Item 8. Financial Statements and Supplementary Data

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Item 8. Financial Statements and Supplementary Data

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Teradyne, Inc.:

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Teradyne, Inc. and its subsidiaries (the “Company”) as of December 31, 2018 and 2017, and the related consolidated statements of operations, comprehensive income (loss), shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2018, including the related notes and schedule of valuation and qualified accounts for each of the three years in the period ended December 31, 2018 appearing under Item 15(c) (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control—Integrated Framework (2013) issued by the COSO.

Change in Accounting Principle

As discussed in Note B to the consolidated financial statements, the Company changed the manner in which it accounts for revenue from contracts with customers in 2018.

Basis for Opinions

The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Annual Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP

Boston, Massachusetts

March 1, 2019

We have served as the Company’s auditor since 1968.

TERADYNE, INC.

CONSOLIDATED BALANCE SHEETS


	December 31,
	2018			2017
	(in thousands, except per share information)
ASSETS
Current assets:
Cash and cash equivalents	$	926,752		$	429,843
Marketable securities		190,096			1,347,979
Accounts receivable, less allowance for doubtful accounts of $1,673 and $2,219 in 2018 and 2017, respectively		291,267			272,783
Inventories, net		153,541			107,525
Prepayments and other current assets		170,826			112,151

Total current assets		1,732,482			2,270,281
Property, plant and equipment, net		279,821			268,447
Marketable securities		87,731			125,926
Deferred tax assets		70,848			84,026
Retirement plans assets		16,883			17,491
Other assets		11,509			12,275
Acquired intangible assets, net		125,482			79,088
Goodwill		381,850			252,011

Total assets	$	2,706,606		$	3,109,545

LIABILITIES
Current liabilities:
Accounts payable	$	100,688		$	86,393
Accrued employees’ compensation and withholdings		148,566			141,694
Deferred revenue and customer advances		77,711			83,614
Other accrued liabilities		78,272			59,083
Contingent consideration		34,865			24,497
Income taxes payable		36,185			59,055

Total current liabilities		476,287			454,336
Retirement plans liabilities		117,456			119,776
Long-term deferred revenue and customer advances		32,750			30,127
Long-term contingent consideration		35,678			20,605
Deferred tax liabilities		20,662			6,720
Long-term other accrued liabilities		37,547			10,273
Long-term income taxes payable		83,891			148,075
Long-term debt		379,981			365,987

Total liabilities		1,184,252			1,155,899

Commitments and contingencies (Note K)
SHAREHOLDERS’ EQUITY
Common stock, $0.125 par value, 1,000,000 shares authorized, 175,522 and 195,548 shares issued and outstanding at December 31, 2018 and 2017, respectively		21,940			24,444
Additional paid-in capital		1,671,645			1,638,413
Accumulated other comprehensive (loss) income		(13,040	)		18,776
(Accumulated deficit) Retained earnings		(158,191	)		272,013

Total shareholders’ equity		1,522,354			1,953,646

Total liabilities and shareholders’ equity	$	2,706,606		$	3,109,545

The accompanying notes are an integral part of the consolidated financial statements.

TERADYNE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS


	Years Ended December 31,
	2018			2017			2016
	(in thousands, except per share amounts)
Revenues:
Products	$	1,729,621		$	1,784,695		$	1,453,248
Services		371,181			351,911			300,002

Total revenues		2,100,802			2,136,606			1,753,250
Cost of revenues:
Cost of products		727,138			760,967			660,056
Cost of services		153,270			154,186			134,586

Total cost of revenues (exclusive of acquired intangible assets amortization shown separately below)		880,408			915,153			794,642

Gross profit		1,220,394			1,221,453			958,608
Operating expenses:
Selling and administrative		390,669			348,913			316,544
Engineering and development		301,505			307,305			292,159
Acquired intangible assets amortization		39,191			30,530			52,648
Restructuring and other		15,232			9,362			21,942
Goodwill impairment		—			—			254,946
Acquired intangible assets impairment		—			—			83,339

Total operating expenses		746,597			696,110			1,021,578

Income (loss) from operations		473,797			525,343			(62,970	)
Non-operating (income) expenses:
Interest income		(26,704	)		(17,805	)		(9,296	)
Interest expense		31,269			21,663			3,637
Other (income) expense, net		1,431			(2,927	)		(2,251	)

Income (loss) before income taxes		467,801			524,412			(55,060	)
Income tax provision (benefit)		16,022			266,720			(11,639	)

Net income (loss)	$	451,779		$	257,692		$	(43,421	)

Net income (loss) per common share:
Basic	$	2.41		$	1.30		$	(0.21	)

Diluted	$	2.35		$	1.28		$	(0.21	)

Weighted average common shares—basic		187,672			198,069			202,578

Weighted average common shares—diluted		192,605			201,641			202,578

Cash dividend declared per common share	$	0.36		$	0.28		$	0.24

The accompanying notes are an integral part of the consolidated financial statements.

TERADYNE, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)


	Years Ended December 31,
	2018			2017			2016
	(in thousands)
Net income (loss)	$	451,779		$	257,692		$	(43,421	)
Other comprehensive (loss) income, net of tax:
Foreign currency translation adjustment, net of tax of $0, $0, $0		(28,442	)		37,840			(13,162	)
Available-for-sale marketable securities:
Unrealized (losses) gains on marketable securities arising during period, net of tax of $(722), $1,903, $923, respectively		(2,110	)		1,863			2,037
Less: Reclassification adjustment for losses (gains) included in net income, net of tax of $(21), $(297), $(255), respectively		1,337			(441	)		(683	)

		(773	)		1,422			1,354
Defined benefit pension and post-retirement plans:
Amortization of prior service benefit included in net periodic pension and post-retirement benefit, net of tax $(71), $(154), $(190), respectively		(245	)		(272	)		(321	)
Prior service benefit arising during period, net of tax of $0, $0, $34, respectively		—			—			59

		(245	)		(272	)		(262	)

Other comprehensive (loss) income		(29,460	)		38,990			(12,070	)

Comprehensive income (loss)	$	422,319		$	296,682		$	(55,491	)

The accompanying notes are an integral part of the consolidated financial statements.

TERADYNE, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

Years Ended December 31, 2018, 2017 and 2016


	Common Stock Shares Issued			Common Stock Par Value			Additional Paid-in Capital			Accumulated Other Comprehensive (Loss) Income			Retained Earnings (Accumulated Deficit)			Total Shareholders’ Equity
	(in thousands)
Balance, December 31, 2015		203,641		$	25,455		$	1,480,647		$	(8,144	)	$	467,828		$	1,965,786
Issuance of stock to employees under benefit plans, net of shares withheld for payroll tax of $9,398		2,377			297			10,368									10,665
Equity component of convertible debt								100,836									100,836
Equity component of convertible notes issuance cost								(2,017	)								(2,017	)
Purchase of convertible notes hedges								(100,834	)								(100,834	)
Proceeds from issuance of warrants								67,852									67,852
Stock-based compensation expense								30,745									30,745
Repurchase of common stock		(6,841	)		(855	)								(145,476	)		(146,331	)
Tax benefit related to stock options and restricted stock units								6,087									6,087
Cash dividends														(48,639	)		(48,639	)
Net loss														(43,421	)		(43,421	)
Foreign currency translation adjustment											(13,162	)					(13,162	)
Unrealized gains on marketable securities:
Unrealized gains on marketable securities, net of tax of $923											2,037						2,037
Less: reclassification adjustment for gains included in net income, net of tax $(255)											(683	)					(683	)
Amortization of prior service (credit) cost, net of tax of $(190)											(321	)					(321	)
Prior service income arising during period, net of tax of $34											59						59

Balance, December 31, 2016		199,177			24,897			1,593,684			(20,214	)		230,292			1,828,659
Issuance of stock to employees under benefit plans, net of shares withheld for payroll tax of $12,881		2,211			277			10,747									11,024
Stock-based compensation expense								33,982									33,982
Repurchase of common stock		(5,840	)		(730	)								(199,574	)		(200,304	)
Cumulative effect adjustment for prior year tax benefits related to stock options and restricted stock units														39,081			39,081
Cash dividends														(55,478	)		(55,478	)
Net income														257,692			257,692
Foreign currency translation adjustment											37,840						37,840
Unrealized gains on marketable securities:
Unrealized gains on marketable securities, net of tax of $1,903											1,863						1,863
Less: reclassification adjustment for gains included in net income, net of tax of $(297)											(441	)					(441	)
Amortization of prior service benefit, net of tax of $(154)											(272	)					(272	)

Balance, December 31, 2017		195,548			24,444			1,638,413			18,776			272,013			1,953,646
Issuance of stock to employees under benefit plans, net of shares withheld for payroll tax of $20,025		1,613			201			(72	)								129
Stock-based compensation expense								33,304									33,304
Repurchase of common stock		(21,639	)		(2,705	)								(829,651	)		(832,356	)
Cash dividends														(67,367	)		(67,367	)
Net income														451,779			451,779
Foreign currency translation adjustment											(28,442	)					(28,442	)
Unrealized losses on marketable securities:
Unrealized losses on marketable securities, net of tax of $(722)											(2,110	)					(2,110	)
Less: reclassification adjustment for losses included in net income, net of tax $(21)											1,337						1,337
Reclassification of unrealized gains on equity securities, net of tax of $(902)											(3,125	)		3,125			—
Amortization of prior service benefit, net of tax of $(71)											(245	)					(245	)
Reclassification of tax effects resulting from the Tax Reform Act, net of tax of $769											769			(769	)		—
Cumulative effect of changes in accounting principle related to revenue recognition														12,679			12,679

Balance, December 31, 2018		175,522		$	21,940		$	1,671,645		$	(13,040	)	$	(158,191	)	$	1,522,354

The accompanying notes are an integral part of the consolidated financial statements.

TERADYNE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Years Ended December 31,
	2018			2017			2016
	(in thousands)
Cash flows from operating activities:
Net income (loss)	$	451,779		$	257,692		$	(43,421	)
Adjustments to reconcile net income (loss) from operations to net cash provided by operating activities:
Depreciation		67,415			66,122			64,782
Amortization		45,809			41,953			55,227
Stock-based compensation		33,577			34,097			30,750
Deferred taxes		28,340			37,105			(62,936	)
Provision for excess and obsolete inventory		11,242			8,844			17,493
Contingent consideration fair value adjustment		987			7,820			15,896
Losses (gains) on investments		3,494			(878	)		(1,050	)
Retirement plans actuarial gains		(3,316	)		(6,624	)		(3,203	)
Property insurance recovery, net		—			(4,309	)		—
Goodwill impairment		—			—			254,946
Acquired intangible assets impairment		—			—			83,339
Tax benefit related to employee stock compensation awards		—			—			(6,198	)
Other		1,083			1,585			602
Changes in operating assets and liabilities, net of businesses acquired:
Accounts receivable		(17,938	)		(80,584	)		18,325
Inventories		(29,498	)		44,960			34,263
Prepayments and other assets		(58,402	)		2,254			(19,194	)
Accounts payable and other accrued expenses		13,693			43,574			6,820
Deferred revenue and customer advances		13,379			4,984			(3,634	)
Retirement plan contributions		(4,334	)		(5,902	)		(6,044	)
Income taxes		(80,429	)		173,802			18,434

Net cash provided by operating activities		476,881			626,495			455,197

Cash flows from investing activities:
Purchases of property, plant and equipment		(114,379	)		(105,375	)		(85,272	)
Proceeds from government subsidy for property, plant and equipment		7,920			—			—
Purchases of marketable securities		(918,744	)		(1,391,917	)		(1,656,267	)
Proceeds from maturities of marketable securities		1,270,439			701,681			243,232
Proceeds from sales of marketable securities		846,122			527,746			852,794
Proceeds from insurance		1,126			5,064			5,051
Acquisition of businesses, net of cash acquired		(169,474	)		—			—

Net cash provided by (used for) investing activities		923,010			(262,801	)		(640,462	)

Cash flows from financing activities:
Issuance of common stock under stock purchase and stock option plans		20,973			24,493			20,473
Repurchase of common stock		(823,478	)		(200,304	)		(146,331	)
Dividend payments		(67,322	)		(55,447	)		(48,619	)
Payments related to net settlement of employee stock compensation awards		(20,023	)		(12,881	)		(9,398	)
Payments of contingent consideration		(13,571	)		(1,050	)		(11,697	)
Proceeds from issuance of convertible notes, net of issuance costs		—			—			450,800
Purchase of convertible note hedges		—			—			(100,834	)
Proceeds from issuance of warrants		—			—			67,852
Tax benefit related to employee stock compensation awards		—			—			6,198

Net cash (used for) provided by financing activities		(903,421	)		(245,189	)		228,444

Effects of exchange rate changes on cash and cash equivalents		439			3,454			—

Increase in cash and cash equivalents		496,909			121,959			43,179
Cash and cash equivalents at beginning of year		429,843			307,884			264,705

Cash and cash equivalents at end of year	$	926,752		$	429,843		$	307,884

Supplementary disclosure of cash flow information:
Cash paid for:
Interest	$	6,205		$	6,446		$	446
Income taxes	$	72,811		$	53,775		$	40,424

The accompanying notes are an integral part of the consolidated financial statements.

TERADYNE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A. THE COMPANY

Teradyne, Inc. (“Teradyne”) is a leading global supplier of automation equipment for test and industrial applications. Teradyne designs, develops, manufactures and sells automatic test systems used to test semiconductors, wireless products, data storage and complex electronics systems in the consumer electronics, wireless, automotive, industrial, computing, communications, and aerospace and defense industries. Teradyne’s industrial automation products include collaborative robotic arms, autonomous mobile robots and advanced robotic control software used by global manufacturing and light industrial customers to improve quality, increase manufacturing and material handling efficiency and decrease manufacturing costs. Teradyne’s automatic test equipment and industrial automation products and services include:

	•		semiconductor test (“Semiconductor Test”) systems;

	•		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”);

	•		industrial automation (“Industrial Automation”) products; and

	•		wireless test (“Wireless Test”) systems.

On June 11, 2015, Teradyne acquired Universal Robots A/S (“Universal Robots”) for approximately $284 million of cash plus up to an additional $65 million of cash if certain performance targets are met extending through 2018. Universal Robots is the leading supplier of collaborative robots which are low-cost, easy-to-deploy and simple-to-program robots that work side by side with production workers. Universal Robots is a separate operating and reportable segment, Industrial Automation.

On February 26, 2018, Teradyne acquired Energid Technologies Corporation (“Energid”) for a total purchase price of approximately $28 million. Energid’s technology enables and simplifies the programming of complex robotic motions used in a wide variety of end markets, ranging from heavy industry to healthcare, utilizing both traditional robots and collaborative robots.

On April 25, 2018, Teradyne acquired Mobile Industrial Robots ApS (“MiR”), a Danish limited liability company, for a total purchase price of approximately $198 million, which included $145 million of cash paid and $53 million of contingent consideration measured at fair value. The contingent consideration is payable upon achievement of certain thresholds and targets for revenue and earnings before interest and taxes through 2020. At December 31, 2018, the maximum amount of contingent consideration that could be paid is $115 million. MiR is the leading maker of collaborative autonomous mobile robots for industrial applications.

Universal Robots, MiR and Energid are included in Teradyne’s Industrial Automation segment.

B. ACCOUNTING POLICIES

The consolidated financial statements include the accounts of Teradyne and its wholly-owned subsidiaries. All significant intercompany balances and transactions are eliminated. Certain prior years’ amounts were reclassified to conform to the current year presentation.

Preparation of Financial Statements and Use of Estimates

The preparation of consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure 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 judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ significantly from these estimates.

Revenue Recognition

Revenue from Contracts with Customers

Teradyne adopted Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with Customers” on January 1, 2018 using the modified retrospective method for all contracts not completed as of the date of adoption. The reported results for 2018 reflect the application of ASC 606 while the reported results for 2017 were prepared under the guidance of ASC 605, “Revenue Recognition,” which is also referred to herein as “Legacy GAAP” or the “previous guidance.” Teradyne recorded a net increase to retained earnings of $12.7 million as of January 1, 2018 due to the cumulative impact of adopting ASC 606. The adoption of ASC 606 represents a change in accounting principle that will more closely align the timing of revenue recognition with the delivery of Teradyne’s hardware and services and will provide financial statement readers with enhanced disclosures. In accordance with ASC 606, revenue is recognized when or as a customer obtains control of promised goods or services. The amount of revenue recognized reflects the consideration to which Teradyne expects to be entitled to receive in exchange for fulfillment of the performance obligation. Teradyne’s primary source of revenue will continue to be from the sale of systems, instruments, robots, and the delivery of services.

