collectively these products represent “System Test”). |
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We have a broad customer base which includes integrated device manufacturers (“IDMs”), outsourced semiconductor assembly and test providers (“OSATs”), wafer foundries, fabless companies that design, but contract with others for the manufacture of, integrated circuits (“ICs”), developers of wireless devices and consumer electronics, manufacturers of circuit boards, automotive suppliers, wireless product manufacturers, storage device manufacturers, aerospace and military contractors.
In 2014, we acquired Avionics Interface Technologies, LLC (“AIT”), a supplier of equipment for testing state-of-the-art data communication buses. The acquisition of AIT complements our Defense/Aerospace line of bus test instrumentation for commercial and defense avionics systems. AIT is included in our System Test segment.
In 2013, we acquired ZTEC Instruments Inc. (“ZTEC”), a supplier of modular wireless test instruments. The acquisition of ZTEC expands our Wireless Test segment into the design verification test of wireless components and chipsets.
We believe our recent acquisitions have enhanced our opportunities for growth. We will continue to invest in our business, grow market share in our markets and expand further our addressable markets while tightly managing our costs.
The sales of our products and services are dependent, to a large degree, on customers who are subject to cyclical trends in the demand for their products. These cyclical periods have had, and will continue to have, a significant effect on our business since our customers often delay or accelerate purchases in reaction to changes in their businesses and to demand fluctuations in the semiconductor and electronics industries. Historically, these demand fluctuations have resulted in significant variations in our results of operations. The sharp swings in the semiconductor and electronics industries in recent years have generally affected the semiconductor and electronics test equipment and services industries more significantly than the overall capital equipment sector.
In the fourth quarter of 2014, we performed our annual goodwill impairment test and recorded a goodwill impairment charge of $98.9 million in our Wireless Test segment as a result of decreased projected demand attributable to an estimated smaller future wireless test market due to reuse of wireless test equipment, price competition and different testing techniques. Further reductions in the size of the wireless test market may occur, which may result in additional goodwill impairment charges, increased risk of excess and obsolete inventories, asset write-offs and restructuring charges.
In 2013, revenues from our Storage Test business unit were significantly lower than in 2012 due to lower hard disk drive demand from lower shipments of personal computers. In response to this lower demand, during the third quarter of 2013, we implemented a headcount reduction in the Storage Test business unit. It is possible that we may need to take further cost control and reduction measures including reducing the number of employees and reducing manufacturing capacity. A prolonged slowdown in Storage Test demand may result in increased risk of excess and obsolete inventories, asset write-offs and restructuring charges.
Critical Accounting Policies and Estimates
We have identified the policies discussed below as critical to understanding our business and our results of operations and financial condition. The impact and any associated risks related to these policies on our business operations is discussed throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations where such policies affect our reported and expected financial results.
Revenue Recognition
We recognize revenues when there is persuasive evidence of an arrangement, title and risk of loss have passed, delivery has occurred or the services have been rendered, the sales price is fixed or determinable and collection of the related receivable is reasonably assured. Title and risk of loss generally pass to our customers upon shipment or at delivery destination point. In circumstances where either title or risk of loss pass upon destination, acceptance or cash payment, we defer revenue recognition until such events occur.
Our equipment has non-software and embedded software components that function together to deliver the equipment’s essential functionality. Revenue is recognized upon shipment or at delivery destination point, provided that customer acceptance criteria can be demonstrated prior to shipment. Certain contracts require us to perform tests of the product to ensure that performance meets the published product specifications or customer requested specifications, which are generally conducted prior to shipment. Where the criteria cannot be demonstrated prior to shipment, revenue is deferred until customer acceptance has been received. We also defer the portion of the sales price that is not due until acceptance, which represents deferred profit.
For multiple element arrangements, we allocate revenue to all deliverables based on their relative selling prices. In such circumstances, a hierarchy is used to determine the selling price for allocating revenue to deliverables as follows: (i) vendor-specific objective evidence of selling price (“VSOE”), (ii) third-party evidence of selling price (“TPE”), and (iii) best estimate of the selling price (“BESP”). For a delivered item to be considered a separate unit, the delivered item must have value to the customer on a standalone basis and the delivery or performance of the undelivered item must be considered probable and substantially in our control.
Our post-shipment obligations include installation, training services, one-year standard warranties, and extended warranties. Installation does not alter the product capabilities, does not require specialized skills or tools and can be performed by the customers or other vendors. Installation is typically provided within five days of product shipment and is completed within one to two days thereafter. Training services are optional and do not affect the customers’ ability to use the product. We defer revenue for the selling price of installation and training. Extended warranties constitute warranty obligations beyond one year and we defer revenue in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 605-20, “Separately Priced Extended Warranty and Product Maintenance Contracts” and ASC 605-25, “Revenue Recognition Multiple-Element Arrangements.” Service revenue is recognized over the contractual period or as services are performed.
Our products are generally subject to warranty and the related costs of the warranty are provided for in cost of revenues when product revenue is recognized. We classify shipping and handling costs in cost of revenues.
We do not provide our customers with contractual rights of return for any of our products.
Retirement and Postretirement Plans
Effective January 1, 2012, we changed the method of recognizing actuarial gains and losses for our defined benefit pension plans and postretirement benefit plan and calculating the expected return on plan assets for our defined benefit pension plans. Historically, we recognized net actuarial gains and losses in accumulated other comprehensive income within shareholders’ equity on our consolidated balance sheet on an annual basis and amortized them into operating results over the average remaining years of service of the plan participants, to the extent such gains and losses were outside of a range (“corridor”). In 2012, we elected to immediately recognize net actuarial gains and losses and the change in the fair value of the plan assets in our operating results in the year in which they occur or upon any interim remeasurement of the plans. In addition, we used to calculate the expected return on plan assets using a calculated market-related value of plan assets. Effective January 1, 2012, we elected to calculate the expected return on plan assets using the fair value of the plan assets.
We believe that this new method is preferable as it eliminates the delay in recognizing gains and losses in our operating results and it will improve the transparency by faster recognition of the effects of economic and
interest rate trends on plan obligations and investments. These actuarial gains and losses are generally measured annually as of December 31 and, accordingly, will be recorded during the fourth quarter of each year or upon any interim remeasurement of the plans. In accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 250, “Accounting Changes and Error Corrections”, all prior periods presented in this Annual Report on Form 10-K have been adjusted to apply the new accounting method retrospectively.
Inventories
Inventories are stated at the lower of cost (first-in, first-out basis) or net realizable value. On a quarterly basis, we use consistent methodologies to evaluate all inventories for net realizable value. We record a provision for both excess and obsolete inventory when such write-downs or write-offs are identified through the quarterly review process. The inventory valuation is based upon assumptions about future demand, product mix, and possible alternative uses.
Equity Incentive and Stock Purchase Plans
Stock-based compensation expense is based on the grant-date fair value estimated in accordance with the provisions of ASC 718, “Compensation—Stock Compensation.” As required by ASC 718, we have made an estimate of expected forfeitures and are recognizing compensation costs only for those stock-based compensation awards expected to vest.
Income Taxes
Deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The measurement of deferred tax assets is reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax assets will not be realized. We performed the required assessment of positive and negative evidence regarding the realization of the net deferred tax assets in accordance with ASC 740, “Accounting for Income Taxes.” This assessment included the evaluation of scheduled reversals of deferred tax liabilities, estimates of projected future taxable income and tax-planning strategies. Although realization is not assured, based on our assessment, we concluded that it is more likely than not that such assets, net of the existing valuation allowance, will be realized. U.S. income taxes are not provided for on the earnings of non-U.S. subsidiaries which are expected to be reinvested indefinitely in operations outside the U.S. For intra-period tax allocations, we first utilize non-equity related tax attributes, such as net operating losses and credit carryforwards, and then equity-related tax attributes. We use the with-and-without method for calculating excess stock compensation deductions and do not take into account any indirect impacts of excess stock compensation deductions on its research and development tax credits, domestic production activities deduction, and other differences between financial reporting and tax reporting.
Investments
We account for our investments in debt and equity securities in accordance with the provisions of ASC 320-10, “Investments—Debt and Equity Securities.” On a quarterly basis, we review our investments to identify and evaluate those that have an indication of a potential other-than-temporary impairment. Factors considered in determining whether a loss is other-than-temporary include:
| • | The length of time and the extent to which the market value has been less than cost; |
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| • | The financial condition and near-term prospects of the issuer; and |
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| • | The intent and ability to retain the investment in the issuer for a period of time sufficient to allow for any anticipated recovery in market value. |
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Goodwill, Intangible and Long-Lived Assets
We assess goodwill for impairment at least annually in the fourth quarter, as of December 31, on a reporting unit basis, or more frequently, when events and circumstances occur indicating that the recorded goodwill may be impaired. If the book value of a reporting unit exceeds its fair value, the implied fair value of goodwill is compared with the carrying amount of goodwill. If the carrying amount of goodwill exceeds the implied fair value, an impairment charge is recorded in an amount equal to that excess. In the fourth quarter of 2014, we performed our annual goodwill impairment test and recorded a goodwill impairment charge of $98.9 million in our Wireless Test segment as a result of decreased projected demand attributable to an estimated smaller future wireless test market due to reuse of wireless test equipment, price competition and different testing techniques.
We assess the impairment of intangible and long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important in the determination of an impairment include significant underperformance relative to historical or projected future operating results, significant changes in the manner that we use the acquired asset and significant negative industry or economic trends.
As a result of the Wireless Test segment goodwill impairment charge in the fourth quarter of 2014 described above, we performed an impairment test of the Wireless Test segment’s intangible and long-lived assets based on a comparison of the estimated undiscounted cash flows to the recorded value of the assets and there was no indication of impairment. When we determine that the carrying value of intangible and long-lived assets may not be recoverable based upon the existence of one or more of the above indicators of impairment, we measure any impairment based on a projected discounted cash flow method using a discount rate commensurate with the associated risks.
SELECTED RELATIONSHIPS WITHIN THE CONSOLIDATED
STATEMENTS OF OPERATIONS
| Year Ended December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| Percentage of revenues: | ||||||||||||
| Revenues: | ||||||||||||
| Products | 82.8 | % | 80.9 | % | 83.5 | % | ||||||
| Services | 17.2 | 19.1 | 16.5 | |||||||||
| Total revenues | 100.0 | 100.0 | 100.0 | |||||||||
| Cost of revenues: | ||||||||||||
| Cost of products | 38.9 | 34.9 | 38.8 | |||||||||
| Cost of services | 7.8 | 8.4 | 7.7 | |||||||||
| Total cost of revenues (exclusive of acquired intangible assets amortization shown separately below) | 46.7 | 43.4 | 46.5 | |||||||||
| Gross profit | 53.3 | 56.6 | 53.5 | |||||||||
| Operating expenses: | ||||||||||||
| Engineering and development | 17.7 | 18.5 | 15.4 | |||||||||
| Selling and administrative | 19.4 | 19.6 | 16.7 | |||||||||
| Goodwill impairment | 6.0 | — | — | |||||||||
| Acquired intangible assets amortization | 4.3 | 5.1 | 4.4 | |||||||||
| Restructuring and other | 0.1 | 0.1 | (0.5 | ) | ||||||||
| Total operating expenses | 47.5 | 43.3 | 36.1 | |||||||||
| Income from operations | 5.9 | 13.4 | 17.3 | |||||||||
| Non-operating (income) expenses: | ||||||||||||
| Interest income | (0.4 | ) | (0.3 | ) | (0.2 | ) | ||||||
| Interest expense | 0.4 | 1.8 | 1.5 | |||||||||
| Other (income) expense, net | — | (2.3 | ) | 0.1 | ||||||||
| Income before income taxes | 5.8 | 14.1 | 16.1 | |||||||||
| Provision for income taxes | 0.9 | 2.6 | 3.0 | |||||||||
| Net income | 4.9 | % | 11.6 | % | 13.1 | % | ||||||
Results of Operations
Book to Bill Ratio
Book to bill ratio is calculated as net bookings divided by net sales. Book to bill ratio by reportable segment was as follows:
| Three months ended December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| Semiconductor Test | 1.0 | 1.0 | 1.0 | |||||||||
| Wireless Test | 1.0 | 0.7 | 1.1 | |||||||||
| System Test | 1.5 | 1.0 | 1.6 | |||||||||
| Total Company | 1.0 | 1.0 | 1.1 |
Revenues
Revenues for our three reportable segments were as follows:
| 2014 | 2013 | 2012 | 2013-2014 Dollar Change | 2012-2013 Dollar Change | ||||||||||||||||
| (in millions) | ||||||||||||||||||||
| Semiconductor Test | $ | 1,300.8 | $ | 1,023.0 | $ | 1,127.7 | $ | 277.8 | $ | (104.7 | ) | |||||||||
| Wireless Test | 184.5 | 251.9 | 286.4 | (67.4 | ) | (34.5 | ) | |||||||||||||
| System Test | 162.5 | 153.0 | 242.7 | 9.5 | (89.7 | ) | ||||||||||||||
| $ | 1,647.8 | $ | 1,427.9 | $ | 1,656.8 | $ | 219.9 | $ | (228.9 | ) | ||||||||||
The increase in Semiconductor Test revenues of $277.8 million or 27% from 2013 to 2014 was primarily due to higher system-on-a-chip (“SOC”) product volume, driven by a larger application processor test market driven by market demand.