In accordance with ASC 606, Teradyne recognizes revenues, when or as control is transferred to a customer. Teradyne’s determination of revenue is dependent upon a five step process outlined below.

Step 1: Identify the contract with the customer

Teradyne accounts for a contract with a customer when there is written approval, the contract is committed, the rights of the parties, including payment terms, are identified, the contract has commercial substance and consideration is probable of collection.

Step 2: Identify the performance obligations in the contract

Teradyne periodically enters into contracts with customers in which a customer may purchase a combination of goods and services, such as products with extended warranty obligations. Teradyne determines performance obligations by assessing whether the products or services are distinct from the other elements of the contract. In order to be distinct, the product or service must perform either on its own or with readily available resources and must be separate within the context of the contract.

Step 3: Determine the transaction price

Teradyne considers the amount stated on the face of the purchase order to be the transaction price. Teradyne does not have material variable consideration which could impact the stated purchase price agreed to by Teradyne and the customer.

Step 4: Allocate the transaction price to the performance obligations in the contract

Transaction price is allocated to each individual performance obligation based on the standalone selling price of that performance obligation. Teradyne uses standalone transactions when available to value each performance obligation. If standalone transactions are not available, Teradyne will estimate the standalone selling price through market assessments or cost plus a reasonable margin analysis. Any discounts from standalone selling price are spread proportionally to each performance obligation.

Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation

In order to determine the appropriate timing for revenue recognition, Teradyne first determines if the transaction meets any of three criteria for over time recognition. If the transaction meets the criteria for over time recognition, Teradyne recognizes revenue as the good or service is delivered. Teradyne uses input variables such as hours or months utilized or costs incurred to determine the amount of revenue to recognize in a given period. Input variables are used as they best align consumption with benefit to the customer. For transactions that do not meet the criteria for over time recognition, Teradyne will recognize revenue at a point in time based on an assessment of the five criteria for transfer of control. Teradyne has concluded that revenue should be recognized when shipped or delivered based on contractual terms. Typically, acceptance of Teradyne’s products and services is a formality as Teradyne delivers similar systems, instruments and robots to standard specifications. In cases where acceptance is not deemed a formality, Teradyne will defer revenue recognition until customer acceptance.

Revenue recognized in accordance with ASC 606 was $2,088.8 million for the twelve months ended December 31, 2018. For the twelve months ended December 31, 2018, Teradyne also recognized $12.0 million in revenue on leases of Teradyne systems, which are accounted for outside of ASC 606.

Disaggregation of Revenue

The following table provides information about disaggregated revenue by primary geographical market, major product line and timing of revenue recognition.


	For the Year Ended December 31, 2018
	Semiconductor Test				System Test						Industrial Automation						Wireless Test		Corporate and Other			Consolidated
	System on a Chip		Memory		Defense/ Aerospace		Storage Test		Production Board Test		Universal Robots		Mobile Industrial Robots		Energid
	(in thousands)
*Americas*
Point in time	$	43,398	$	14,579	$	59,246	$	767	$	9,082	$	68,289	$	7,326	$	543	$	17,730	$	(1,205	)	$	219,755
Over time		35,100		2,774		24,577		—		3,091		649		—		997		1,436		—			68,624
*Europe, Middle East and Africa*
Point in time		50,988		9,726		3,056		—		16,733		105,776		10,839		—		3,821		—			200,939
Over time		21,584		1,125		2,124		—		6,467		1,000		—		1,591		1,147		—			35,038
*Asia Pacific*
Point in time		916,107		235,061		2,769		58,004		17,761		57,830		5,950		10		100,985		—			1,394,477
Over time		140,887		10,203		965		7,877		3,221		551		—		101		6,127		—			169,932
Lease revenue		10,885		—		—		—		392		—		—		—		760		—			12,037

Total	$	1,218,949	$	273,468	$	92,737	$	66,648	$	56,747	$	234,095	$	24,115	$	3,242	$	132,006	$	(1,205	)	$	2,100,802

Performance Obligations

Hardware

Teradyne hardware consists primarily of semiconductor test systems and instruments, defense/aerospace test instrumentation and systems, storage test systems and instruments, circuit-board test and inspection systems and instruments, collaborative robots, autonomous mobile robots and wireless test systems. The hardware includes a standard 12-month warranty. This warranty is not considered a distinct performance obligation because it does not obligate Teradyne to provide a separate service to the customer and it cannot be purchased separately. Teradyne’s hardware is recognized at a point in time upon transfer of control to the customer.

Extended Warranty

Customers have the option to purchase an extended warranty, which extends the warranty period for systems and robots beyond the one-year standard warranty. The extended warranty is purchased in the same transaction as the system or robot purchase and is classified as a separate performance obligation, which meets the criteria for over time recognition. The relative standalone selling price of the extended warranty is recognized ratably over the course of the extended warranty based on months completed.

Training and Applications Support

Teradyne sells training and applications support to customers either in standalone transactions or included with system purchases. The training and support allow the customer to use Teradyne’s systems efficiently and effectively. Training and applications support included in system orders are valued based on their standalone selling price and all training and applications support is recognized over time as the customer receives and consumes the benefit associated with each. Both are recognized using an input method of hours consumed as this best depicts the transfer of services to the customer.

Service Agreements

Service agreements are recognized ratably over the period of agreement based on months completed.

Post-Contract Customer Support (“PCS”)

Teradyne provides support services for certain systems and robots outside of warranty. These services include telephone support, bug fixes, and when-and-if available upgrades. Standalone selling price for PCS is not directly observable as Teradyne does not sell these services separately. Teradyne has estimated the standalone selling price for these services based on adjusted market assessments. Revenue for PCS is recognized ratably over the performance period.

Teradyne does not allow customer returns or provide refunds to customers for any products or services.

Contract Balances

The following table provides information about contract liabilities. Teradyne does not have material contract assets on the balance sheet.


	December 31, 2018		January 1, 2018 (as adjusted)		Increase
	(in thousands)
Deferred revenue and customer advances	$	77,711	$	76,638	$	1,073
Long-term deferred revenue and customer advances		32,750		20,848		11,902

The amount of revenue recognized during the twelve months ended December 31, 2018 that was previously included within the deferred revenue and customer advances balance was $69.9 million and primarily relates to extended warranties, training, application support and PCS. Each of these represents a distinct performance obligation. Customers typically pay for these services net 30 to 60 days from the date that transfer of control of the associated system or product occurs. Teradyne expects to recognize 70% of the remaining performance obligation in the next 12 months, 25% in 1-3 years, and the remainder thereafter.

Practical Expedients

Teradyne has adopted the practical expedients available within ASC 340 “Other Assets and Deferred Costs” for contract assets, specifically in relation to incremental costs of obtaining a contract. Teradyne generally expenses sales commissions when incurred because the amortization period would be less than one year. Teradyne records these costs within selling and administrative expenses.

Teradyne has adopted the practical expedient, which states an entity need not adjust the promised amount of consideration for the effects of a significant financing component if the entity expects, at contract inception, that the period between when the entity transfers a promised good or service to the customer and when the customer pays for that good or service will be one year or less. Teradyne does not have material payments associated with performance obligations outside this one-year time frame.

Impacts

The following tables summarize the impact of ASC 606 to Teradyne’s consolidated financial statements. Differences are the result of timing differences between the recognition of revenue under ASC 606 and ASC 605 primarily with respect to software transactions deferred due to lack of vendor specific objective evidence of price under ASC 605 and Teradyne’s assessment of acceptance under ASC 606. Under Legacy GAAP, Teradyne did not recognize revenue prior to acceptance if payment, title, or risk of loss was tied to acceptance. Under ASC 606, Teradyne recognizes revenue prior to receipt of acceptance if acceptance is deemed a formality.

Condensed Consolidated Balance Sheet:


	December 31, 2018
	As Reported			Adjustments to Recognize under Legacy GAAP			Legacy GAAP
	(in thousands, except per share amount)
Assets
Accounts receivable, less allowance for doubtful accounts	$	291,267		$	(37,348	)	$	253,919
Inventories, net		153,541			10,759			164,300
Deferred tax assets		70,848			(3,874	)		66,974
Liabilities
Deferred revenue and customer advances	$	77,711		$	(4,118	)	$	73,593
Income taxes payable		36,185			(4,495	)		31,690
Long-term deferred revenue and customer advances		32,750			(10,303	)		22,447
Shareholders’ equity
Accumulated deficit	$	(158,191	)	$	(11,547	)	$	(169,738	)

Condensed Consolidated Statement of Operation:


	For the Year Ended December 31, 2018
	As Reported		Adjustments to Recognize under Legacy GAAP			Legacy GAAP
	(in thousands, except per share amount)
Total revenues	$	2,100,802	$	(39,184	)	$	2,061,618
Total cost of revenues		880,408		(10,760	)		869,648
Income tax provision		16,022		(4,197	)		11,825
Net income		451,779		(24,227	)		427,552
Net income per common share:
Basic	$	2.41	$	(0.13	)	$	2.28

Diluted	$	2.35	$	(0.13	)	$	2.22

As of December 31, 2018 and 2017, deferred revenue and customer advances consisted of the following and are included in the short and long-term deferred revenue and customer advances:


	2018		2017
	(in thousands)
Maintenance and training	$	58,362	$	57,256
Extended warranty		27,422		24,438
Customer advances, undelivered elements and other		24,677		32,047

Total deferred revenue and customer advances	$	110,461	$	113,741

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:


	Amount
	(in thousands)
Balance at December 31, 2015	$	6,925
Accruals for warranties issued during the period		14,291
Accruals related to pre-existing warranties		(1,354	)
Settlements made during the period		(12,659	)

Balance at December 31, 2016		7,203
Accruals for warranties issued during the period		14,223
Accruals related to pre-existing warranties		(379	)
Settlements made during the period		(12,847	)

Balance at December 31, 2017		8,200
Acquisition		41
Accruals for warranties issued during the period		13,045
Accruals related to pre-existing warranties		921
Settlements made during the period		(14,298	)

Balance at December 31, 2018	$	7,909

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:


	Amount
	(in thousands)
Balance at December 31, 2015	$	30,024
Deferral of new extended warranty revenue		19,909
Recognition of extended warranty deferred revenue		(21,733	)

Balance at December 31, 2016		28,200
Deferral of new extended warranty revenue		20,513
Recognition of extended warranty deferred revenue		(24,275	)

Balance at December 31, 2017		24,438
Deferral of new extended warranty revenue		23,753
Recognition of extended warranty deferred revenue		(20,769	)

Balance at December 31, 2018	$	27,422

Accounts Receivable and Allowance for Doubtful Accounts

Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The volatility of the industries that Teradyne serves can cause certain of its customers to experience shortages of cash flows, which can impact their ability to make required payments. Teradyne maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. Estimated allowances for doubtful accounts are reviewed periodically taking into account the customer’s recent payment history, the customer’s current financial statements and other information regarding the customer’s credit worthiness. Account balances are written off against the allowance when it is determined the receivable will not be recovered.

Teradyne sells certain trade accounts receivables on a non-recourse basis to third-party financial institutions pursuant to factoring agreements. Teradyne accounts for these transactions as sales of receivables and presents cash proceeds as a cash provided by operating activities in the consolidated statements of cash flows. Total trade accounts receivable sold under the factoring agreements were $52.2 million and $5.4 million during 2018 and 2017, respectively. Factoring fees for the sales of receivables were recorded in interest expense and were not material.

Inventories

Inventories are stated at the lower of cost (first-in, first-out basis) or net realizable value. On a quarterly basis, Teradyne uses consistent methodologies to evaluate all inventories for net realizable value. Teradyne records 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.

Investments

Teradyne accounts for its investments in debt and equity securities in accordance with the provisions of ASC 320-10, “Investments—Debt and Equity Securities.” ASC 320-10 requires that certain debt and equity securities be classified into one of three categories; trading, available-for-sale or held-to-maturity securities. On a quarterly basis, Teradyne reviews its investments to identify and evaluate those that have an indication of a potential other-than-temporary impairment. Factors considered in determining whether a loss is other-than-temporary include:

	•		The length of time and the extent to which the market value has been less than cost;

	•		The financial condition and near-term prospects of the issuer; and

	•		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.

Teradyne uses the market and income approach techniques to value its financial instruments and there were no changes in valuation techniques during the twelve months ended December 31, 2018 and 2017. As defined in ASC 820-10, “Fair Value Measurements and Disclosures,” fair value is the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. ASC 820-10 requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:

Level 1: Quoted prices in active markets for identical assets as of the reporting date;

Level 2: Inputs other than Level 1, that are observable either directly or indirectly as of the reporting date. For example, a common approach for valuing fixed income securities is the use of matrix pricing. Matrix pricing is a mathematical technique used to value securities by relying on the securities’ relationship to other benchmark quoted prices, and is considered a Level 2 input; or

Level 3: Unobservable inputs that are not supported by market data. Unobservable inputs are developed based on the best information available, which might include Teradyne’s own data.

In accordance with ASC 820-10, Teradyne measures its debt and equity investments at fair value. Teradyne’s debt investments are classified as Level 2, and equity investments are classified as Level 1. Acquisition-related contingent consideration is classified as Level 3. Teradyne determines the fair value of acquisition-related contingent consideration using a Monte Carlo simulation model. Assumptions utilized in the model include forecasted revenues, revenue volatility, earnings before interest and taxes, and discount rate.

Financial Assets and Financial Liabilities

In January 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-01, “Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” Teradyne adopted the new accounting guidance in the first quarter of 2018 using the modified retrospective approach. This guidance requires that changes in fair value of equity securities be accounted for directly in earnings. Previously, the changes in fair value were recorded in accumulated other comprehensive income on the balance sheet. Teradyne continues to record realized gains in interest income and realized losses in interest expense. The adoption of this new accounting guidance increased the January 1, 2018 retained earnings balance by $3.1 million and decreased the accumulated other comprehensive income balance by the same amount.

Prepayments

Prepayments consist of the following and are included in prepayments and other current assets on the balance sheet:


	2018		2017
	(in thousands)
Contract manufacturer and supplier prepayments	$	131,642	$	82,503
Prepaid taxes		9,646		5,039
Prepaid maintenance and other services		8,487		8,189
Other prepayments		12,744		12,386

Total prepayments	$	162,519	$	108,117

Retirement and Postretirement Plans

Teradyne recognizes net actuarial gains and losses and the change in the fair value of the plan assets in its operating results in the year in which they occur or upon any interim remeasurement of the plans. Teradyne calculates the expected return on plan assets using the fair value of the plan assets. Actuarial gains and losses are generally measured annually as of December 31 and, accordingly, recorded during the fourth quarter of each year or upon any interim remeasurement of the plans.

Retirement Benefits

In March 2017, the FASB issued ASU 2017-07, “Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” Teradyne retrospectively adopted the new accounting guidance on presentation of net periodic pension costs and net periodic postretirement benefit costs in the first quarter of 2018. This guidance requires the service cost component of net benefit costs to be reported in the same line item in the consolidated statement of operations as other employee compensation costs. The non-service components of net benefit costs such as interest cost, expected return on assets, amortization of prior service cost, and actuarial gains or losses, are required to be reported separately outside of income or loss from operations. Following the adoption of this

guidance, Teradyne continues to record the service cost component in the same line item as other employee compensation costs and the non-service components of net benefit costs such as interest cost, expected return on assets, amortization of prior service cost, and actuarial gains or losses are reported within other (income) expense, net. In the twelve months ended December 31, 2017 and 2016, the retrospective adoption of this standard decreased income from operations by $5.0 million and $3.0 million, respectively, due to the removal of net actuarial pension gains and increased non-operating (income) expense by the same amount with no impact to net income.

Goodwill, Intangible and Long-Lived Assets

Teradyne accounts for goodwill and intangible assets in accordance with ASC 350-10, “Intangibles-Goodwill and Other.” Intangible assets are amortized over their estimated useful economic life and are carried at cost less accumulated amortization. Goodwill is assessed 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. In accordance with ASC 350-10, Teradyne has the option to perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If Teradyne determines this is the case, Teradyne is required to perform the two-step goodwill impairment test to identify potential goodwill impairment and measure the amount of goodwill impairment loss to be recognized. If Teradyne determines that it is more likely than not that the fair value of the reporting unit is greater than its carrying amounts, the two-step goodwill impairment test is not required.

In accordance with ASC 360-10, “Impairment or Disposal of Long-Lived 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. Each impairment test is based on a comparison of the estimated undiscounted cash flows to the recorded value of the asset. If impairment is indicated, the asset is written down to its estimated fair value based on a discounted cash flow analysis. The cash flow estimates used to determine the impairment, if any, contain management’s best estimates using appropriate assumptions and projections at that time.