The decrease in Semiconductor Test revenues of $104.7 million or 9% from 2012 to 2013 was primarily due to a decrease in SOC test product sales because of a smaller application processor test market, partially offset by higher memory system sales.
The decrease in Wireless Test revenues of $67.4 million or 27% from 2013 to 2014 was primarily due to lower cellular and connectivity product volume.
The decrease in Wireless Test revenues of $34.5 million or 12% from 2012 to 2013 was primarily due to lower connectivity product volume, partially offset by higher cellular product volume.
The increase in System Test revenues of $9.5 million or 6% from 2013 to 2014 was primarily due to higher product volume in Storage Test and Production Board Test, partially offset by lower Defense/Aerospace product sales.
The decrease in System Test revenues of $89.7 million or 37% from 2012 to 2013 was primarily due to lower product volume in Storage Test. The decrease in Storage Test sales was due to lower hard disk drive demand primarily from lower shipments of personal computers.
Our three reportable segments accounted for the following percentages of consolidated revenues for each of the last three years:
| 2014 | 2013 | 2012 | ||||||||||
| Semiconductor Test | 79 | % | 71 | % | 68 | % | ||||||
| Wireless Test | 11 | 18 | 17 | |||||||||
| System Test | 10 | 11 | 15 | |||||||||
| 100 | % | 100 | % | 100 | % | |||||||
Revenues by country as a percentage of total revenues were as follows (1):
| 2014 | 2013 | 2012 | ||||||||||
| Taiwan | 30 | % | 19 | % | 18 | % | ||||||
| China | 18 | 23 | 21 | |||||||||
| United States | 13 | 16 | 14 | |||||||||
| Korea | 9 | 8 | 13 | |||||||||
| Singapore | 7 | 8 | 6 | |||||||||
| Europe | 7 | 6 | 5 | |||||||||
| Malaysia | 5 | 6 | 4 | |||||||||
| Philippines | 4 | 4 | 7 | |||||||||
| Japan | 4 | 6 | 6 | |||||||||
| Thailand | 2 | 2 | 5 | |||||||||
| Rest of the World | 1 | 2 | 1 | |||||||||
| 100 | % | 100 | % | 100 | % | |||||||
| (1) | Revenues attributable to a country are based on location of customer site. |
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The breakout of product and service revenues for the past three years was as follows:
| 2014 | 2013 | 2012 | 2013-2014 Dollar Change | 2012-2013 Dollar Change | ||||||||||||||||
| (in millions) | ||||||||||||||||||||
| Product Revenues | $ | 1,364.0 | $ | 1,154.9 | $ | 1,383.6 | $ | 209.1 | $ | (228.7 | ) | |||||||||
| Service Revenues | 283.8 | 273.0 | 273.2 | 10.8 | (0.2 | ) | ||||||||||||||
| $ | 1,647.8 | $ | 1,427.9 | $ | 1,656.8 | $ | 219.9 | $ | (228.9 | ) | ||||||||||
Our product revenues increased $209.1 million or 18% in 2014 from 2013 primarily due to an increase in SOC test product volume, driven by a larger application processor test market driven by market demand. This increase was partially offset by lower cellular and connectivity product volume in Wireless Test. Service revenues, which are derived from the servicing of our installed base of products and includes equipment maintenance contracts, repairs, extended warranties, parts sales, and applications support, increased $10.8 million or 4%.
Our product revenues decreased $228.7 million or 17% in 2013 from 2012 primarily due to a decrease in SOC test product sales because of a smaller application processor test market and due to lower product volume in Storage Test.
In 2014, no single customer accounted for more than 10% of our consolidated revenues. In 2013 and 2012, revenues from one customer accounted for 12% and 10%, respectively, of our consolidated revenues. In each of the years 2014, 2013 and 2012, our three largest customers in aggregate accounted for 21%, 26% and 29%, respectively, of our consolidated revenues.
Gross Profit
| 2014 | 2013 | 2012 | 2013-2014 Dollar / Point Change | 2012-2013 Dollar / Point Change | ||||||||||||||||
| (dollars in millions) | ||||||||||||||||||||
| Gross Profit | $ | 878.8 | $ | 808.8 | $ | 886.0 | $ | 70.0 | $ | (77.2 | ) | |||||||||
| Percent of Total Revenues | 53.3 | % | 56.6 | % | 53.5 | % | (3.3 | ) | 3.1 |
Gross profit as a percent of total revenues decreased from 2013 to 2014 by 3.3 points. This decrease was a result of a decrease of 2.8 points related to unfavorable product mix in SOC Semiconductor Test and lower Wireless Test sales and a decrease of 1.1 points due to pension expense in 2014 compared to pension income in 2013, partially offset by an increase of 1.1 points due to higher sales volume.
Gross profit as a percent of total revenues increased from 2012 to 2013 by 3.1 points. This increase was a result of an increase of 1.7 points related to favorable product mix in SOC Semiconductor Test and lower Storage Test system sales compared to 2012, an increase of 1.1 points due to pension income in 2013 compared to pension expense in 2012, an increase of 1.1 points due to lower excess and obsolete inventory provisions and increased sales of previously reserved inventory, and an increase of 0.4 points as a result of no purchase accounting inventory step-up in 2013, partially offset by a decrease of 1.4 points due to lower sales volume across all segments.
The breakout of product and service gross profit was as follows:
| 2014 | 2013 | 2012 | 2013-2014 Dollar / Point Change | 2012-2013 Dollar / Point Change | ||||||||||||||||
| (dollars in millions) | ||||||||||||||||||||
| Product Gross Profit | $ | 723.2 | $ | 655.9 | $ | 740.7 | $ | 67.3 | $ | (84.8 | ) | |||||||||
| Percent of Product Revenues | 53.0 | % | 56.8 | % | 53.5 | % | (3.8 | ) | 3.3 | |||||||||||
| Service Gross Profit | $ | 155.6 | $ | 152.9 | $ | 145.3 | $ | 2.7 | $ | 7.6 | ||||||||||
| Percent of Service Revenues | 54.8 | % | 56.0 | % | 53.2 | % | (1.2 | ) | 2.8 |
We assess the carrying value of our inventory on a quarterly basis by estimating future demand and comparing that demand against on-hand and on-order inventory positions. Forecasted revenue information is obtained from the sales and marketing groups and incorporates factors such as backlog and future product demand. This quarterly process identifies obsolete and excess inventory. Obsolete inventory, which represents items for which there is no demand, is fully reserved. Excess inventory, which represents inventory items that are not expected to be consumed during the next twelve quarters for our Semiconductor Test and System Test segments and next four quarters for our Wireless Test segment, is written-down to estimated net realizable value.
During the year ended December 31, 2014, we recorded an inventory provision of $22.2 million included in cost of revenues, due to the following factors:
| — | A charge of $15.4 million due to downward revisions to previously forecasted demand levels, of which $8.1 million was in Semiconductor Test, $5.2 million was in Wireless Test and $2.1 million was in System Test; and |
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| — | A $6.8 million inventory write-down as a result of product transition, of which $6.3 million was in Semiconductor test and $0.5 million in Wireless Test. |
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During the year ended December 31, 2013, we recorded an inventory provision of $16.6 million included in cost of revenues, due to the following factors:
| — | A charge of $12.2 million due to downward revisions to previously forecasted demand levels, of which $5.2 million was in Semiconductor Test, $4.2 million was in System Test and $2.8 million was in Wireless Test; and |
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| — | A $4.4 million inventory write-down as a result of product transition in Wireless Test. |
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During the year ended December 31, 2012, we recorded an inventory provision of $26.8 million included in cost of revenues, due to the following factors:
| — | A charge of $12.0 million due to decline in demand compared to previously forecasted demand levels for prior generation Magnum testers resulted in an inventory provision in Semiconductor Test; |
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| — | A $5.3 million inventory write-down as a result of product transition related to the Flex Test Platform in Semiconductor Test; |
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| — | A $3.9 million inventory write-down as a result of product transition in Wireless Test; and |
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| — | The remainder of the charge of $5.6 million primarily reflects downward revisions to previously forecasted demand levels, of which $4.3 million was in System Test, $1.1 million in Semiconductor Test and $0.2 million in Wireless Test. |
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During the years ended December 31, 2014, 2013 and 2012, we scrapped $20.8 million, $35.3 million and $9.6 million of inventory, respectively, and sold $12.9 million, $9.8 million and $4.3 million of previously written-down or written-off inventory, respectively. As of December 31, 2014, we had inventory related reserves for amounts which had been written-down or written-off totaling $111.3 million. We have no pre-determined timeline to scrap the remaining inventory.
Engineering and Development
Engineering and development expenses were as follows:
| 2014 | 2013 | 2012 | 2013-2014 Change | 2012-2013 Change | ||||||||||||||||
| (dollars in millions) | ||||||||||||||||||||
| Engineering and Development | $ | 291.6 | $ | 264.1 | $ | 255.9 | $ | 27.5 | $ | 8.2 | ||||||||||
| Percent of Total Revenues | 17.7 | % | 18.5 | % | 15.4 | % |
The increase of $27.5 million from 2013 to 2014 was due primarily to $12.2 million of pension expense in 2014 compared to $4.4 million of pension income in 2013, a $10.9 million increase in Semiconductor Test spending, $2.7 million of higher variable compensation and $2.6 million of increased spending in Wireless Test, partially offset by lower System Test spending.
The increase of $8.2 million in engineering and development expenses from 2012 to 2013 was due primarily to a $21.7 million increase in Semiconductor Test spending, partially offset by $4.4 million of pension income in 2013 compared to $7.5 million of pension expense in 2012.
Selling and Administrative
Selling and administrative expenses were as follows:
| 2014 | 2013 | 2012 | 2013-2014 Change | 2012-2013 Change | ||||||||||||||||
| (dollars in millions) | ||||||||||||||||||||
| Selling and Administrative | $ | 319.7 | $ | 279.6 | $ | 277.0 | $ | 40.1 | $ | 2.6 | ||||||||||
| Percent of Total Revenues | 19.4 | % | 19.6 | % | 16.7 | % |
The increase of $40.1 million from 2013 to 2014 was due primarily to $21.6 million of pension expense in 2014 compared to $2.9 million of pension income in 2013, a one-time $6.6 million stock-based compensation charge in 2014 related to a retirement agreement entered into with our retired chief executive officer and increased spending in Semiconductor Test and Corporate.
The increase of $2.6 million in selling and administrative expenses from 2012 to 2013 was due primarily to a $7.0 million increase in Wireless Test spending, a $5.4 million increase in Semiconductor Test spending, partially offset by $2.9 million of pension income in 2013 compared to $6.8 million of pension expense in 2012.
Acquired Intangible Assets Amortization
Acquired intangible assets amortization expense was as follows:
| 2014 | 2013 | 2012 | 2013-2014 Change | 2012-2013 Change | ||||||||||||||||
| (dollars in millions) | ||||||||||||||||||||
| Acquired Intangible Assets Amortization | $ | 70.8 | $ | 72.4 | $ | 73.5 | $ | (1.6 | ) | $ | (1.1 | ) | ||||||||
| Percent of Total Revenues | 4.3 | % | 5.1 | % | 4.4 | % |
Acquired intangible assets amortization expense decreased from 2013 to 2014 due to intangible assets that became fully amortized during the year, partially offset by increased amortization expense due to the AIT acquisition. Acquired intangible assets amortization expense decreased from 2012 to 2013 due to intangible assets that became fully amortized during the year, partially offset by increased amortization expense due to the ZTEC acquisition.