Property, Plant and Equipment

Property, plant and equipment are stated at cost and depreciated over the estimated useful lives of the assets. Leasehold improvements and major renewals are capitalized and included in property, plant and equipment accounts while expenditures for maintenance and repairs and minor renewals are charged to expense. When assets are retired, the assets and related accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in the consolidated statements of operations.

Teradyne provides for depreciation of its assets principally on the straight-line method with the cost of the assets being charged to expense over their useful lives as follows:


Buildings		40 years
Building improvements		5 to 10 years
Leasehold improvements		Lesser of lease term or 10 years
Furniture and fixtures		10 years
Test systems manufactured internally		6 years
Machinery and equipment		3 to 5 years
Software		3 to 5 years

Test systems manufactured internally are used by Teradyne for customer evaluations and manufacturing and support of its customers. Teradyne depreciates the test systems manufactured internally over a six-year life to cost of revenues, engineering and development, and selling and administrative expenses. Teradyne often sells internally manufactured test equipment to customers. Upon the sale of an internally manufactured test system,

the net book value of the system is transferred to inventory and expensed as cost of revenues. The net book value of internally manufactured test systems sold in the years ended December 31, 2018, 2017, and 2016 was $3.8 million, $3.6 million, and $11.4 million, respectively.

Engineering and Development Costs

Teradyne’s products are highly technical in nature and require a large and continuing engineering and development effort. Software development costs incurred prior to the establishment of technological feasibility are charged to expense. Software development costs incurred subsequent to the establishment of technological feasibility are capitalized until the product is available for release to customers. To date, the period between achieving technological feasibility and general availability of the product has been short and software development costs eligible for capitalization have not been material. Engineering and development costs are expensed as incurred and consist primarily of salaries, contractor fees including non-recurring engineering charges related to product design, allocated facility costs, depreciation, and tooling costs.

Stock Compensation Plans and Employee Stock Purchase Plan

Stock-based compensation expense is based on the grant-date fair value estimated in accordance with the provisions of ASC 718-10, “Compensation-Stock Compensation.”

In March 2016, the FASB issued ASU 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” Teradyne adopted this ASU in the first quarter of 2017. This ASU changes how Teradyne accounts for certain aspects of share-based payment awards to employees, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statements of cash flows.

Adoption of this ASU required recognition of a cumulative effect adjustment to retained earnings for any prior year excess tax benefits or tax deficiencies not previously recorded. The cumulative effect adjustment of $39 million was recorded in the first quarter of 2017 as an increase to retained earnings and deferred tax assets.

This ASU also required a change in how Teradyne recognizes the excess tax benefits or tax deficiencies related to stock-based compensation. Prior to adopting ASU 2016-09, these excess tax benefits or tax deficiencies were credited or charged to additional paid-in capital in Teradyne’s consolidated balance sheets. In accordance with ASU 2016-09, starting in the first quarter of 2017, these excess tax benefits or tax deficiencies are recognized as a discrete tax benefit or discrete tax expense to the current income tax provision in Teradyne’s consolidated statements of operations.

ASU 2016-09 requires companies to adopt the amendment related to accounting for excess tax benefits or tax deficiencies on a prospective basis. In 2017, Teradyne recognized a discrete tax benefit of $6.3 million related to net excess tax benefit.

In addition, under ASU 2016-09, all excess tax benefits related to share-based payments are reported as cash flows from operating activities. Previously, excess tax benefits from share-based payment arrangements were reported as cash flows from financing activities. The classification amendment was applied prospectively. This ASU also clarifies that all cash payments made to taxing authorities on the employees’ behalf for withheld shares should be presented as financing activities on the statement of cash flows. Previously, Teradyne reported cash payments made to taxing authorities as operating activities on the statement of cash flows. This change was applied retrospectively.

Upon adoption of ASU 2016-09, Teradyne made an accounting policy election to continue accounting for forfeitures by applying an estimated forfeiture rate and to continue to recognize compensation costs only for those stock-based compensation awards expected to vest.

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

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. Teradyne 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 its assessment, Teradyne concluded that it is more likely than not that such assets, net of the existing valuation allowance, will be realized.

Advertising Costs

Teradyne expenses all advertising costs as incurred. Advertising costs were $15.4 million, $9.1 million, and $6.4 million in 2018, 2017, and 2016, respectively.

Translation of Non-U.S. Currencies

The functional currency for all subsidiaries is the U.S. dollar, except for the Universal Robots and MiR reporting units for which the local currency is its functional currency. All foreign currency denominated monetary assets and liabilities are remeasured on a monthly basis into the functional currency using exchange rates in effect at the end of the period. All foreign currency denominated non-monetary assets and liabilities are remeasured into the functional currency using historical exchange rates. Net foreign exchange gains and losses resulting from remeasurement are included in other (income) expense, net. For Industrial Automation, assets and liabilities are translated into U.S. dollars using exchange rates in effect at the end of the period. Revenue and expense amounts are translated using an average of exchange rates in effect during the period. Translation adjustments are recorded within accumulated other comprehensive income (loss).

Net foreign exchange gains and losses resulting from remeasurement are included in other (income) expense, net. For the years ended December 31, 2018, 2017, and 2016, (gains) losses from the remeasurement of the monetary assets and liabilities denominated in foreign currencies were $(2.4) million, $2.9 million, and $(8.0) million, respectively.

These amounts do not reflect the corresponding (gains) losses from foreign exchange contracts. See Note G: “Financial Instruments” regarding foreign exchange contracts.

Net Income (Loss) per Common Share

Basic net income (loss) per common share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Except where the result would be anti-dilutive, diluted net income (loss) per common share is calculated by dividing net income (loss) by the sum of the weighted average number of common shares plus common stock equivalents, if applicable.

With respect to its convertible debt issued in 2016, Teradyne has determined that it has the ability and intent to settle the principal of the convertible debt in cash; accordingly, the principal amount is excluded from the determination of diluted earnings per share. As a result, Teradyne is accounting for the conversion spread using the treasury stock method.

Comprehensive Income (Loss)

Comprehensive income (loss) includes net income, unrealized pension and postretirement prior service costs and benefits, unrealized gains and losses on investments in debt marketable securities and foreign currency translation adjustment. Prior to 2018, comprehensive income (loss) included unrealized gains and losses on investments in equity marketable securities.

C. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

On January 26, 2017, the FASB issued ASU 2017-04, “Intangibles—Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment.” The new guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance will remain largely unchanged. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. The same one-step impairment test will be applied to goodwill at all reporting units, even those with zero or negative carrying amounts. Entities will be required to disclose the amount of goodwill at reporting units with zero or negative carrying amounts. The revised guidance will be applied prospectively, and is effective in 2020. Early adoption is permitted for any impairment tests performed after January 1, 2017. Teradyne is currently evaluating the impact of this ASU on its financial position, results of operations and statements of cash flows.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” The guidance in this ASU supersedes the lease recognition requirements in ASC Topic 840, “Leases.” The new standard establishes a right- of-use (“ROU”) model that requires a lessee to record an ROU asset and a lease liability on the balance sheet for all leases with terms longer than twelve months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the statements of operations. The new standard is effective for annual periods beginning after December 15, 2018 with early adoption permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. In July 2018, the FASB issued ASU 2018-11, “Leases (Topic 842): Targeted Improvements,” which amends ASU 2016-02. The new ASU offers an additional transition method by which entities may elect not to recast the comparative periods presented in financial statements in the period of adoption and allows lessors to elect a practical expedient to not separate lease and non-lease components when certain conditions are met. This ASU has the same transition requirements and effective date as ASU 2016-02. Teradyne elected not to recast the comparative periods presented in financial statements in the period of adoption. Teradyne adopted this guidance in January 2019; as a result it recorded between $50 and $60 million of operating lease right-of-use assets and operating lease liabilities. Adoption had an immaterial impact on Teradyne’s results of operations.

D. ACQUISITIONS

Business

Mobile Industrial Robots

On April 25, 2018, Teradyne acquired all the issued and outstanding shares of MiR, a Danish limited liability company located in Odense, Denmark. MiR is the leading maker of collaborative autonomous mobile robots for industrial applications. MiR is part of Teradyne’s Industrial Automation segment.

The total purchase price of $197.8 million included $145.2 million of cash paid and $52.6 million of contingent consideration measured at fair value. The contingent consideration is payable in Euros upon the achievement of certain thresholds and targets for revenue and earnings before interest and taxes for periods from January 1, 2018 to December 31, 2018; January 1, 2018 to December 31, 2019; and January 1, 2018 to December 31, 2020. At December 31, 2018, the maximum amount of contingent consideration that could be paid is $115 million. Contingent consideration for the period from January 1, 2018 to December 31, 2018 was $31.0 million and is expected to be paid in March 2019.

The valuation of the contingent consideration is dependent on the following assumptions: forecasted revenues, revenue volatility, earnings before interest and taxes, and discount rate. These assumptions were estimated based on a review of the historical and projected results.

The MiR acquisition was accounted for as a business combination and, accordingly, the results have been included in Teradyne’s consolidated results of operations from the date of acquisition. MiR’s products will help expand the Industrial Automation segment, which is a key component of our growth strategy. The allocation of the total purchase price to MiR’s net tangible liabilities and identifiable intangible assets was based on their estimated fair values as of the acquisition date. The excess of the purchase price over the identifiable intangible assets and net tangible liabilities in the amount of $136.0 million was allocated to goodwill, which is not deductible for tax purposes. MiR’s results have been included in Teradyne’s Industrial Automation segment from the date of acquisition.

The following table represents the final allocation of the purchase price:


	Purchase Price Allocation
	(in thousands)
Goodwill	$	135,976
Intangible assets		80,670
Tangible assets acquired and liabilities assumed:
Current assets		6,039
Non-current assets		1,336
Accounts payable and current liabilities		(7,336	)
Long-term deferred tax liabilities		(18,007	)
Other long-term liabilities		(900	)

Total purchase price	$	197,778

Teradyne estimated the fair value of intangible assets using the income and cost approaches. Acquired intangible assets are amortized on a straight-line basis over their estimated useful lives. Components of these intangible assets and their estimated useful lives at the acquisition date are as follows:


	Fair Value		Estimated Useful Life
	(in thousands)		(in years)
Developed technology	$	58,900		7.0
Trademarks and tradenames		13,240		11.0
Customer relationships		8,500		2.5
Backlog		30		0.2

Total intangible assets	$	80,670		7.2

For the period from April 25, 2018 to December 31, 2018, MiR contributed $24.1 million of revenues and had a $(7.6) million loss before income taxes.

The following unaudited pro forma information gives effect to the acquisition of MiR as if the acquisition occurred on January 1, 2017. The unaudited pro forma results are not necessarily indicative of what actually would have occurred had the acquisition been in effect for the periods presented:


	For the Year Ended
	December 31, 2018		December 31, 2017
	(in thousands, except per share amounts)
Revenues	$	2,107,600	$	2,148,320
Net income	$	450,559	$	243,399
Net income per common share:
Basic	$	2.40	$	1.23

Diluted	$	2.34	$	1.21

Pro forma results for the year ended December 31, 2018 were adjusted to exclude $2.9 million of acquisition related costs and $0.4 million of non-recurring expense related to fair value adjustment to acquisition-date inventory.

Pro forma results for the year ended December 31, 2017 were adjusted to include $2.9 million of acquisition related costs and $0.4 million of non-recurring expense related to fair value adjustment to acquisition-date inventory.

Energid Technologies Corporation

On February 26, 2018, Teradyne acquired all of the issued and outstanding shares of Energid for a total purchase price of approximately $27.6 million. Energid’s technology enables and simplifies the programming of complex robotic motions used in a wide variety of end markets, ranging from heavy industry to healthcare, utilizing both traditional robots and collaborative robots. The Energid acquisition was accounted for as a business combination and, accordingly, Energid’s results have been included in Teradyne’s Industrial Automation segment from the date of acquisition. As of the acquisition date, Teradyne’s purchase price allocation was goodwill of $14.4 million which is deductible for tax purposes, acquired intangible assets of $12.3 million with an average estimated useful life of 7.7 years, and $1.0 million of net tangible assets. The acquisition was not material to Teradyne’s condensed consolidated financial statements.

E. INVENTORIES

Inventories, net consisted of the following at December 31, 2018 and 2017:


	2018		2017
	(in thousands)
Raw material	$	89,365	$	62,668
Work-in-process		31,014		19,464
Finished goods		33,162		25,393

	$	153,541	$	107,525

Inventory reserves for the years ended December 31, 2018 and 2017 were $100.8 million and $102.9 million, respectively.

F. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment, net consisted of the following at December 31, 2018 and 2017:


	2018		2017
	(in thousands)
Land	$	16,561	$	16,561
Buildings		105,935		98,369
Machinery and equipment		689,770		647,961
Furniture and fixtures, and software		90,384		88,539
Leasehold improvements		52,536		49,540
Construction in progress		6,276		13,522

		961,462		914,492
Less: accumulated depreciation		681,641		646,045

	$	279,821	$	268,447

Depreciation of property, plant and equipment for the years ended December 31, 2018, 2017, and 2016 was $67.4 million, $66.1 million, and $64.8 million, respectively. As of December 31, 2018 and 2017, the gross book value included in machinery and equipment for internally manufactured test systems being leased by customers was $5.5 million and $18.1 million, respectively. As of December 31, 2018 and 2017, the accumulated depreciation on these test systems was $5.2 million and $13.7 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

Effective January 1, 2018, Teradyne adopted ASU 2016-01, “Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,” using the modified retrospective approach. This guidance requires that changes in fair value of equity securities be accounted for directly in earnings. Prior to 2018, the changes in fair value of equity securities were recorded in accumulated other comprehensive income (loss) on the balance sheet.

Teradyne’s available-for-sale debt securities are classified as Level 2 and equity securities are classified as Level 1. Contingent consideration is classified as Level 3. The vast majority of Level 2 securities are fixed income securities priced by third party pricing vendors. These pricing vendors utilize the most recent observable market information in pricing these securities or, if specific prices are not available, use other observable inputs like market transactions involving identical or comparable securities.

During the years ended December 31, 2018 and 2017, there were no transfers in or out of Level 1, Level 2, or Level 3 financial instruments.

Realized gains recorded in 2018, 2017, and 2016 were $4.0 million, $1.1 million, and $1.6 million, respectively. Realized losses recorded in 2018, 2017, and 2016 were $1.6 million, $0.3 million, and $0.5 million, respectively. Realized gains are included in interest income and realized losses are included in interest expense. Unrealized gains and losses on available-for-sale debt securities are included in accumulated other comprehensive income (loss) on the balance sheet.

Unrealized gains related to equity securities are included in interest income and unrealized losses are included in interest expense. Unrealized losses related to equity securities recognized in 2018 were $6.0 million.

The cost of securities sold is based on the specific identification method.