Goodwill Impairment
In the fourth quarter of 2014, we performed our annual goodwill impairment test and recorded a goodwill impairment charge of $98.9 million in our Wireless Test segment as a result of decreased projected demand attributable to an estimated smaller future wireless test market due to reuse of wireless test equipment, price competition and different testing techniques. Further reductions in the size of the wireless test market may occur, which may result in additional goodwill impairment charges, increased risk of excess and obsolete inventories, asset write-offs and restructuring charges.
Restructuring and Other
Restructuring
During the year ended December 31, 2014, we recorded $1.6 million of charges related to headcount reductions of approximately 43 people, primarily in Semiconductor Test and Wireless Test.
During the year ended December 31, 2013, we recorded $1.9 million of severance charges related to headcount reductions of 48 people primarily in System Test and Semiconductor Test and a $(0.4) million credit in Corporate related to a change in the estimated exit costs related to a leased facility.
During the year ended December 31, 2012, we recorded $1.0 million of severance charges related to headcount reductions of 19 people primarily in System Test and Semiconductor Test.
The remaining accrual for severance of $0.4 million is reflected in the accrued employees’ compensation and withholdings on the balance sheet and is expected to be paid by June 2015.
Other
During the year ended December 31, 2014, we recorded a $0.6 million gain from the fair value adjustment to decrease the ZTEC acquisition contingent consideration, partially offset by $0.4 million of acquisition costs related to AIT.
During the year ended December 31, 2012, due to a decrease in specified new product revenue through the December 31, 2012 earn-out period end date, we recorded an $8.8 million gain from the fair value adjustment to decrease the LitePoint acquisition contingent consideration.
Interest and Other
| 2014 | 2013 | 2012 | 2013-2014 Change | 2012-2013 Change | ||||||||||||||||
| (in millions) | ||||||||||||||||||||
| Interest Income | $ | (6.3 | ) | $ | (4.1 | ) | $ | (4.1 | ) | $ | (2.2 | ) | $ | — | ||||||
| Interest Expense | 6.9 | 26.1 | 24.5 | (19.2 | ) | 1.6 | ||||||||||||||
| Other (income) expense, net | 0.4 | (33.2 | ) | 1.0 | 33.6 | (34.2 | ) |
Interest income increased by $2.2 million, from $4.1 million in 2013 to $6.3 million in 2014, due primarily to higher cash and marketable securities balances in 2014.
Interest expense decreased by $19.2 million, from $26.1 million in 2013 to $6.9 million in 2014, due primarily to a repayment of our convertible debt in the first quarter of 2014. In 2013 and 2012, interest expense included convertible debt discount amortization.
In 2013, other (income) expense, net included a $34.2 million gain from the sale of an equity investment.
Income (Loss) Before Income Taxes
| 2014 | 2013 | 2012 | 2013-2014 Change | 2012-2013 Change | ||||||||||||||||
| (in millions) | ||||||||||||||||||||
| Semiconductor Test | $ | 255.8 | $ | 153.8 | $ | 186.0 | $ | 102.0 | $ | (32.2 | ) | |||||||||
| Wireless Test | (116.2 | ) | 23.1 | 83.1 | (139.3 | ) | (60.0 | ) | ||||||||||||
| System Test | 12.1 | 3.1 | 34.2 | 9.0 | (31.1 | ) | ||||||||||||||
| Corporate (1) | (56.3 | ) | 21.9 | (37.3 | ) | (78.2 | ) | 59.2 | ||||||||||||
| $ | 95.4 | $ | 201.9 | $ | 266.0 | $ | (106.5 | ) | $ | (64.1 | ) | |||||||||
| (1) | Included in Corporate are pension and postretirement plans actuarial gains and losses, interest income and interest expense. |
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The decrease in income before income taxes from 2013 to 2014 was primarily due to a $98.9 million goodwill impairment charge related to Wireless Test and $46.6 million pension expense related to actuarial losses in 2014, partially offset by higher income due to higher revenues in Semiconductor Test in 2014.
The decrease in income before income taxes from 2012 to 2013 was primarily due to lower revenues in 2013 compared to 2012, a $9.8 million increase in restructuring and other costs, partially offset by a $34.2 million gain from the sale of an equity investment in 2013.
Income Taxes
Income tax expense for 2014, 2013 and 2012 totaled $14.1 million, $37.0 million and $48.9 million, respectively. The effective tax rate for 2014, 2013 and 2012 was 14.8%, 18.3% and 18.4%, respectively. The decrease in income tax expense from 2013 to 2014 was primarily attributable to a shift in the geographic distribution of income which decreased income subject to taxation in the United States relative to lower tax rate jurisdictions, partially offset by an increase in income tax expense associated with uncertain tax positions and a reduction in the benefit from U.S. research and development tax credits.
The decrease in income tax expense from 2012 to 2013 was due to the reinstatement of the U.S. research and development tax credit in 2013 for fiscal years 2013 and 2012 and lower pre-tax income, partially offset by higher tax expense for uncertain tax positions and state taxes.
U.S. research and development tax credits provided a 7.9% and 7.2% reduction to the 2014 and 2013 U.S. statutory federal tax rate of 35.0%, respectively. The research and development tax credit expired at the end of 2014; therefore if the credit is not re-enacted there could be an unfavorable impact on our 2015 effective income tax rate.
We operate under a tax holiday in Singapore, which is effective through December 31, 2015. The tax savings attributable to the Singapore tax holiday for the years ended December 31, 2014, 2013 and 2012 were $13.2 million or $0.06 per diluted share, $4.7 million or $0.02 per diluted share and $10.9 million or $0.05 per diluted share, respectively. We are in discussions with the Singapore Economic Development Board with respect to extension of the tax holiday for periods after December 31, 2015.