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 December 31, 2018 and 2017:


	December 31, 2018
	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	$	312,512	$	—	$	—	$	312,512
Cash equivalents		253,525		360,715		—		614,240
Available for sale securities:
U.S. Treasury securities		—		109,721		—		109,721
Commercial paper		—		86,117		—		86,117
Corporate debt securities		—		40,020		—		40,020
U.S. government agency securities		—		9,611		—		9,611
Certificates of deposit and time deposits		—		7,604		—		7,604
Debt mutual funds		3,187		—		—		3,187
Non-U.S. government securities		—		376		—		376
Equity securities:
Mutual funds		21,191		—		—		21,191

		590,415		614,164		—		1,204,579
Derivative assets		—		79		—		79

Total	$	590,415	$	614,243	$	—	$	1,204,658

Liabilities
Contingent consideration	$	—	$	—	$	70,543	$	70,543
Derivative liabilities		—		514		—		514

Total	$	—	$	514	$	70,543	$	71,057

Reported as follows:


	Level 1		Level 2		Level 3		Total
	(in thousands)
Assets
Cash and cash equivalents	$	566,037	$	360,715	$	—	$	926,752
Marketable securities		—		190,096		—		190,096
Long-term marketable securities		24,378		63,353		—		87,731
Prepayments		—		79		—		79

Total	$	590,415	$	614,243	$	—	$	1,204,658

Liabilities
Other current liabilities	$	—	$	514	$	—	$	514
Contingent consideration		—		—		34,865		34,865
Long-term contingent consideration		—		—		35,678		35,678

Total	$	—	$	514	$	70,543	$	71,057


	December 31, 2017
	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	$	197,955	$	—	$	—	$	197,955
Cash equivalents		206,335		25,553		—		231,888
Available for sale securities:
U.S. Treasury securities		—		855,795		—		855,795
Commercial paper		—		282,840		—		282,840
Certificates of deposit and time deposits		—		167,342		—		167,342
Corporate debt securities		—		133,186		—		133,186
Equity and debt mutual funds		23,430		—		—		23,430
U.S. government agency securities		—		10,726		—		10,726
Non-U.S. government securities		—		586		—		586

		427,720		1,476,028		—		1,903,748
Derivative assets		—		389		—		389

Total	$	427,720	$	1,476,417	$	—	$	1,904,137

Liabilities
Contingent consideration	$	—	$	—	$	45,102	$	45,102
Derivative liabilities		—		446		—		446

Total	$	—	$	446	$	45,102	$	45,548

Reported as follows:


	Level 1		Level 2		Level 3		Total
	(in thousands)
Assets
Cash and cash equivalents	$	404,290	$	25,553	$	—	$	429,843
Marketable securities		—		1,347,979		—		1,347,979
Long-term marketable securities		23,430		102,496		—		125,926
Prepayments		—		389		—		389

	$	427,720	$	1,476,417	$	—	$	1,904,137

Liabilities
Other current liabilities	$	—	$	446	$	—	$	446
Contingent consideration		—		—		24,497		24,497
Long-term contingent consideration		—		—		20,605		20,605

	$	—	$	446	$	45,102	$	45,548

Changes in the fair value of Level 3 contingent consideration for the years ended December 31, 2018 and 2017 were as follows:


	Contingent Consideration
	(in thousands)
Balance at December 31, 2016	$	38,332
Payments (1)		(1,050	)
Fair value adjustment (2)		7,820

Balance at December 31, 2017		45,102
Acquisition of MiR		52,547
Foreign currency impact		(3,540	)
Payments (3)		(24,553	)
Fair value adjustment (4)		987

Balance at December 31, 2018	$	70,543

(1)	During the year ended December 31, 2017, Teradyne paid $1.1 million of contingent consideration for the earn-out in connection with the acquisition of Avionics Interface Technologies, LLC (“AIT”).

(2)	During the year ended December 31, 2017, the fair value of contingent consideration for the earn-out in connection with the acquisition of Universal Robots was increased by $7.8 million primarily due to an increase in forecasted revenues and decrease in discount rate.

(3)	During the year ended December 31, 2018, Teradyne paid $24.6 million of contingent consideration for the earn-out in connection with the acquisition of Universal Robots.

(4)

During the year ended December 31, 2018, the fair value of contingent consideration for the earn-out in connection with the acquisition of MiR was increased by $17.7 million primarily due to an increase in forecasted revenues. During the year ended December 31, 2018, the fair value of contingent consideration for the earn-out in connection with the acquisition of Universal Robots was decreased by $16.7 million primarily due to a decrease in forecasted revenues.

The following table provides quantitative information associated with the fair value measurement of Teradyne’s Level 3 financial instrument:


Liability	December 31, 2018 Fair Value		Valuation Technique	Unobservable Inputs	Weighted Average
	(in thousands)
Contingent consideration (MiR)	$	66,672(1)	Monte Carlo simulation	Revenue volatility		18.0%
				Discount rate		1.1%

Contingent consideration (Universal Robots)		$3,871(1)

(1)	Contingent consideration related to MiR and Universal Robots acquisitions of $31.0 million and $3.9 million, respectively, is expected to be paid in March 2019.

As of December 31, 2018, the significant unobservable inputs used in the Monte Carlo simulation to fair value the MiR contingent consideration include forecasted revenues, revenue volatility, earnings before interest and taxes and discount rate. Increases or decreases in the inputs would result in a higher or lower fair value measurement. As of December 31, 2018, the maximum amount of contingent consideration that could be paid in connection with the acquisition of MiR is $115 million. The earn-out periods end on December 31, 2018, December 31, 2019, and December 31, 2020.

The carrying amounts and fair values of Teradyne’s financial instruments at December 31, 2018 and 2017 were as follows:


	December 31, 2018				December 31, 2017
	Carrying Value		Fair Value		Carrying Value		Fair Value
	(in thousands)
Assets
Cash and cash equivalents	$	926,752	$	926,752	$	429,843	$	429,843
Marketable securities		277,827		277,827		1,473,905		1,473,905
Derivative assets		79		79		389		389
Liabilities
Contingent consideration		70,543		70,543		45,102		45,102
Derivative liabilities		514		514		446		446
Convertible debt (1)		379,981		547,113		365,987		659,525

(1)	The carrying value represents the bifurcated debt component only, while the fair value is based on quoted market prices for the convertible note which includes the equity conversion features.

The fair values of accounts receivable, net and accounts payable approximate the carrying amount due to the short term nature of these instruments.

The following tables summarize the composition of available-for-sale marketable securities at December 31, 2018 and 2017:


	December 31, 2018
	Available-for-Sale									Fair Market Value of Investments with Unrealized Losses
	Cost		Unrealized Gain		Unrealized (Loss)			Fair Market Value
	(in thousands)
U.S. Treasury securities	$	110,969	$	112	$	(1,360	)	$	109,721	$	75,040
Commercial paper		86,130		13		(26	)		86,117		85,094
Corporate debt securities		41,133		432		(1,545	)		40,020		24,767
U.S. government agency securities		9,646		1		(36	)		9,611		7,077
Certificates of deposit and time deposits		7,604		—		—			7,604		—
Debt mutual funds		3,153		34		—			3,187		—
Non-U.S. government securities		376		—		—			376		—

	$	259,011	$	592	$	(2,967	)	$	256,636	$	191,978

Reported as follows:


	Cost		Unrealized Gain		Unrealized (Loss)			Fair Market Value		Fair Market Value of Investments with Unrealized Losses
	(in thousands)
Marketable securities	$	190,100	$	88	$	(92	)	$	190,096	$	140,262
Long-term marketable securities		68,911		504		(2,875	)		66,540		51,716

	$	259,011	$	592	$	(2,967	)	$	256,636	$	191,978


	December 31, 2017
	Available-for-Sale									Fair Market Value of Investments with Unrealized Losses
	Cost		Unrealized Gain		Unrealized (Loss)			Fair Market Value
	(in thousands)
U.S. Treasury securities	$	858,258	$	72	$	(2,535	)	$	855,795	$	850,163
Commercial paper		283,009		18		(187	)		282,840		258,933
Certificates of deposit and time deposits		167,523		6		(187	)		167,342		138,340
Corporate debt securities		131,179		2,380		(373	)		133,186		91,010
Equity and debt mutual funds		19,403		4,102		(75	)		23,430		1,723
U.S. government agency securities		10,775		—		(49	)		10,726		10,727
Non-U.S. government securities		582		4		—			586		—

	$	1,470,729	$	6,582	$	(3,406	)	$	1,473,905	$	1,350,896

Reported as follows:


	Cost		Unrealized Gain		Unrealized (Loss)			Fair Market Value		Fair Market Value of Investments with Unrealized Losses
	(in thousands)
Marketable securities	$	1,349,970	$	38	$	(2,029	)	$	1,347,979	$	1,288,844
Long-term marketable securities		120,759		6,544		(1,377	)		125,926		62,052

	$	1,470,729	$	6,582	$	(3,406	)	$	1,473,905	$	1,350,896

As of December 31, 2018, the fair market value of investments with unrealized losses totaled $192.0 million. Of this value, $28.5 million had unrealized losses of $1.6 million greater than one year and $163.5 million had unrealized losses of $1.4 million for less than one year.

As of December 31, 2017, the fair market value of investments with unrealized losses totaled $1,350.9 million. Of this value, $141.0 million had unrealized losses of $1.2 million greater than one year and $1,209.9 million had unrealized losses of $2.2 million for less than one year.

Teradyne reviews its investments to identify and evaluate investments that have an indication of possible impairment. Based on this review, Teradyne determined that the unrealized losses related to these investments at December 31, 2018 and 2017, were temporary.

The contractual maturities of investments in available-for-sale marketable securities held at December 31, 2018 were as follows:


	Cost		Fair Value
	(in thousands)
Due within one year	$	190,100	$	190,096
Due after 1 year through 5 years		9,199		9,144
Due after 5 years through 10 years		14,081		13,405
Due after 10 years		42,478		40,804

Total	$	255,858	$	253,449

Contractual maturities of investments is available-for-sale marketable securities held at December 31, 2018 exclude $3.2 million of debt mutual funds as they do not have a contractual maturity date.

Derivatives

Teradyne conducts business in a number of foreign countries, with certain transactions denominated in local currencies. The purpose of Teradyne’s foreign currency management is to minimize the effect of exchange rate fluctuations on certain foreign currency denominated monetary assets and liabilities. Teradyne does not use derivative financial instruments for trading or speculative purposes.

To minimize the effect of exchange rate fluctuations associated with the remeasurement of monetary assets and liabilities denominated in foreign currencies, Teradyne enters into foreign currency forward contracts. The change in fair value of these derivatives is recorded directly in earnings, and is used to offset the change in value of the monetary assets and liabilities denominated in foreign currencies.

At December 31, 2018 and 2017, Teradyne had the following contracts to buy and sell non-U.S. currencies for U.S. dollars and other non-U.S. currencies with the following notional amounts:


	December 31, 2018								December 31, 2017
	Buy Position			Sell Position		Net Total			Buy Position			Sell Position		Net Total
	(in millions)
Japanese Yen	$	(35.0	)	$	—	$	(35.0	)	$	(35.7	)	$	—	$	(35.7	)
Taiwan Dollar		(11.2	)		—		(11.2	)		(9.9	)		—		(9.9	)
Korean Won		(9.6	)		—		(9.6	)		(8.9	)		—		(8.9	)
British Pound Sterling		(1.4	)		—		(1.4	)		(1.4	)		—		(1.4	)
Euro		—			82.2		82.2			—			27.4		27.4
Singapore Dollar		—			15.7		15.7			—			33.5		33.5
Philippine Peso		—			5.2		5.2			—			—		—
Chinese Yuan		—			2.8		2.8			—			—		—

Total	$	(57.2	)	$	105.9	$	48.7		$	(55.9	)	$	60.9	$	5.0

The fair value of the outstanding contracts was a loss of $0.4 million and $0.1 million, respectively, at December 31, 2018 and 2017.

Gains and losses on foreign currency forward contracts and foreign currency remeasurement gains and losses on monetary assets and liabilities are included in other (income) expense, net.

The following table summarizes the fair value of derivative instruments as of December 31, 2018 and 2017:


	Balance Sheet Location	December 31, 2018			December 31, 2017
		(in thousands)
Derivatives not designated as hedging instruments:
Foreign exchange contracts	Prepayments	$	79		$	389
Foreign exchange contracts	Other current liabilities		(514	)		(446	)

Total derivatives		$	(435	)	$	(57	)

The following table summarizes the effect of derivative instruments in the statements of operations recognized for the years ended December 31, 2018, 2017, and 2016.


	Location of (Gains) Losses Recognized in Statement of Operations	2018		2017			2016
		(in thousands)
Derivatives not designated as hedging instruments:
Foreign exchange contracts	Other (income) expense, net	$	7,257	$	(1,133	)	$	8,671

(1)	The table does not reflect the corresponding gains and losses from the remeasurement of the monetary assets and liabilities denominated in foreign currencies.

(2)	For the years ended December 31, 2018 and 2016, net gains from the remeasurement of monetary assets and liabilities denominated in foreign currencies were $2.4 million and $8.0 million, respectively.

(3)	For the year ended December 31, 2017, net losses from the remeasurement of monetary assets and liabilities denominated in foreign currencies were $2.9 million.

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

Concentration of Credit Risk

Financial instruments which potentially subject Teradyne to concentrations of credit risk consist principally of cash equivalents, marketable securities, forward currency contracts and accounts receivable. Teradyne’s cash equivalents consist primarily of money market funds invested in U.S. Treasuries and government agencies. Teradyne’s fixed income available-for-sale marketable securities have a minimum rating of AA by one or more of the major credit rating agencies. Teradyne places foreign currency forward contracts with high credit-quality financial institutions in order to minimize credit risk exposure. Concentrations of credit risk with respect to accounts receivable are limited due to the large number of geographically dispersed customers. Teradyne performs ongoing credit evaluations of its customers’ financial condition and from time to time may require customers to provide a letter of credit from a bank to secure accounts receivable. There were no customers who accounted for more than 10% of Teradyne’s accounts receivable balance as of December 31, 2018 and December 31, 2017.

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 from December 12, 2016 at a rate of 1.25% per year payable semiannually in arrears on June 15 and December 15 of each year, beginning on June 15, 2017. The Notes will be convertible at the option of the noteholders at any time prior to the close of business on the business day immediately preceding September 15, 2023, only under the following circumstances: (1) during any calendar quarter beginning after March 31, 2017 (and only during such calendar quarter), if the closing sale price of Teradyne’s common stock, for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than 130% of the conversion price on each applicable trading day; (2) during the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price (as defined in the Indenture) per $1,000 principal amount of Notes for each trading day of the measurement period was less

than 98% of the product of the closing sale price of the Teradyne’s common stock and the conversion rate on each such trading day; and (3) upon the occurrence of specified corporate events. On or after September 15, 2023 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their Notes at any time, regardless of the foregoing circumstances. Teradyne may satisfy its conversion obligation by paying or delivering cash, shares of its common stock or a combination of cash and shares of its common stock, at Teradyne’s election. As of December 31, 2018, the conversion price was approximately $31.70 per share of Teradyne’s common stock. The conversion rate is subject to adjustment under certain circumstances.

Concurrent with the offering of the Notes, Teradyne entered into convertible note hedge transactions (the “Note Hedge Transactions”) with the initial purchasers or their affiliates (the “Option Counterparties”). The Note Hedge Transactions cover, subject to customary anti-dilution adjustments, the number of shares of the common stock that underlie the Notes, with a strike price equal to the conversion price of the Notes of $31.70. The Note Hedge Transactions cover, subject to customary anti-dilution adjustments, approximately 14.5 million shares of Teradyne’s common stock.

Separately and concurrent with the pricing of the Notes, Teradyne entered into warrant transactions with the Option Counterparties (the “Warrant Transactions”) in which it sold net-share-settled (or, at its election subject to certain conditions, cash-settled) warrants to the Option Counterparties. The Warrant Transactions cover, subject to customary anti-dilution adjustments, approximately 14.5 million shares of common stock. As of December 31, 2018, the strike price of the warrants was approximately $39.78 per share. The strike price is subject to adjustment under certain circumstances. The Warrant Transactions could have a dilutive effect to Teradyne’s common stock to the extent that the market price per share of Teradyne’s common stock, as measured under the terms of the Warrant Transactions, exceeds the applicable strike price of the warrants.

The Note Hedge Transactions are expected to reduce the potential dilution to Teradyne’s common stock upon any conversion of the Notes. However, the Warrant Transactions could separately have a dilutive effect to the extent that the market value per share of Teradyne’s common stock exceeds the applicable strike price of the warrant. The net cost of the Note Hedge Transactions, after being partially offset by the proceeds from the sale of the warrants, was approximately $33.0 million.

In connection with establishing their initial hedge of these convertible note hedge and warrant transactions, the Option Counterparties have entered into various derivative transactions with respect to Teradyne’s common stock and/or purchased shares of Teradyne’s common stock or other securities, including the Notes, concurrent with, or shortly after, the pricing of the Notes. In addition, the Option Counterparties may modify their hedge positions by entering into or unwinding various derivative transactions with respect to Teradyne’s common stock or by selling Teradyne’s common stock or other securities, including the Notes, in secondary market transactions (and may do so during any observation period related to the conversion of the Notes). These activities could adversely affect the value of Teradyne’s common stock and the Notes.

Teradyne considered the guidance of ASC 815-40, “Derivatives and Hedging—Contracts in Entity’s Own Equity,” and concluded that the convertible note hedge is both indexed to Teradyne’s stock and should be classified in stockholders’ equity in its statements of financial position. The convertible note hedge is considered indexed to Teradyne’s stock as the terms of the Note Hedge Transactions do not contain an exercise contingency and the settlement amount equals the difference between the fair value of a fixed number of Teradyne’s shares and a fixed strike price. Because the only variable that can affect the settlement amount is Teradyne’s stock price, which is an input to the fair value of a fixed-for-fixed option contract, the convertible note hedge is considered indexed to Teradyne’s stock.

Teradyne assessed whether the convertible note hedge should be classified as equity under ASC 815-40. In the Note Hedge Transactions contract the settlement terms permit net cash settlement or net share settlement, at the option of Teradyne. Therefore, the criteria as set forth in ASC 815-40 were evaluated by Teradyne. In reviewing the criteria, Teradyne noted the following: (1) the convertible note hedge does not require Teradyne to issue shares; (2) there is no requirement to net cash settle the convertible note hedge for failure to make timely filings with the SEC; (3) in the case of termination, the convertible note hedge is settled in the same consideration as the holders of the underlying stock; (4) the counterparty does not have rights that rank higher than those of a shareholder of the stock underlying the convertible note hedge; and (5) there is no requirement to post collateral. Based on its analysis of those criteria, Teradyne concluded that the convertible note hedge should be recorded in equity and no further adjustment should be made in future periods to adjust the value of the convertible note hedge.

Teradyne analyzed the Warrant Transactions under ASC 815-40, “Derivatives and Hedging—Contracts in Entity’s Own Equity,” and other relevant literature, and determined that it met the criteria for classification as an equity transaction and is considered indexed to Teradyne’s stock. As a result, Teradyne recorded the proceeds from the warrants as an increase to additional paid-in capital. Teradyne does not recognize subsequent changes in fair value of the warrants in its financial statements.

The provisions of ASC 470-20, “Debt with Conversion and Other Options,” are applicable to the Notes. ASC 470-20 requires Teradyne to separately account for the liability (debt) and equity (conversion feature) components of the Notes in a manner that reflects Teradyne’s nonconvertible debt borrowing rate at the date of issuance when interest cost is recognized in subsequent periods. Teradyne allocated $100.8 million of the $460.0 million principal amount of the Notes to the equity component, which represents a discount to the debt and will be amortized to interest expense using the effective interest method through December 2023. Accordingly, Teradyne’s effective annual interest rate on the Notes will be approximately 5.0%. The Notes are classified as long-term debt in the balance sheet based on their December 15, 2023 maturity date. Debt issuance costs of approximately $7.2 million are being amortized to interest expense using the effective interest method over the seven year term of the Notes. As of December 31, 2018, debt issuance costs were approximately $5.3 million.

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


	December 31, 2018		December 31, 2017
	(in thousands)
Debt principal	$	460,000	$	460,000
Unamortized discount		80,019		94,013

Net carrying amount of convertible debt	$	379,981	$	365,987


	For the year ended
	December 31, 2018		December 31, 2017
	(in thousands)
Contractual interest expense on the coupon	$	5,750	$	5,734
Amortization of the discount component and debt issue fees recognized as interest expense		13,995		13,318

Total interest expense on the convertible debt	$	19,745	$	19,052

As of December 31, 2018, the unamortized discount was $80.0 million, which will be amortized over five years using the effective interest rate method. The carrying amount of the equity component was $100.8 million. As of December 31, 2018, the conversion price was approximately $31.70 per share and if converted the value of the notes was $455.4 million.

Revolving Credit Facility

On April 27, 2015, Teradyne entered into a Credit Agreement (the “Credit Agreement”) with Barclays Bank PLC, as administrative agent and collateral agent, and the lenders party thereto. The Credit Agreement provides for a five-year, senior secured revolving credit facility of up to $350 million (the “Credit Facility”). The Credit Agreement further provides that, subject to customary conditions, Teradyne may seek to obtain from existing or new lenders incremental commitments under the Credit Facility in an aggregate principal amount not to exceed $150 million.

Proceeds from the Credit Facility may be used for general corporate purposes and working capital. Teradyne incurred $2.3 million in costs related to the revolving credit facility. These costs are being amortized over the five-year term of the revolving credit facility and are included in interest expense in the statements of operations. As of March 1, 2019, Teradyne has not borrowed any funds under the Credit Facility.

The interest rates applicable to loans under the Credit Facility are, at Teradyne’s option, equal to either a base rate plus a margin ranging from 0.00% to 1.00% per annum or LIBOR plus a margin ranging from 1.00% to 2.00% per annum, based on the Consolidated Leverage Ratio of Teradyne and its Restricted Subsidiaries. In addition, Teradyne will pay a commitment fee on the unused portion of the commitments under the Credit Facility ranging from 0.125% to 0.350% per annum, based on the then applicable Consolidated Leverage Ratio.

Teradyne is not required to repay any loans under the Credit Facility prior to maturity, subject to certain customary exceptions. Teradyne is permitted to prepay all or any portion of the loans under the Credit Facility prior to maturity without premium or penalty, other than customary LIBOR breakage costs.

The Credit Agreement contains customary events of default, representations, warranties and affirmative and negative covenants that, among other things, limit Teradyne’s and its Restricted Subsidiaries’ ability to sell assets, grant liens on assets, incur other secured indebtedness and make certain investments and restricted payments, all subject to exceptions set forth in the Credit Agreement. The Credit Agreement also requires Teradyne to satisfy two financial ratios measured as of the end of each fiscal quarter: a consolidated leverage ratio and an interest coverage ratio. As of December 31, 2018, Teradyne was in compliance with all covenants.

The Credit Facility is guaranteed by certain of Teradyne’s domestic subsidiaries and collateralized by assets of Teradyne and such subsidiaries, including a pledge of 65% of the capital stock of certain foreign subsidiaries.

I. ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME

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


	Foreign Currency Translation Adjustment			Unrealized Gains (Losses) on Marketable Securities			Retirement Plans Prior Service Credit			Total
	(in thousands)
Balance at December 31, 2016, net of tax of $0, $209, $(778)	$	(21,921	)	$	(60	)	$	1,767		$	(20,214	)

Other comprehensive income before reclassifications, net of tax of $0, $1,903, $0		37,840			1,863			—			39,703
Amounts reclassified from accumulated other comprehensive income, net of tax of $0, $(297), $(154)		—			(441	)		(272	)		(713	)

Net current period other comprehensive income, net of tax of $0, $1,606, $(154)		37,840			1,422			(272	)		38,990

Balance at December 31, 2017, net of tax of $0, $1,815, $(932)		15,919			1,362			1,495			18,776

Other comprehensive loss before reclassifications, net of tax of $0, $(722), $0		(28,442	)		(2,110	)		—			(30,552	)
Amounts reclassified from accumulated other comprehensive income, net of tax of $0, $(21), $(71)		—			1,337			(245	)		1,092

Net current period other comprehensive loss, net of tax of $0, $(743), $(71)		(28,442	)		(773	)		(245	)		(29,460	)

Reclassification of tax effects resulting from the Tax Reform Act, net of tax of $0, $(691), $(78), respectively (a)		—			691			78			769
Reclassification of unrealized gains on equity securities, net of tax of $0, $(902), $0, respectively, (b)		—			(3,125	)		—			(3,125	)

Balance at December 31, 2018, net of tax of $0, $(521), $(1,081)	$	(12,523	)	$	(1,845	)	$	1,328		$	(13,040	)

(a)

In the year ended December 31, 2018, Teradyne early adopted ASU 2018-02, “Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” As a result, the stranded tax effects resulting from the Tax Reform Act enacted in December 2017 were reclassified from accumulated other comprehensive income to retained earnings.

(b)	In the year ended December 31, 2018, Teradyne adopted ASU 2016-01, “Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” See Note B: “Accounting Policies.”

Reclassifications out of accumulated other comprehensive income to the statements of operations for the years ended December 31, 2018, 2017, and 2016 were as follows:


Details about Accumulated Other Comprehensive Income Components	For the year ended							Affected Line Item in the Statements of Operations
	December 31, 2018			December 31, 2017		December 31, 2016
	(in thousands)
Available-for-sale marketable securities
Unrealized (losses) gains, net of tax of $21, $297, $255	$	(1,337	)	$	441	$	683		Interest income (expense)
Defined benefit pension and postretirement plans:
Amortization of prior service benefit, net of tax of $71, $154, $190		245			272		321		(a)

Total reclassifications, net of tax of $92, $451, $445	$	(1,092	)	$	713	$	1,004		Net income

(a)	The amortization of prior service credit is included in the computation of net periodic pension cost and postretirement benefit; see Note N: “Retirement Plans.”

J. GOODWILL AND 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. Goodwill is considered to be impaired when the net book value of a reporting unit exceeds its estimated fair value.

Teradyne has the option to perform a qualitative assessment (“Step zero”) to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If Teradyne determines this is the case, Teradyne is required to perform the two-step goodwill impairment test to identify potential goodwill impairment and measure the amount of goodwill impairment loss to be recognized. If Teradyne determines that it is more likely than not that the fair value of the reporting unit is greater than its carrying amounts, the two-step goodwill impairment test is not required. When performing the two-step process, the first step involves a comparison of the estimated fair value of a reporting unit to its carrying amount, including goodwill. In performing the first step, Teradyne determines the fair value of a reporting unit using the results derived from an income approach and a market approach. The income approach is estimated through the discounted cash flow (“DCF”) analysis. Determining fair value requires the exercise of significant judgment, including judgments about appropriate discount rates, perpetual growth rates, and the amount and timing of expected future cash flows. Discount rates are based on a weighted average cost of capital (“WACC”), which represents the average rate a business must pay its providers of debt and equity, plus a risk premium. The WACC used to test goodwill is derived from a group of comparable companies. The cash flows employed in the DCF analysis are derived from internal forecasts and external market forecasts. The market approach estimates the fair value of the reporting unit by utilizing the market comparable method which is based on revenue and earnings multiples from comparable companies. If the estimated fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impaired and the second step of the impairment test is not necessary. If the carrying amount of a reporting unit exceeds its estimated fair value, then the second step of the goodwill impairment test must be performed. The second step of the goodwill impairment test compares the implied fair value of the reporting unit’s goodwill with its carrying amount of goodwill to measure the amount of impairment loss, if any. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination, whereby the estimated fair value of the reporting unit is allocated to all of the assets and

liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess.

In the second quarter of 2016, the Wireless Test reporting unit (which is Teradyne’s Wireless Test operating and reportable segment) reduced headcount by 11% as a result of a sharp decline in projected demand attributable to an estimated smaller future wireless test market. The decrease in projected demand was due to lower forecasted buying from Teradyne’s largest Wireless Test segment customer (who has contributed between 51% and 73% of annual Wireless Test sales since the LitePoint acquisition in 2011 through 2015) as a result of the customer’s numerous operational efficiencies; slower smartphone growth rates; and a slowdown of new wireless technology adoption. Teradyne considered the headcount reduction and sharp decline in projected demand to be a triggering event for an interim goodwill impairment test.

Teradyne allocated the fair value of the Wireless Test reporting unit to all of its assets and liabilities (including unrecognized intangible assets). The net book value of raw materials inventory was estimated as an approximation of current replacement costs. The fair value of finished goods inventory was estimated at the present value of selling price less direct selling costs and profit on the selling effort. The selling price used in the inventory fair values was based upon the product gross margins included in Teradyne’s forecast. The fair value of the deferred revenue liability was estimated by assessing the costs required to service the obligation plus a reasonable profit margin. The fair value for personal property assets, which consisted of furniture and fixtures, machinery and equipment, computer equipment, software and leasehold improvements, was estimated using the replacement cost approach, which approximated carrying value. The fair value of intangible assets was estimated using the income approach and, in particular, developed technology and trademarks/trade names were valued using the relief-from-royalty method and customer relationships and customer backlog were valued using the discounted cash flow method. Royalty rates were estimated using rates applicable to wireless testing equipment and other similar technologies. Based upon this allocation, Teradyne determined that the Wireless Test reporting unit goodwill is valued at $8.0 million and recorded an impairment loss of $254.9 million in the second quarter of 2016.

In the fourth quarter of 2018, Teradyne performed the annual goodwill impairment test. Teradyne completed step one of the two-step impairment test for the Universal Robots reporting unit. Teradyne completed step zero for the Wireless Test, Defense/Aerospace, MiR, and Energid reporting units. There was no impairment as a result of the annual test performed in the fourth quarter of 2018.

In the fourth quarter of 2017, Teradyne performed the annual goodwill impairment test. Teradyne completed step one of the two-step impairment test for the Universal Robots reporting unit. Teradyne completed step zero for the Wireless Test and Defense/Aerospace reporting units. There was no impairment as a result of the annual test performed in the fourth quarter of 2017.

In the fourth quarter of 2016, Teradyne performed the annual goodwill impairment test. Teradyne completed step one of the two-step impairment test for the Universal Robots, Wireless Test and Defense/Aerospace reporting units. There was no impairment as a result of the annual test performed in the fourth quarter of 2016.

The changes in the carrying amount of goodwill by reportable segments for the years ended December 31, 2018 and 2017 are as follows:


	Industrial Automation			System Test			Wireless Test			Semiconductor Test			Total
	(in thousands)
Balance at December 31, 2016:
Goodwill	$	204,851		$	158,699		$	361,819		$	260,540		$	985,909
Accumulated impairment losses		—			(148,183	)		(353,843	)		(260,540	)		(762,566	)

		204,851			10,516			7,976			—			223,343
Foreign currency translation adjustment		28,668			—			—			—			28,668

Balance at December 31, 2017:
Goodwill		233,519			158,699			361,819			260,540			1,014,577
Accumulated impairment losses		—			(148,183	)		(353,843	)		(260,540	)		(762,566	)

		233,519			10,516			7,976			—			252,011
MiR acquisition		135,976			—			—			—			135,976
Energid acquisition		14,394			—			—			—			14,394
Foreign currency translation adjustment		(20,531	)		—			—			—			(20,531	)
Balance at December 31, 2018:
Goodwill		363,358			158,699			361,819			260,540			1,144,416
Accumulated impairment losses		—			(148,183	)		(353,843	)		(260,540	)		(762,566	)

	$	363,358		$	10,516		$	7,976		$	—		$	381,850

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. As a result of the Wireless Test segment goodwill impairment review in the second quarter of 2016, Teradyne performed an impairment test of the Wireless Test segment’s intangible and long-lived assets. The impairment test is based on a comparison of the estimated undiscounted cash flows to the carrying value of the asset group. If undiscounted cash flows for the asset group are less than the carrying amount, the asset group is written down to its estimated fair value based on a discounted cash flow analysis. The cash flow estimates used to determine the impairment contain management’s best estimates using appropriate assumptions and projections at that time. The fair value of intangible assets was estimated using the income approach and, in particular, developed technology and trademarks/trade names were valued using the relief-from-royalty method and customer relationships were valued using the discounted cash flow method. Royalty rates were estimated using rates applicable to wireless testing equipment and other similar technologies. As a result of the analysis, Teradyne recorded an $83.3 million impairment charge in the second quarter of 2016 in acquired intangible assets impairment on the statements of operations, resulting in a remaining intangible assets balance of $2.2 million at December 31, 2018 for the Wireless Test segment.

There were no events or circumstances indicating that the carrying value of intangible and long-lived assets may not be recoverable in 2018 and 2017.

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


	December 31, 2018
	Gross Carrying Amount (1)(2)		Accumulated Amortization (2)			Foreign Currency Translation Adjustment			Net Carrying Amount
	(in thousands)
Developed technology	$	336,308	$	(252,080	)	$	(4,079	)	$	80,149
Customer relationships		97,153		(83,448	)		(340	)		13,365
Tradenames and trademarks		64,420		(31,653	)		(799	)		31,968
Non-compete agreement		320		(320	)		—			—
Backlog		30		(30	)		—			—

Total intangible assets	$	498,231	$	(367,531	)	$	(5,218	)	$	125,482


	December 31, 2017
	Gross Carrying Amount		Accumulated Amortization			Foreign Currency Translation Adjustment		Net Carrying Amount
	(in thousands)
Developed technology	$	270,877	$	(226,190	)	$	1,618	$	46,305
Customer relationships		92,741		(83,585	)		171		9,327
Tradenames and trademarks		50,100		(27,120	)		416		23,396
Non-compete agreement		320		(260	)		—		60

Total intangible assets	$	414,038	$	(337,155	)	$	2,205	$	79,088

(1)	Includes intangible assets acquired in 2018, $80.7 million from the MiR acquisition and $12.3 million from the Energid acquisition.

(2)	In 2018, $8.8 million of amortizable intangible assets became fully amortized and have been eliminated from the gross carrying amount and accumulated amortization.

Aggregate intangible assets amortization expense for the years ended December 31, 2018, 2017, and 2016 was $39.2 million, $30.5 million, and $52.6 million, respectively. Estimated intangible assets amortization expense for each of the five succeeding fiscal years is as follows:


Year	Amortization Expense
	(in thousands)
2019	$	38,496
2020		24,186
2021		13,945
2022		13,052
2023		12,785
Thereafter		23,018

K. COMMITMENTS AND CONTINGENCIES

Purchase Commitments

As of December 31, 2018, Teradyne had entered into non-cancelable purchase commitments for certain components and materials. The purchase commitments covered by the agreements aggregate to approximately $242.1 million, of which $232.5 million is for less than one year.