Contractual Obligations
The following table reflects our contractual obligations as of December 31, 2014:
| Payments Due by Period | ||||||||||||||||||||||||
| Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | Other | |||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||
| Operating Lease Obligations | $ | 53,991 | $ | 13,521 | $ | 18,618 | $ | 8,638 | $ | 13,214 | — | |||||||||||||
| Purchase Obligations | 151,459 | 146,543 | 4,916 | — | — | — | ||||||||||||||||||
| Retirement Plan Contributions | 112,637 | 4,260 | 8,351 | 8,853 | 91,173 | — | ||||||||||||||||||
| Other Long-Term Liabilities Reflected on the Balance Sheet under GAAP (1) | 58,674 | — | 19,929 | — | — | 38,745 | ||||||||||||||||||
| Total | $ | 376,761 | $ | 164,324 | $ | 51,814 | $ | 17,491 | $ | 104,387 | $ | 38,745 | ||||||||||||
| (1) | Included in Other Long-Term Liabilities are liabilities for customer advances, extended warranty, uncertain tax positions, deferred tax liabilities and other obligations. For certain long-term obligations, we are unable to provide a reasonably reliable estimate of the timing of future payments relating to these obligations and therefore we included these amounts in the column marked “Other.” |
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Liquidity and Capital Resources
Our cash, cash equivalents and marketable securities balance increased $99.2 million to $1.3 billion from 2013 to 2014. Cash activity for 2014, 2013 and 2012 was as follows:
| 2014 | 2013 | 2012 | 2013-2014 Change | 2012-2013 Change | ||||||||||||||||
| (in millions) | ||||||||||||||||||||
| Cash provided by operating activities: | ||||||||||||||||||||
| Net income, adjusted for non-cash items | $ | 439.7 | $ | 318.4 | $ | 444.8 | $ | 121.3 | $ | (126.4 | ) | |||||||||
| Change in operating assets and liabilities, net of businesses acquired | 52.4 | (49.7 | ) | (41.8 | ) | 102.1 | (7.9 | ) | ||||||||||||
| Net cash provided by operating activities | $ | 492.1 | $ | 268.7 | $ | 402.9 | $ | 223.4 | $ | (134.3 | ) | |||||||||
| Net cash used for investing activities | (332.9 | ) | (283.3 | ) | (602.5 | ) | (49.6 | ) | 319.2 | |||||||||||
| Net cash (used for) provided by financing activities | $ | (206.6 | ) | $ | 17.3 | $ | (35.3 | ) | $ | (223.9 | ) | $ | 52.6 | |||||||
| (Decrease) increase of cash and cash equivalents | $ | (47.4 | ) | $ | 2.7 | $ | (234.8 | ) | $ | (50.1 | ) | $ | 237.5 | |||||||
In 2014, changes in operating assets and liabilities, net of businesses acquired, provided cash of $52.4 million. This was due to a $100.8 million decrease in operating assets and a $48.4 million decrease in operating liabilities.
The decrease in operating assets was due to a $41.5 million decrease in prepayments and other assets primarily related to a reduction in prepayments to our contract manufacturers, a $51.2 million decrease in inventories due to higher sales, and an $8.1 million decrease in accounts receivable.
The decrease in operating liabilities was due to $33.9 million of retirement plan contributions, a $17.0 million decrease in other accrued liabilities, a $16.9 million decrease in accounts payable, a $7.3 million decrease in accrued employee compensation due primarily to employee stock awards payroll taxes and variable compensation payments, a $4.3 million convertible note interest payment, partially offset by a $22.0 million increase in customer advance payments and deferred revenue, and an $8.9 million increase in accrued income taxes.
Investing activities during 2014 used cash of $332.9 million due to $1,578.7 million used for purchases of marketable securities and $169.0 million used for purchases of property, plant and equipment, and $19.4 million used for the acquisition of AIT, completed in October 2014, partially offset by proceeds from sales and maturities of marketable securities that provided cash of $859.7 million and $570.4 million, respectively, and net proceeds from life insurance of $4.2 million primarily related to the cash surrender value from the cancellation of Teradyne owned life insurance policies on its retired chief executive officer. The increase in purchase of property, plant and equipment of $62.3 million in 2014 compared to the year ended December 31, 2013 is primarily due to testers used for customer leases.
Financing activities during 2014 used cash of $206.6 million, $191.0 million of cash was used for payments on long-term debt related to the convertible note and a loan in Japan and $37.4 million was used for dividend payments, partially offset by $21.3 million provided by the issuance of common stock under employee stock purchase and stock option plans and $0.5 million from the tax benefit related to stock options and restricted stock units.
In 2013, changes in operating assets and liabilities, net of businesses sold and acquired, used cash of $49.7 million. This was due to a $32.1 million increase in operating assets and a $17.7 million decrease in operating liabilities.
The increase in operating assets was due to a $49.6 million increase in prepayments due primarily to prepayments to our contract manufacturers and a $3.7 million increase in accounts receivable, partially offset by a $21.2 million decrease in inventories.
The decrease in operating liabilities was due to a $2.5 million decrease in accrued employee compensation due primarily to employee stock awards payroll taxes and variable compensation payments, a $28.9 million decrease in customer advance payments and deferred revenue, and $5.5 million of retirement plan contributions, partially offset by a $13.9 million increase in other accrued liabilities, a $3.7 million increase in accounts payable due to higher fourth quarter sales volume, and a $1.6 million increase in accrued income taxes.
Investing activities during 2013 used cash of $283.3 million. In October 2013, we completed the acquisition of ZTEC for an initial cash purchase price, net of cash acquired, of $15.0 million. Purchases of property, plant and equipment were $106.7 million. Purchases of marketable securities used cash of $1,170.5 million, partially offset by proceeds from maturities and sales of marketable securities that provided cash of $516.5 million and $458.5 million, respectively. The sale of an equity investment provided cash of $34.2 million. Purchases of life insurance policies used cash of $0.3 million.
Financing activities during 2013 provided cash of $17.3 million, $17.6 million was from the issuance of common stock under stock option and stock purchase plans, and $2.7 million from the tax benefit related to stock options and restricted stock units, partially offset by $0.4 million of cash used for payments related to LitePoint acquisition contingent consideration and $2.5 million of cash used for payments on long-term debt related to a loan in Japan.
In 2012, changes in operating assets and liabilities, net of businesses sold and acquired, used cash of $41.8 million. This was due to a $9.4 million increase in operating assets and a $32.4 million decrease in operating liabilities.
The increase in operating assets was due to a $24.1 million increase in accounts receivable and a $3.0 million increase in prepayments due primarily to supplier prepayments, partially offset by a $17.7 million decrease in inventories.