Commitments

Teradyne leases certain of its office buildings and other facilities under various operating lease arrangements that include renewal options and escalation clauses for adjusting rent payments to reflect changes in price indices. Rental expense for leases with fixed escalation clauses is recognized on a straight line basis over the lease term.

Rental expense for the years ended December 31, 2018, 2017, and 2016 was $19.3 million, $20.2 million, and $19.1 million, respectively.

The following table reflects Teradyne’s non-cancelable operating lease commitments:


	Non-cancelable Lease Commitments
	(in thousands)
2019	$	19,570
2020		18,293
2021		13,578
2022		9,693
2023		5,449
Beyond 2024		9,472

Total	$	76,055

Legal Claims

Teradyne is subject to legal proceedings, claims and investigations that arise 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.

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 has entered 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 charter. 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.

As a matter of ordinary business course, 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 revenue for estimated warranty expense based upon historical experience. When Teradyne receives revenue for

extended warranties beyond the standard duration, it is deferred and recognized on a straight line basis over the contract period. Related costs are expensed as incurred. As of December 31, 2018 and 2017, Teradyne had a product warranty accrual of $7.9 million and $8.2 million, respectively, included in other accrued liabilities, and revenue deferrals related to extended warranties of $27.4 million and $24.4 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 December 31, 2018 and 2017, except for product warranty, Teradyne has not recorded any liabilities for these guarantees and obligations because the amount would be immaterial.

L. NET INCOME (LOSS) PER COMMON SHARE

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


	2018		2017		2016
	(in thousands, except per share amounts)
Net income (loss) for basic and diluted net income per share	$	451,779	$	257,692	$	(43,421	)

Weighted average common shares-basic		187,672		198,069		202,578
Effect of dilutive potential common shares:
Incremental shares from assumed conversion of convertible notes (1)		2,749		1,298		—
Convertible note hedge warrant shares (2)		485		112		—
Restricted stock units		1,385		1,800		—
Stock options		278		335		0
Employee stock purchase rights		36		27		0

Dilutive potential common shares		4,933		3,572		—

Weighted average common shares-diluted		192,605		201,641		202,578

Net income (loss) per common share-basic	$	2.41	$	1.30	$	(0.21	)

Net income (loss) per common share-diluted	$	2.35	$	1.28	$	(0.21	)

(1)	Incremental shares from the assumed conversion of the convertible notes was calculated using the difference between the average Teradyne stock price for the period and the conversion price of $31.70, multiplied by 14.5 million shares. The result of this calculation, representing the total intrinsic value of the convertible debt, was divided by the average Teradyne stock price for the period.

(2)	Convertible notes hedge warrant shares were calculated using the difference between the average Teradyne stock price for the period and the warrant price of $39.78, multiplied by 14.5 million shares. The result of this calculation, representing the total intrinsic value of the warrant, was divided by the average Teradyne stock price for the period.

The computation of diluted net income per common share for 2018 excludes the effect of the potential exercise of stock options to purchase approximately 0.1 million shares and restricted stock units to purchase approximately 0.5 million shares because the effect would have been anti-dilutive.

The computation of diluted net income per common share for 2017 excludes the effect of the potential exercise of stock options to purchase approximately 0.1 million shares because the effect would have been anti-dilutive.

The computation of diluted net loss per common share for 2016 excludes the effect of the potential exercise of all outstanding stock options and restricted stock units because Teradyne had a net loss and inclusion would be anti-dilutive.

M. RESTRUCTURING AND OTHER

During the year ended December 31, 2018, Teradyne recorded an expense of $17.7 million for the increase in the fair value of the MiR contingent consideration liability, $8.7 million of severance charges related to headcount reductions primarily in Semiconductor Test, and $4.5 million for acquisition related expenses and compensation, partially offset by a gain of $16.7 million for the decrease in the fair value of the Universal Robots contingent consideration liability.

During the year ended December 31, 2017, Teradyne recorded an expense of $7.8 million for the increase in the fair value of the Universal Robots contingent consideration liability, $3.8 million of severance charges related to headcount reductions primarily in Semiconductor Test, $1.1 million for an impairment of fixed assets in Semiconductor Test, $1.0 million for a lease impairment of a Wireless Test facility in Sunnyvale, CA, which was terminated in September 2017, and $0.8 million of expenses related to an earthquake in Kumamoto, Japan, partially offset by $5.1 million of property insurance recovery related to the Japan earthquake.

During the year ended December 31, 2016, Teradyne recorded an expense of $15.9 million for the increase in the fair value of the contingent consideration liability, of which $15.3 million was related to Universal Robots and $0.6 million was related to AIT, $6.0 million of severance charges related to headcount reductions primarily in Wireless Test, $4.2 million for an impairment of fixed assets, and $0.9 million for expenses related to an earthquake in Kumamoto, Japan, partially offset by $5.1 million of property insurance recovery related to the Japan earthquake.

N. RETIREMENT PLANS

ASC 715_,_ “Compensation—Retirement Benefits,” requires an employer with defined benefit plans or other postretirement benefit plans to recognize an asset or a liability on its balance sheet for the overfunded or underfunded status of the plans as defined by ASC 715. The pension asset or liability represents a difference between the fair value of the pension plan’s assets and the projected benefit obligation at December 31. Teradyne uses a December 31 measurement date for all of 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 the plans in accordance with local laws and to the extent that such contributions are tax deductible. The assets of these plans consist primarily of fixed income and equity securities. In addition, Teradyne has an unfunded supplemental executive defined benefit plan in the United States to provide retirement benefits in excess of levels allowed by the Employment Retirement Income Security Act (“ERISA”) and the Internal Revenue Code (the “IRC”), as well as unfunded qualified foreign plans.

During 2018, Teradyne purchased a group annuity contract for its retiree participants in the U.S. qualified pension plan. Under the group annuity, the accrued pension obligations for approximately 1,700 retiree participants were transferred to an insurance company. The reduction in the pension benefit obligation and pension assets was $151.3 million. During 2018, Teradyne recorded a settlement loss of $0.3 million related to the retiree group annuity transaction.

The December 31 balances of these defined benefit pension plans assets and obligations are shown below:


	2018						2017
	United States			Foreign			United States			Foreign
	(in thousands)
*Assets and Obligations*
Change in benefit obligation:
Projected benefit obligation:
Beginning of year	$	363,026		$	39,353		$	353,616		$	60,738
Service cost		2,196			786			2,239			818
Interest cost		8,940			687			13,151			852
Actuarial (gain) loss		(30,136	)		773			12,702			262
Benefits paid		(14,793	)		(741	)		(18,682	)		(994	)
Retiree annuity purchase		(151,341	)		—			—			—
Liability loss due to settlement		345			—			—			—
Settlements		—			—			—			(28,560	)
Admin expenses paid		—			—			—			(40	)
Non-U.S. currency movement		—			(1,712	)		—			6,277

End of year		178,237			39,146			363,026			39,353

Change in plan assets:
Fair value of plan assets:
Beginning of year		324,506			1,307			307,304			27,571
Company contributions		2,587			822			4,462			883
Actual return on plan assets		(16,658	)		50			31,422			737
Benefits paid		(14,793	)		(741	)		(18,682	)		(994	)
Retiree annuity purchase		(151,341	)		—			—			—
Settlements		—			—			—			(28,560	)
Admin expenses paid		—			—			—			(40	)
Non-U.S. currency movement		—			(38	)		—			1,710

End of year		144,301			1,400			324,506			1,307

Funded status	$	(33,936	)	$	(37,746	)	$	(38,520	)	$	(38,046	)

The following table provides amounts recorded within the account line items of the statements of financial position as of December 31:


	2018						2017
	United States			Foreign			United States			Foreign
	(in thousands)
Retirement plans assets	$	16,883		$	—		$	17,491		$	—
Accrued employees’ compensation and withholdings		(2,676	)		(852	)		(2,524	)		(863	)
Retirement plans liabilities		(48,143	)		(36,894	)		(53,487	)		(37,183	)

Funded status	$	(33,936	)	$	(37,746	)	$	(38,520	)	$	(38,046	)

The following table provides amounts recognized in accumulated other comprehensive income as of December 31:


	2018				2017
	United States		Foreign		United States		Foreign
	(in thousands)
Prior service cost, before tax	$	—	$	—	$	58	$	—
Deferred taxes		560		—		539		—

Total recognized in other comprehensive income, net of tax	$	560	$	—	$	597	$	—

The accumulated benefit obligation for the United States defined benefit pension plans was $172.8 million and $354.3 million at December 31, 2018 and 2017, respectively. The accumulated benefit obligation for foreign defined benefit pension plans was $35.6 million and $34.7 million at December 31, 2018 and 2017, respectively.

Information for pension plans with an accumulated benefit obligation in excess of plan assets as of December 31:


	2018				2017
	United States		Foreign		United States		Foreign
	(in millions)
Projected benefit obligation	$	50.8	$	39.1	$	56.0	$	39.4
Accumulated benefit obligation		48.6		35.6		51.6		34.7
Fair value of plan assets		—		1.4		—		1.3

Expense

For the years ended December 31, 2018, 2017, and 2016, Teradyne’s net periodic pension (income) cost was comprised of the following:


	2018						2017						2016
	United States			Foreign			United States			Foreign			United States			Foreign
	(in thousands)
Components of Net Periodic Pension (Income) Cost:
Service cost	$	2,196		$	786		$	2,239		$	818		$	2,302		$	761
Interest cost		8,940			687			13,151			852			13,630			1,185
Expected return on plan assets		(9,049	)		(19	)		(12,008	)		(165	)		(13,830	)		(443	)
Amortization of prior service cost		58			—			70			—			96			—
Net actuarial (gain) loss		(4,429	)		743			(6,712	)		(310	)		(4,013	)		815
Settlement loss		345			—			—			—			—			—

Total net periodic pension (income) cost	$	(1,939	)	$	2,197		$	(3,260	)	$	1,195		$	(1,815	)	$	2,318

Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income:
Reversal of amortization items:
Prior service cost		(58	)		—			(70	)		—			(96	)		—

Total recognized in other comprehensive income		(58	)		—			(70	)		—			(96	)		—

Total recognized in net periodic pension (income) cost and other comprehensive income	$	(1,997	)	$	2,197		$	(3,330	)	$	1,195		$	(1,911	)	$	2,318

Weighted Average Assumptions to Determine Net Periodic Pension Cost at January 1:


	2018						2017						2016
	United States			Foreign			United States			Foreign			United States			Foreign
Discount rate		3.4	%		1.8	%		3.9	%		1.8	%		4.0	%		2.3	%
Expected return on plan assets		4.3			1.5			4.0			2.0			4.8			2.0
Salary progression rate		2.3			2.7			2.6			2.7			2.7			3.2

Weighted Average Assumptions to Determine Pension Obligations at December 31:


	2018						2017
	United States			Foreign			United States			Foreign
Discount rate		4.1	%		1.8	%		3.4	%		1.8	%
Salary progression rate		2.3			2.6			2.3			2.7

In developing the expected return on plan assets assumption, Teradyne evaluates input from its investment manager and pension consultants, including their forecast of asset class return expectations. Teradyne believes that 4.25% was an appropriate rate to use for fiscal 2018 for the U.S. Qualified Pension Plan (“U.S. Plan”).

The discount rate utilized to determine future pension obligations for the U.S. Plan is based on FTSE Pension Index adjusted for the plan’s expected cash flows and was 4.15% at December 31, 2018, up from 3.4% at December 31, 2017.

Plan Assets

As of December 31, 2018, the fair value of Teradyne’s pension plans’ assets totaled $145.7 million of which $144.3 million was related to the U.S. Plan and $1.4 million was related to the Taiwan defined benefit pension plan. Substantially all of Teradyne’s pension plans’ assets are held in individual trusts, which were established for the investment of assets of Teradyne’s sponsored retirement plans.

The following table provides weighted average pension asset allocation by asset category at December 31, 2018 and 2017:


	2018						2017
	United States			Foreign			United States			Foreign
Fixed income securities		94.0	%		—	%		88.1	%		—	%
Equity securities		5.0			—			9.9			—
Other		1.0			100.0			2.0			100.0

		100.0	%		100.0	%		100.0	%		100.0	%

The assets of the U.S. Plan are overseen by the Teradyne Fiduciary Committee which is comprised of members of senior management drawn from appropriate diversified levels of the management team. The Fiduciary Committee is responsible for setting the policy that provides the framework for management of the U.S. Plan assets. In accordance with its responsibilities, the Fiduciary Committee meets on a regular basis to review the performance of the U.S. Plan assets and compliance with the investment policy. The policy sets forth

an investment structure for managing U.S. Plan assets, including setting the asset allocation ranges, which are expected to provide an appropriate level of overall diversification required to maximize the long-term return on plan assets for a prudent and reasonable level of risk given prevailing market conditions, total investment return over the long term, and preservation of capital, while maintaining sufficient liquidity to pay the benefits of the U.S. Plan. The investment portfolio will not, at any time, have a direct investment in Teradyne stock. It may have indirect investment in Teradyne stock, if one of the funds selected by the investment manager invests in Teradyne stock. In developing the asset allocation ranges, third party asset allocation studies are periodically performed that consider the current and expected positions of the plan assets and funded status. Based on this study and other appropriate information, the Fiduciary Committee establishes asset allocation ranges taking into account acceptable risk targets and associated returns. The investment return objectives are to avoid excessive volatility and produce a rate of return that at least matches the Policy Index identified below. The manager’s investment performance is reviewed at least annually. Results for the total portfolio and for each major category of assets are evaluated in comparison with appropriate market indices and the Policy Index.

The target asset allocation and the index for each asset category for the U.S. Plan, per the investment policy, are as follows:


Asset Category:	Policy Index:	Target Allocation
U.S. corporate fixed income	Barclays U.S. Corporate A or Better Index		75	%
Global equity	MSCI World Minimum Volatility Index		5
U.S. government fixed income	Barclays U.S. 20+ Year Treasury Strips Index		14
High yield fixed income	Barclays U.S. Corporate High Yield 2% Issuer Cap Index		5
Cash	Citigroup Three Month U.S. Treasury Bill Index		1

Teradyne’s U.S. Plan invests primarily in common trust funds. Units held in the common trust funds are valued at the unit price as reported by the investment manager based on the asset value of the underlying investments; underlying investments in equity securities are valued at the last reported sales price, and underlying investments in fixed-income securities are generally valued using methods based upon market transactions for comparable securities.

In 2017, the U.K. defined benefit pension was terminated and the obligations and assets of the plan were transferred to an insurance company.

During the year ended December 31, 2018, $2.7 million of pension assets were transferred out of Level 3 to Level 2. During the year ended December 31, 2017, there were no transfers of pension assets in or out of Level 1, Level 2 or Level 3.

The fair value of pension plan assets by asset category and by level at December 31, 2018 and December 31, 2017 were as follows:


	December 31, 2018
	United States								Foreign
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
	(in thousands)
Fixed income securities:
Corporate debt securities	$	—	$	115,424	$	—	$	115,424	$	—	$	—	$	—	$	—
U.S. government securities		—		20,176		—		20,176		—		—		—		—
Global equity		—		7,252		—		7,252		—		—		—		—
Other		—		—		—		—		—		1,400		—		1,400
Cash and cash equivalents		1,449		—		—		1,449		—		—		—		—

Total	$	1,449	$	142,852	$	—	$	144,301	$	—	$	1,400	$	—	$	1,400


	December 31, 2017
	United States								Foreign
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
	(in thousands)
Fixed income securities:
Corporate debt securities	$	—	$	260,294	$	—	$	260,294	$	—	$	—	$	—	$	—
U.S. government securities		—		25,709		—		25,709		—		—		—		—
Global equity		—		32,120		—		32,120		—		—		—		—
Group annuity insurance contracts		—		—		3,166		3,166		—		—		—		—
Other		—		—		—		—		—		1,307		—		1,307
Cash and cash equivalents		3,217		—		—		3,217		—		—		—		—

Total	$	3,217	$	318,123	$	3,166	$	324,506	$	—	$	1,307	$	—	$	1,307

The pension plan assets identified as Level 3 above are related to group annuity insurance contracts held by the U.S. Plan.