The decrease in operating liabilities was due to a $15.7 million decrease in accrued employee compensation due primarily to employee stock awards payroll taxes and variable compensation payments, a $14.6 million decrease in customer advance payments and deferred revenue, a $11.5 million decrease in accounts payable due to lower fourth quarter sales volume, a $5.6 million decrease in other accrued liabilities, and $4.8 million of retirement plan contributions, partially offset by a $19.8 million increase in accrued income taxes.
Investing activities during 2012 used cash of $602.5 million, due to $748.2 million used for purchases of marketable securities and $119.1 million used for purchases of property, plant and equipment, partially offset by proceeds from sales and maturities of marketable securities that provided cash of $38.3 million and $225.1 million, respectively, and proceeds of $1.5 million from life insurance policies.
Financing activities during 2012 used cash of $35.3 million, $18.5 million was from the issuance of common stock under stock option and stock purchase plans, and $8.5 million from the tax benefit related to stock options and restricted stock units, partially offset by $59.7 million of cash used for payments related to LitePoint acquisition contingent consideration and $2.5 million of cash used for payments on long-term debt related to a loan in Japan.
In January 2014, our Board of Directors declared an initial quarterly cash dividend of $0.06 per share. In each of the second, third and fourth quarters of 2014, we paid a cash dividend of $0.06 per share. In January 2015, our Board of Directors declared a quarterly dividend of $0.06 per share to be paid on March 24, 2015 to shareholders of record as of February 27, 2015. Total dividend payments in 2014 were $37.4 million. Payment of future cash dividends are subject to the discretion of our Board of Directors and will depend, among other things, upon our earnings, capital requirements and financial condition.
In January 2015, our Board of Directors authorized the repurchase of up to $500 million of common stock, $300 million of which we intend to repurchase in 2015.
We believe our cash, cash equivalents and marketable securities balance will be sufficient to pay our quarterly dividend, execute our authorized share repurchase program and meet our working capital and expenditure needs for at least the next twelve months. The amount of cash, cash equivalents and marketable securities in the U.S. and our operations in the U.S. provide sufficient liquidity to fund our business activities in the U.S. We have approximately $616 million of cash outside the U.S. that if repatriated would incur additional taxes. Determination of the additional taxes that would be incurred is not practicable due to uncertainty regarding the remittance structure, the mix of earnings and earnings and profit pools in the year of remittance, and overall complexity of the calculation. Inflation has not had a significant long-term impact on earnings.
Retirement Plans
ASC 715-20, “Compensation – Retirement Benefits – Defined Benefit Plans” 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 715-20. The pension asset or liability represents the difference between the fair value of the pension plan’s assets and the projected benefit obligation as of December 31. For other postretirement benefit plans, the liability is the difference between the fair value of the plan’s assets and the accumulated postretirement benefit obligation as of December 31.
Our pension expense, which includes the U.S. Qualified Pension Plan (“U.S. Plan”), certain qualified plans for non-U.S. subsidiaries, and a U.S. Supplemental Executive Defined Benefit Plan, was approximately $52.4 million for the year ended December 31, 2014. The largest portion of our 2014 pension expense was $31.2 million for our U.S. Plan. Pension expense is calculated based upon a number of actuarial assumptions. Discount rate and expected return on assets are two assumptions which are important elements of pension plan expense/income and asset/liability measurement. We evaluate our discount rate and expected rate of return on assets assumptions annually on a plan and country specific basis. We evaluate other assumptions related to demographic factors, such as retirement age, mortality and turnover periodically, and update them to reflect our experience and expectations for the future. In the fourth quarter of 2014, we updated the mortality assumptions related to our U.S retirement plans using the mortality tables published in October 2014 by the U.S. Society of Actuaries. The change in the mortality assumptions resulted in approximately $39.0 million of actuarial losses in 2014 for the U.S. retirement plans.
In developing the expected return on U.S. Plan assets assumption, we evaluated input from our investment managers and pension consultants, including their review of asset class return expectations. Based on this review, we believe that 5.0% was an appropriate rate to use for 2014. The December 31, 2014 asset allocation for our U.S. Plan was 83% invested in fixed income securities, 16% invested in equity securities, and 1% invested in other securities. Our investment managers regularly review the actual asset allocation and periodically rebalance the portfolio to ensure alignment with our targeted allocations.
Effective January 1, 2012, we elected to immediately recognize net actuarial gains and losses and the change in the fair value of plans assets in our operating results in the year in which they occur or upon any interim remeasurement of the plans. In addition, we used to calculate the expected return on plan assets using a calculated market-related value of plan assets. Effective January 1, 2012, we elected to calculate the expected return on plan assets using the fair value of the plan assets.
The discount rate that we utilized for determining future pension obligations for the U.S. Plan is based on the Citigroup Pension Index adjusted for the U.S. Plan’s expected cash flows and was 3.7% at December 31, 2014, down from 4.5% at December 31, 2013. We estimate that in 2015 we will recognize approximately $1.5 million of pension income for the U.S. Plan. The U.S. Plan pension income estimate for 2015 is based on a 3.7% discount rate and 4.75% return on assets. Future pension expense or income will depend on future investment performance, changes in future discount rates and various other factors related to the employee population participating in our pension plans.
As of December 31, 2014, our pension plans had unrecognized pension prior service cost of $0.4 million.
We performed a sensitivity analysis, which expresses the potential U.S. Plan (income) expense for the year ending December 31, 2015, which would result from changes to either the discount rate or the expected return on plan assets. The below estimates exclude the impact of any potential actuarial gains or losses. It is difficult to reliably forecast or predict whether there will be any actuarial gains or losses in 2015 as they are primarily driven by events and circumstances beyond our control, such as changes in interest rates and the performance of the financial markets.
| Discount Rate | ||||||||||||
| Return on Plan Assets | 3.2% | 3.7% | 4.2% | |||||||||
| (in millions) | ||||||||||||
| 4.25% | $ | (0.8 | ) | $ | 0.0 | $ | 0.6 | |||||
| 4.75% | (2.3 | ) | (1.5 | ) | (0.9 | ) | ||||||
| 5.25% | (3.8 | ) | (3.1 | ) | (2.5 | ) |
The assets of the U.S. Plan consist substantially of fixed income securities. U.S. Plan assets have increased from $256.4 million at December 31, 2013 to $316.1 million at December 31, 2014.
Our funding policy is to make contributions to our pension plans in accordance with local laws and to the extent that such contributions are tax deductible. During 2014, we made contributions of $30.0 million to the U.S. Plan, $1.8 million to the U.S. supplemental executive defined benefit pension plan and $1.2 million to certain qualified plans for non-U.S. subsidiaries. We expect to contribute approximately $2.5 million to the U.S. supplemental executive defined benefit pension plan in 2015. Contributions that will be made in 2015 to certain qualified plans for non-U.S. subsidiaries are based on local statutory requirements and will be approximately $1.0 million. We do not expect to make any contributions to the U.S. Plan in 2015.
Equity Compensation Plans
In addition to our 1996 Employee Stock Purchase Plan discussed in Note N: “Stock Based Compensation” in Notes to Consolidated Financial Statements, we have a 2006 Equity and Cash Compensation Incentive Plan (the “2006 Equity Plan”) under which equity securities are authorized for issuance. The 2006 Equity Plan was initially approved by stockholders on May 25, 2006.
At our annual meeting of stockholders held May 21, 2013, our stockholders approved an amendment to the 2006 Equity Plan to increase the number of shares issuable thereunder by 10.0 million, for an aggregate of 32.0 million shares issuable thereunder, and our stockholders also approved an amendment to our 1996 Employee Stock Purchase Plan to increase the number of shares issuable thereunder by 5.0 million, for an aggregate of 30.4 million shares issuable thereunder.
The following table presents information about these plans as of December 31, 2014 (share numbers in thousands):
| Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column one) | |||||||||
| Equity plans approved by shareholders | 4,871 | (1) | $ | 17.03 | 17,787 | (2) | ||||||
| Equity plans not approved by shareholders (3,4,5) | 988 | $ | 3.09 | — | ||||||||
| Total | 5,859 | $ | 7.89 | 17,787 | ||||||||
| (1) | Includes 4,351,325 shares of restricted stock units that are not included in the calculation of the weighted average exercise price. |
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| (2) | Consists of 12,443,022 securities available for issuance under the 2006 Equity Plan and 5,343,654 of securities available for issuance under the Employee Stock Purchase Plan. |
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| (3) | In connection with the 2008 acquisition of Nextest (the “Nextest Acquisition”), we assumed the options and restricted stock units granted under the Nextest Systems Corporation 1998 Equity Incentive Plan, as amended, and the Nextest Systems Corporation 2006 Equity Incentive Plan (collectively, the “Nextest Plans”). Upon the consummation of the Nextest Acquisition, these options and restricted stock units were converted automatically into, respectively, options to purchase and restricted stock units representing, an aggregate of 4,417,594 shares of our common stock. No additional awards will be granted under the Nextest Plans. As of December 31, 2014, there were outstanding options exercisable for an aggregate of 185,036 shares of our common stock pursuant to the Nextest Plans, with a weighted average exercise price of $3.18 per share. |
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| (4) | In connection with the 2008 acquisition of Eagle Test (the “Eagle Acquisition”), we assumed the options granted under the Eagle Test Systems, Inc. 2003 Stock Option and Grant Plan and the Eagle Test Systems, Inc. 2006 Stock Option and Incentive Plan (collectively, the “Eagle Plans”). Upon the consummation of the Eagle Acquisition, these options were converted automatically into options to purchase an aggregate of 3,594,916 shares of our common stock. No additional awards will be granted under the Eagle Plans. As of December 31, 2014, there were outstanding options exercisable for an aggregate of 129,467 shares of our common stock pursuant to the Eagle Plans, with a weighted average exercise price of $3.85 per share. |
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| (5) | In connection with the 2011 acquisition of LitePoint Corporation (the “LitePoint Acquisition”), we assumed the options granted under the LitePoint Corporation 2002 Stock Plan (the “LitePoint Plan”). Upon the consummation of the LitePoint Acquisition, these options were converted automatically into options to purchase an aggregate of 2,828,344 shares of our common stock. No additional awards will be granted under the LitePoint Plan. As of December 31, 2014, there were outstanding options exercisable for an aggregate of 673,703 shares of our common stock pursuant to the LitePoint Plan, with a weighted average exercise price of $2.92 per share. |
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The purpose of the 2006 Equity Plan is to motivate employees, officers and directors by providing equity ownership and compensation opportunities in Teradyne. The aggregate number of shares available under the 2006 Equity Plan as of December 31, 2014 was 12,443,022 shares of our common stock. The 2006 Equity Plan authorizes the grant of stock-based awards in the form of (1) non-qualified and incentive stock options, (2) stock appreciation rights, (3) restricted stock awards and restricted stock unit awards, (4) phantom stock, and (5) other stock-based awards. Awards may be tied to time-based vesting schedules and/or performance-based vesting measured by reference to performance criteria chosen by the Compensation Committee of the Board of Directors, which administers the 2006 Equity Plan. Awards may be made to any employee, officer, consultant and advisor of Teradyne and our subsidiaries, as well as, to our directors. The maximum number of shares of stock-based awards that may be granted to one participant during any one fiscal year is 2,000,000 shares of common stock. The 2006 Equity Plan will expire on May 24, 2016.
As of December 31, 2014, total unrecognized compensation expense related to non-vested restricted stock units and options was $51.3 million, and is expected to be recognized over a weighted average period of 2.4 years.
Performance Graph
The following graph compares the change in our cumulative total shareholder return in our common stock with (i) the Standard & Poor’s 500 Index and (ii) the Philadelphia Semiconductor Index. The comparison assumes $100.00 was invested on December 31, 2009 in our common stock and in each of the foregoing indices and assumes reinvestment of dividends, if any. Historic stock price performance is not necessarily indicative of future price performance.
Recently Issued Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” which will replace numerous requirements in U.S. GAAP, including industry-specific requirements, and provide companies with a single revenue recognition model for recognizing revenue from contracts with customers. The core principle of the new standard is that a company should recognize revenue to show the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be
entitled to in exchange for those goods or services. The new standard will be effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. For Teradyne, the standard will be effective in the first quarter of 2017. The two permitted transition methods under the new standard are the full retrospective method, in which case the standard would be applied to each prior reporting period presented, or the modified retrospective method, in which case the cumulative effect of applying the standard would be recognized at the date of initial application. We have not yet selected a transition method. We are currently evaluating the impact of this ASU on our financial position and results of operations.
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