Changes in the fair value of Level 3 group annuity insurance contracts for the years ended December 31, 2018 and 2017 were as follows:


	Group Annuity Insurance Contracts
	(in thousands)
Balance at December 31, 2016	$	29,456
Settlements		(28,560	)
Interest and market value adjustments		959
Benefits paid		(244	)
Other		(61	)
Non-U.S. currency movement		1,616

Balance at December 31, 2017		3,166
Transfer out of Level 3		(2,658	)
Purchases of retiree annuity insurance contracts		(512	)
Interest and market value adjustments		59
Benefits paid		(40	)
Other		(15	)

Balance at December 31, 2018	$	—

Contributions

Teradyne’s funding policy is to make contributions to the plans in accordance with local laws and to the extent that such contributions are tax deductible. During 2018, Teradyne contributed $2.6 million to the U.S. supplemental executive defined benefit pension plan and $0.8 million to certain qualified plans for non-U.S. subsidiaries. During 2017, Teradyne contributed $1.9 million to the U.S. Plan, $2.6 million to the U.S. supplemental executive defined benefit pension plan and $0.9 million to certain qualified plans for non-U.S. subsidiaries. In 2019, contributions to the U.S. supplemental executive defined benefit pension plan and certain qualified plans from non-U.S. subsidiaries will be approximately $2.7 million and $0.9 million, respectively.

Expected Future Pension Benefit Payments

Future benefit payments are expected to be paid as follows:


	United States		Foreign
	(in thousands)
2019	$	6,903	$	874
2020		7,133		1,522
2021		8,026		905
2022		8,863		888
2023		9,584		1,199
2024-2028		57,120		5,921

Postretirement Benefit Plans

In addition to receiving pension benefits, U.S. Teradyne employees who meet early retirement eligibility requirements as of their termination dates may participate in Teradyne’s Welfare Plan, which includes 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.

The December 31 balances of the postretirement assets and obligations are shown below:


	2018			2017
	(in thousands)
*Assets and Obligations*
Change in benefit obligation:
Projected benefit obligation:
Beginning of year	$	6,177		$	5,510
Service cost		39			34
Interest cost		196			201
Actuarial loss		25			398
Special termination benefits		3,708			591
Benefits paid		(889	)		(557	)

End of year		9,256			6,177

Change in plan assets:
Fair value of plan assets:
Beginning of year		—			—
Company contributions		889			557
Benefits paid		(889	)		(557	)

End of year		—			—

Funded status	$	(9,256	)	$	(6,177	)

The following table provides amounts recorded within the account line items of financial position as of December 31:


	2018			2017
	(in thousands)
Accrued employees’ compensation and withholdings	$	(1,310	)	$	(591	)
Retirement plans liability		(7,946	)		(5,586	)

Funded status	$	(9,256	)	$	(6,177	)

The following table provides amounts recognized in accumulated other comprehensive income as of December 31:


	2018			2017
	(in thousands)
Prior service credit, before tax	$	(249	)	$	(622	)
Deferred taxes		(1,641	)		(1,472	)

Total recognized in other comprehensive income, net of tax	$	(1,890	)	$	(2,094	)

The estimated portion of prior service credit remaining in accumulated other comprehensive income that is expected to be recognized as a component of net periodic postretirement benefit income in 2019 is $(0.2) million.

Expense

For the years ended December 31, 2018, 2017, and 2016, Teradyne’s net periodic postretirement benefit cost (income) was comprised of the following:


	2018			2017			2016
	(in thousands)
Components of Net Periodic Postretirement Benefit Cost (income):
Service cost	$	39		$	34		$	37
Interest cost		196			201			218
Amortization of prior service credit		(373	)		(496	)		(607	)
Net actuarial loss		25			398			5
Special termination benefits		3,708			591			—

Total net periodic postretirement benefit cost (income)		3,595			728			(347	)

Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income:
Prior service cost		—			—			(93	)
Reversal of amortization items:
Prior service credit		373			496			607

Total recognized in other comprehensive income		373			496			514

Total recognized in net periodic postretirement benefit cost (income) and other comprehensive income	$	3,968		$	1,224		$	167

Weighted Average Assumptions to Determine Net Periodic Postretirement Benefit Income as of January 1:


	2018			2017			2016
Discount rate		3.4	%		3.9	%		3.9	%
Initial health care cost trend rate		7.9			7.3			7.5
Ultimate health care cost trend rate		4.5			5.0			5.0
Year in which ultimate health care cost trend rate is reached		2026			2023			2023

Weighted Average Assumptions to Determine Postretirement Benefit Obligation as of December 31:


	2018			2017			2016
Discount rate		4.0	%		3.4	%		3.9	%
Initial medical trend		7.5			7.9			7.3
Ultimate health care trend		4.5			4.5			5.0
Medical cost trend rate decrease to ultimate rate in year		2026			2026			2023

Assumed health care trend rates could have a significant effect on the amounts reported for health care plans. A one percentage point change in the assumed health care cost trend rates for the year ended December 31, 2018 would have the following effects:


	1 Percentage Point Increase		1 Percentage Point Decrease
	(in thousands)
Effect on total service and interest cost components	$	7	$	(7	)
Effect on postretirement benefit obligations		181		(171	)

Expected Future Benefit Payments

Future benefit payments are expected to be paid as follows:


	Benefit Payments
	(in thousands)
2019	$	1,310
2020		1,234
2021		1,181
2022		984
2023		811
2024-2028		2,364

O. STOCK-BASED COMPENSATION

Stock Compensation Plans

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

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.

Time-based restricted stock unit awards granted to employees vest in equal annual installments over four years. Restricted stock unit awards granted to non-employee directors vest in full, on the earlier of (a) the first anniversary of the grant date or (b) the date of the following year’s Annual Meeting of Shareholders. Teradyne expenses the cost of the restricted stock unit awards subject to time based vesting, which is determined to be the fair market value of the shares at the date of grant, ratably over the period during which the restrictions lapse.

Teradyne grants performance-based restricted stock units (“PRSUs”) to its executive officers with a performance metric based on relative total shareholder return (“TSR”). For TSR grants issued in 2018, 2017, and 2016, Teradyne’s three-year TSR performance is measured against the New York Stock Exchange (“NYSE”) Composite Index. The final number of TSR PRSUs that vest will vary based upon the level of performance achieved from 200% to 0% of the target shares capped at four times the grant date value. The TSR PRSUs will vest upon the three-year anniversary of the grant date. The TSR PRSUs are valued using a Monte Carlo simulation model. The number of units expected to be earned, based upon the achievement of the TSR market condition, is factored into the grant date Monte Carlo valuation. Compensation expense is recognized on a straight-line basis over the shorter of the three-year service period or the period from the grant to the date described in the retirement provisions below. Compensation expense for employees meeting the retirement provisions prior to the grant date will be recognized in full on the date of the grant. Compensation expense is recognized regardless of the eventual number of units that are earned based upon the market condition, provided

the executive officer remains an employee at the end of the three-year period. Compensation expense is reversed if at any time during the three-year service period the executive officer is no longer an employee, subject to the retirement and termination eligibility provisions noted below.

In January 2018, 2017, and 2016, Teradyne granted PRSUs to its executive officers with a performance metric based on three-year cumulative non-GAAP profit before interest and tax (“PBIT”) as a percent of Teradyne’s revenue. Non-GAAP PBIT is a financial measure equal to GAAP income from operations less restructuring and other, net; amortization of acquired intangible assets; acquisition and divestiture related charges or credits; pension actuarial gains and losses; non-cash convertible debt interest expense; and other non-recurring gains and charges. The final number of PBIT PRSUs that vest will vary based upon the level of performance achieved from 200% to 0% of the target shares. The PBIT PRSUs will vest upon the three-year anniversary of the grant date. Compensation expense is recognized on a straight-line basis over the three-year service period. 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.

During 2018, 2017, and 2016, Teradyne granted 0.1 million TSR PRSUs, with a grant date fair value of $54.85, $35.66 and $20.29, respectively. The fair value was estimated using the Monte Carlo simulation model with the following assumptions:


	2018			2017			2016
Risk-free interest rate		2.2	%		1.5	%		1.0	%
Teradyne volatility-historical		26.8	%		26.6	%		27.0	%
NYSE Composite Index volatility-historical		12.4	%		13.4	%		13.1	%
Dividend yield		0.8	%		1.0	%		1.2	%

Expected volatility was based on the historical volatility of Teradyne’s stock and the NYSE Composite Index for the 2018, 2017 and 2016 grants, 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 for 2018, 2017 and 2016 was based upon an estimated annual dividend amount of $0.36 per share for 2018, $0.28 per share for 2017 and $0.24 per share for 2016 divided by Teradyne’s stock price on the grant date of $47.70 for the 2018 grant, $28.56 for the 2017 grant, and $19.43 for the 2016 grant.

During 2018, 2017, and 2016, Teradyne granted 0.1 million PBIT PRSUs with a grant date fair value of $46.62, $27.72 and $18.71, respectively.

During 2018, 2017, and 2016, Teradyne granted 0.6 million, 0.8 million, and 1.2 million of service-based restricted stock unit awards to employees, respectively, at a weighted average grant date fair value of $45.92, $28.19, and $18.88, respectively.

During 2018, 2017, and 2016, Teradyne granted 0.1 million of service-based restricted stock unit awards to non-employee directors at a weighted average grant date fair value of $35.81, $34.48, and $18.71, respectively.

During 2018, 2017, and 2016, Teradyne granted 0.1 million of service-based stock options to executive officers at a weighted average grant date fair value of $12.17, $7.13, and $5.30, respectively.

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


	2018			2017			2016
Expected life (years)		5.0			5.0			5.0
Risk-free interest rate		2.4	%		2.0	%		1.4	%
Volatility-historical		26.4	%		27.8	%		32.9	%
Dividend yield		0.80	%		1.00	%		1.20	%

Teradyne determined the stock option’s expected life based upon historical exercise data for executive officers, the age of executives and the terms of the stock option award. Volatility was determined using historical volatility for a period equal to the expected life. The interest rate was determined using the U.S. Treasury yield curve in effect at the time of grant. Dividend yield was based upon an estimated annual dividend amount of $0.36 per share for 2018, $0.28 per share for 2017, and $0.24 per share for 2016 divided by Teradyne’s stock price on the grant date of $47.70 for the 2018 grants, $28.56 for the 2017 grants, and $19.43 for the 2016 grants.

Stock compensation plan activity for the years 2018, 2017, and 2016 is as follows:


	2018			2017			2016
	(in thousands)
Restricted Stock Units:
Non-vested at January 1		3,174			3,778			4,070
Awarded		790			939			1,471
Vested		(1,382	)		(1,434	)		(1,530	)
Forfeited		(128	)		(109	)		(233	)

Non-vested at December 31		2,454			3,174			3,778

Stock Options:
Outstanding at January 1		531			926			1,121
Granted		69			111			130
Exercised		(94	)		(501	)		(324	)
Expired		—			(5	)		(2	)

Outstanding at December 31		506			531			926

Vested and expected to vest at December 31		506			531			926

Exercisable at December 31		256			233			598

Total shares available for the years 2018, 2017, and 2016:


	2018			2017			2016
	(in thousands)
Shares available:
Available for grant at January 1		8,605			9,546			10,914
Options granted		(69	)		(111	)		(130	)
Restricted stock units awarded		(790	)		(939	)		(1,471	)
Restricted stock units forfeited		128			109			233

Available for grant at December 31		7,874			8,605			9,546

Weighted average restricted stock unit award date fair value information for the years 2018, 2017, and 2016 is as follows:


	2018		2017		2016
Non-vested at January 1	$	21.71	$	18.27	$	17.66
Awarded		45.99		28.91		18.95
Vested		20.20		17.90		17.36
Forfeited		24.67		20.35		17.80
Non-vested at December 31	$	29.22	$	21.71	$	18.27

Restricted stock unit awards aggregate intrinsic value information at December 31 for the years 2018, 2017, and 2016 is as follows:


	2018		2017		2016
	(in thousands)
Vested	$	63,688	$	40,649	$	30,008
Outstanding		77,015		132,875		95,952
Expected to vest		77,187		130,594		91,871

Restricted stock units weighted average remaining contractual terms (in years) information at December 31, for the years 2018, 2017, and 2016 is as follows:


	2018		2017		2016
Outstanding		0.92		1.00		1.04
Expected to vest		0.91		0.99		1.03

Weighted average stock options exercise price information for the year ended December 31, 2018 is as follows:


	2018
Outstanding at January 1	$	13.92
Options granted		47.70
Options exercised		10.89
Outstanding at December 31		19.06
Exercisable at December 31		8.31

The total cash received from employees as a result of employee stock options exercises during the years ended December 31, 2018, 2017, and 2016, was $1.0 million, $6.8 million and $2.9 million, respectively. In connection with these exercises, the tax benefit realized by Teradyne for the years ended December 31, 2018, 2017, and 2016, was $0.4 million, $2.5 million, and $0.8 million, respectively.

Stock option aggregate intrinsic value information for the years ended December 31, 2018, 2017, and 2016 is as follows:


	2018		2017		2016
	(in thousands)
Exercised	$	2,960	$	8,035	$	3,729
Outstanding		7,359		14,831		12,468
Vested and expected to vest		7,359		14,831		12,468
Exercisable		5,905		9,076		10,217

Stock options weighted average remaining contractual terms (in years) information at December 31, for the years 2018, 2017, and 2016 is as follows:


	2018		2017		2016
Outstanding		3.6		4.1		3.9
Vested and expected to vest		3.6		4.1		3.9
Exercisable		2.4		2.8		3.2

Significant option groups outstanding at December 31, 2018 and related weighted average price and remaining contractual life information follow:


	Options Outstanding						Options Exercisable
Range Of Exercise Prices	Weighted- Average Remaining Contractual Life (Years)		Shares		Weighted- Average Exercise Price		Shares		Weighted- Average Exercise Price
	(shares in thousands)
$1.48 – $2.58		1.23		67	$	1.83		67	$	1.83
$2.67 – $3.28		2.20		103		2.69		103		2.69
$7.71 – $19.43		3.41		166		18.59		68		18.02
$28.56 – $47.70		5.62		170		36.30		18		28.56

				506	$	19.06		256	$	8.31

As of December 31, 2018, total unrecognized expense related to non-vested restricted stock unit awards and stock options was $44 million, and is expected to be recognized over a weighted average period of 2.4 years.

Employee Stock Purchase Plan

Under the ESPP, eligible employees may purchase shares of common stock through regular payroll deductions of up to 10% of their compensation, to a maximum of shares with a fair market value of $25,000 per calendar year, not to exceed 6,000 shares. Under the plan, the price paid for the common stock is equal to 85% of the stock price on the last business day of the six-month purchase period.

In July 2018, 0.3 million shares of common stock were issued to employees who participated in the plan during the first half of 2018 at the price of $32.36 per share. In January 2019, Teradyne issued 0.4 million shares of common stock to employees who participated in the plan during the second half of 2018 at the price of $26.67 per share.

In July 2017, 0.3 million shares of common stock were issued to employees who participated in the plan during the first half of 2017 at the price of $25.53 per share. In January 2018, Teradyne issued 0.3 million shares of common stock to employees who participated in the plan during the second half of 2017 at the price of $35.59 per share.

In July 2016, 0.5 million shares of common stock were issued to employees who participated in the plan during the first half of 2016 at the price of $16.74 per share. In January 2017, Teradyne issued 0.4 million shares of common stock to employees who participated in the plan during the second half of 2016 at the price of $21.59 per share.

As of December 31, 2018, there were 2.5 million shares available for grant under the ESPP.

The following table provides the effect to income from operations for recording stock-based compensation for the years ended December 31, 2018, 2017, and 2016:


	2018			2017			2016
	(in thousands)
Cost of revenues	$	3,129		$	3,212		$	3,153
Engineering and development		9,181			9,370			9,458
Selling and administrative		21,267			21,515			18,139

Stock-based compensation		33,577			34,097			30,750
Income tax benefit		(12,036	)		(10,462	)		(8,752	)

Total stock-based compensation expense after income taxes	$	21,541		$	23,635		$	21,998

P. SAVINGS PLAN

Teradyne sponsors a defined contribution employee retirement savings plan (“Savings Plan”) covering substantially all U.S. employees. Under the Savings Plan, employees may contribute up to 20% of their compensation (subject to Internal Revenue Service limitations). The Savings Plan provides for a discretionary employer match that is determined each year. In 2018, 2017 and 2016, Teradyne matched 100% of eligible employee contributions up to 4% of their compensation for employees not accruing benefits in the U.S. Qualified Pension Plan. There was no match for employees still actively accruing benefits in the U.S. Qualified Pension Plan. Teradyne’s contributions vest 25% per year for the first four years of employment, and contributions for those employees with four years of service vest immediately.

In addition, Teradyne established an unfunded U.S. Supplemental Savings Plan to provide savings benefits in excess of those allowed by the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code. The provisions of this plan are the same as the Savings Plan. The liability for the U.S. Supplemental Savings Plan at December 31, 2018 and 2017, was $24.4 million and $23.4 million, respectively, and is included in retirement plan liabilities. Teradyne also established defined contribution savings plans for its foreign employees. Under Teradyne’s savings plans, amounts charged to the statements of operations for the years ended December 31, 2018, 2017, and 2016 were $17.2 million, $15.3 million, and $14.5 million, respectively.

Q. INCOME TAXES

The components of income (loss) before income taxes and the provision (benefit) for income taxes as shown in the consolidated statements of operations were as follows:


	2018			2017			2016
	(in thousands)
Income (loss) before income taxes:
U.S.	$	189,691		$	76,699		$	(341,018	)
Non-U.S.		278,110			447,713			285,958

	$	467,801		$	524,412		$	(55,060	)

Provision (benefit) for income taxes:
Current:
U.S. Federal	$	(59,122	)	$	162,679		$	7,750
Non-U.S.		45,083			64,313			41,579
State		1,721			2,623			1,968

		(12,318	)		229,615			51,297

Deferred:
U.S. Federal		29,252			43,687			(51,482	)
Non-U.S.		(1,243	)		(6,476	)		(9,240	)
State		331			(106	)		(2,214	)

		28,340			37,105			(62,936	)

Total provision (benefit) for income taxes:	$	16,022		$	266,720		$	(11,639	)

Income tax expense for 2018 and 2017 totaled $16.0 and $266.7 million, respectively. Income tax benefit for 2016 totaled $11.6 million. The effective tax rate for 2018, 2017 and 2016 was 3.4%, 50.9%, and 21.1%, respectively.

On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act of 2017 (the “Tax Reform Act”), making significant changes to the Internal Revenue Code. The Tax Reform Act has significant direct and indirect implications for accounting for income taxes under ASC 740, “Accounting for Income Taxes” some of which could not be calculated with precision until further clarification and guidance was made available from tax authorities, regulatory bodies or the FASB. In light of this uncertainty, on December 22, 2017 the SEC issued Staff Accounting Bulletin (“SAB”) No. 118, “Income Tax Accounting Implications of the Tax Cuts and Jobs Act,” to address uncertainty in the application of U.S. GAAP when the registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Reform Act. In accordance with SAB 118, Teradyne recorded a provisional amount of $186.0 million of additional income tax expense in the fourth quarter of 2017 which represented Teradyne’s best estimate of the impact of the Tax Reform Act in accordance with Teradyne’s understanding of the Tax Reform Act and available guidance as of that date. The $186.0 million was primarily composed of expense of $161.0 million related to the one-time transition tax on the mandatory deemed repatriation of foreign earnings, $33.6 million of expense related to the remeasurement of certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, and a benefit of $10.3 million associated with the impact of correlative adjustments on uncertain tax positions. In accordance with the requirements of SAB 118, in the fourth quarter of 2018 Teradyne completed its analysis of the effect of the Tax Reform Act based on the application of the most recently available guidance as of December 31, 2018 and recorded $49.5 million of net income tax benefit. The net benefit consisted of $51.7 million of benefit resulting from a reduction in the estimate of the one-time transition tax on the mandatory deemed repatriation of foreign earnings and an expense of $2.2 million associated with the impact of correlative adjustments on uncertain tax positions.

The Tax Reform Act also includes a new U.S. tax base erosion provision, the global intangible low-taxed income (“GILTI”) provision, which imposes a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. Teradyne has made an accounting policy election to account for GILTI as a component of tax expense in the period in which Teradyne is subject to the rules and therefore did not provide any deferred tax impacts of GILTI in its consolidated financial statements.

The decrease in the effective tax rate from 2017 to 2018 was primarily attributable to the $186.0 million of income tax expense recorded in the fourth quarter of 2017 as a provisional estimate of the impact of the Tax Reform Act and the $51.7 million of income tax benefit recorded in the fourth quarter of 2018 resulting from a reduction in the estimate of the one-time transition tax on the mandatory deemed repatriation of foreign earnings and an expense of $2.2 million associated with the impact of correlative adjustments on uncertain tax positions. The change in the effective tax rate from 2017 to 2018 was also impacted by a shift in the geographic distribution of income which increased income subject to taxation in the U.S. relative to lower tax rate jurisdictions, the benefit of the U.S. foreign derived intangible income deduction and increases in discrete benefit from non-taxable foreign exchange gains and losses.

The increase in the effective tax rate from 2016 to 2017 was primarily attributable to the $186.0 million of income tax expense recorded in the fourth quarter of 2017 as a provisional estimate of the impact of the Tax Reform Act. The change in the effective rate from 2016 to 2017 was also impacted by the U.S. non-deductible goodwill impairment charge recorded in 2016, a shift in the geographic distribution of income which increased income subject to taxation in the U.S. relative to lower tax rate jurisdictions, decreases in the discrete benefits from tax reserve releases, increases in discrete expense from non-taxable foreign exchange gains and losses and an increase in the discrete benefit from stock-based compensation.

A reconciliation of the effective tax rate for the years 2018, 2017, and 2016 is as follows:


	2018			2017			2016
U.S. statutory federal tax rate		21.0	%		35.0	%		35.0	%
U.S. transition tax		(10.5	)		28.7			—
U.S. foreign derived intangible income		(1.8	)		—			—
Impact of rate change on deferred tax		0.3			6.9			—
Uncertain tax positions		1.0			1.7			(2.6	)
Foreign taxes		(2.0	)		(16.3	)		78.0
Foreign tax credits		(2.2	)		(2.2	)		49.1
U.S. research and development credit		(2.2	)		(1.6	)		15.8
Equity compensation		(1.2	)		(0.8	)		(2.7	)
State income taxes, net of federal tax benefit		0.1			(0.4	)		2.3
Domestic production activities deduction		—			(0.3	)		2.3
Goodwill impairment		—			—			(162.1	)
U.S. alternative minimum tax credit		—			—			3.7
Inventory cost capitalization		—			—			1.8
Other, net		0.9			0.2			0.5

		3.4	%		50.9	%		21.1	%

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 attributable to the Singapore tax holiday for the years ended December 31, 2018, 2017 and 2016 were $11.9 million or $0.06 per diluted share, $24.8 million or $0.12 per diluted share and $17.0 million or $0.08 per diluted share, respectively. The tax holiday is scheduled to expire on December 31, 2020.

Significant components of Teradyne’s deferred tax assets (liabilities) as of December 31, 2018 and 2017 were as follows:


	2018			2017
	(in thousands)
Deferred tax assets:
Tax credits	$	69,091		$	76,083
Accruals		23,449			27,508
Pension liabilities		20,826			22,602
Inventory valuations		18,514			17,793
Deferred revenue		9,130			9,016
Equity compensation		7,190			6,861
Vacation accrual		4,772			4,747
Net operating loss carryforwards		3,658			5,440
Marketable securities		962			—
Other		685			713

Gross deferred tax assets		158,277			170,763
Less: valuation allowance		(69,852	)		(63,919	)

Total deferred tax assets	$	88,425		$	106,844

Deferred tax liabilities:
Intangible assets	$	(24,211	)	$	(16,120	)
Depreciation		(14,028	)		(12,293	)
Marketable securities		—			(1,125	)

Total deferred tax liabilities	$	(38,239	)	$	(29,538	)

Net deferred assets	$	50,186		$	77,306

As of December 31, 2018 and 2017, Teradyne evaluated the likelihood that it would realize the deferred income taxes to offset future taxable income and concluded that it is more likely than not that a substantial majority of its deferred tax assets will be realized through consideration of both the positive and negative evidence. At December 31, 2018 and 2017, Teradyne maintained a valuation allowance for certain deferred tax assets of $69.9 million and $63.9 million, respectively, primarily related to state net operating losses and state tax credit carryforwards, due to the uncertainty regarding their realization. Adjustments could be required in the future if Teradyne estimates that the amount of deferred tax assets to be realized is more or less than the net amount recorded.

At December 31, 2018, Teradyne had operating loss carryforwards that expire in the following years:


	State Operating Loss Carryforwards		Foreign Operating Loss Carryforwards
	(in thousands)
2019	$	258	$	—
2020		269		—
2021		2,977		—
2022		5,749		—
2023		6,241		—
2024-2028		4,672		—
2029-2033		22,724		44
Beyond 2033		5,305		72
Non-expiring		—		4,389

Total	$	48,195	$	4,505

Teradyne has approximately $98.4 million of tax credit carryforwards including federal business tax credits of approximately $0.9 million which expire in 2028, and state tax credits of $97.5 million, of which $55.6 million do not expire and the remainder expires in the years 2019 through 2038.

Teradyne’s gross unrecognized tax benefits for the years ended December 31, 2018, 2017, and 2016 were as follows:


	2018			2017			2016
	(in thousands)
Beginning balance, as of January 1	$	36,263		$	38,958		$	36,792
Additions:
Tax positions for current year		4,716			8,208			9,766
Tax positions for prior years		2,626			199			187
Reductions:
Tax positions for prior years		(153	)		(10,573	)		(1,960	)
Expiration of statutes		(57	)		(325	)		(3,532	)
Settlements with tax authorities		—			(204	)		(2,295	)

Ending balance as of December 31	$	43,395		$	36,263		$	38,958

Current year and prior year additions include assessment of potential transfer pricing issues worldwide, federal and state tax credits and incentives, capitalization rules, domestic production activities deductions and correlative effects of the transition tax charge. Of the $43.4 million of unrecognized tax benefits as of December 31, 2018, $30.7 million would impact the consolidated income tax rate if ultimately recognized. The remaining $12.6 million would impact deferred taxes if recognized.

On February 4, 2019, the IRS issued a closing audit letter related to the U.S. Federal income tax return for the year ended December 31, 2015 indicating that there was no change to the reported tax. As a result of the completion of the 2015 audit, Teradyne anticipates recording a $33.8 million reduction in the balance of unrecognized tax benefits in the first quarter of 2019 primarily composed of federal and state reserves related to transfer pricing and research credits. Of the $33.8 million reduction in the balance of unrecognized tax benefits, $5.9 million will be offset by valuation allowance. The remaining $27.9 million, net of a $2.0 million reduction for the federal benefit of state reserves, will be recognized as an income tax benefit. Teradyne estimates that it is reasonably possible that the balance of unrecognized tax benefits as of December 31, 2018 may decrease an additional $0.2 million in the next twelve months, as a result of the lapse of statutes of limitation.

Teradyne records all interest and penalties related to income taxes as a component of income tax expense. Accrued interest and penalties related to income tax items at December 31, 2018 and 2017 amounted to $0.3 million and $0.3 million, respectively. For the years ended December 31, 2018, 2017, and 2016, expense of $0.1 million, benefit of $0.1 million and benefit of $0.1 million, respectively, was recorded for interest and penalties related to income tax items.

Teradyne is subject to U.S. federal income tax, as well as income tax in multiple state, local and foreign jurisdictions. As of December 31, 2018, all material state and local income tax matters have been concluded through 2013, all material federal income tax matters have been concluded through 2014 and all material foreign income tax matters have been concluded through 2012. However, in some jurisdictions, including the United States, operating losses and tax credits may be subject to adjustment until such time as they are utilized and the year of utilization is closed to adjustment.

As of December 31, 2018, Teradyne is not permanently reinvested with respect to the unremitted earnings of non-U.S. subsidiaries to the extent that those earnings exceed local statutory and operational requirements. Remittance of those earnings is not expected to result in material income tax.

R. OPERATING SEGMENT, GEOGRAPHIC AND SIGNIFICANT CUSTOMER INFORMATION

Teradyne has four reportable segments (Semiconductor Test, System Test, Industrial Automation and Wireless Test). Each of the Semiconductor Test, System Test, and Wireless Test segments is also an individual operating segment. The Industrial Automation reportable segment consists of operating segments with discrete financial information, which have been combined into one reportable segment as they share similar economic characteristics, types of products, production processes, distribution channels, and currency risks. The Semiconductor Test segment includes operations related to the design, manufacturing and marketing of semiconductor test products and services. The System Test segment includes operations related to the design, manufacturing and marketing of products and services for defense/aerospace instrumentation test, storage test and circuit-board test. The Industrial Automation segment includes operations related to the design, manufacturing and marketing of collaborative robotic arms, autonomous mobile robots and advanced robotic control software. The Wireless Test segment includes operations related to the design, manufacturing and marketing of wireless test products and services.

Teradyne evaluates performance based on several factors, of which the primary financial measure is business segment income (loss) before income taxes. The accounting policies of the business segments are the same as those described in Note B: “Accounting Policies.”

Segment information for the years ended December 31, 2018, 2017, and 2016 is as follows:


	Semiconductor Test		System Test		Industrial Automation			Wireless Test			Corporate And Other			Consolidated
	(in thousands)
2018
Revenues	$	1,492,417	$	216,132	$	261,452		$	132,006		$	(1,205	)	$	2,100,802
Income (loss) before taxes (1)(2)		397,645		48,857		7,670			29,052			(15,423	)		467,801
Total assets (3)		669,452		88,098		607,502			77,570			1,263,984			2,706,606
Property additions		94,496		3,469		11,188			5,226			—			114,379
Depreciation and amortization expense		58,095		6,430		36,755			5,328			6,616			113,224
2017
Revenues	$	1,662,549	$	192,135	$	170,056		$	111,866		$	—		$	2,136,606
Income (loss) before taxes (1)(2)		491,361		10,305		8,763			17,350			(3,368	)		524,411
Total assets (3)		597,480		97,018		368,037			59,912			1,987,098			3,109,545
Property additions		87,920		5,976		7,044			4,435			—			105,375
Depreciation and amortization expense		58,901		6,646		25,711			5,392			11,425			108,075
2016
Revenues	$	1,368,169	$	189,846	$	99,031		$	96,204		$	—		$	1,753,250
Income (loss) before taxes (1)(2)		311,939		28,916		(16,783	)		(371,409	)		(7,723	)		(55,060	)
Total assets (3)		557,546		110,361		317,635			62,366			1,714,585			2,762,493
Property additions		70,543		3,788		6,755			4,186			—			85,272
Depreciation and amortization expense		58,087		6,551		26,869			25,921			2,581			120,009

(1)	Included in Corporate and Other are: contingent consideration adjustments, pension and postretirement plans actuarial gains (losses), severance charges, impairment of fixed assets and expenses related to the Japan earthquake, property insurance recovery, interest income, interest expense, net foreign exchange gains (losses), intercompany eliminations and acquisition related charges.

(2)	Included in income (loss) before taxes are charges and credits related to restructuring and other, and inventory charges. In 2016, loss before income taxes in Wireless Test also included charges related to goodwill and acquired intangible assets impairment.

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

Included in the Semiconductor Test segment are charges in the following accounts:


	For the Year Ended December 31,
	2018		2017		2016
	(in thousands)
Restructuring and other—employee severance	$	8,429	$	1,779	$	2,860
Cost of revenues—inventory charge		6,822		4,606		9,656
Restructuring and other—impairment of fixed assets		—		1,124		—

Included in the System Test segment are charges in the following accounts:


	For the Year Ended December 31,
	2018		2017		2016
	(in thousands)
Cost of revenues—inventory charge	$	1,175	$	1,918	$	630

Included in the Industrial Automation segment are charges in the following accounts:


	For the Year Ended December 31,
	2018		2017		2016
	(in thousands)
Restructuring and other—acquisition related expenses and compensation	$	1,163	$	—	$	—
Cost of revenues—inventory charge		680		—		—
Restructuring and other—employee severance		—		1,414		585

Included in the Wireless Test segment are charges in the following accounts:


	For the Year Ended December 31,
	2018		2017		2016
	(in thousands)
Cost of revenues—inventory charge	$	2,565	$	2,190	$	7,207
Restructuring and other—lease impairment		—		972		—
Restructuring and other—employee severance		—		—		2,650
Goodwill impairment charge		—		—		254,946
Intangible assets impairment charge		—		—		83,339

Included in Corporate and Other are charges and credits in the following accounts:


	For the Year Ended December 31,
	2018			2017			2016
	(in thousands)
Restructuring and other—MiR contingent consideration adjustment	$	17,666		$	—		$	—
Restructuring and other—Universal Robots contingent consideration adjustment		(16,679	)		7,820			15,346
Restructuring and other—acquisition related expenses		3,422			—			—
Restructuring and other		872			—			—
Restructuring and other—expense related to Japan earthquake and impairment of fixed assets		—			755			5,051
Restructuring and other—property insurance recovery		—			(5,064	)		(5,051	)

Information as to Teradyne’s revenues by country is as follows:


	2018		2017		2016
	(in thousands)
Revenues from customers (1):
Taiwan	$	516,322	$	687,031	$	653,076
China		348,942		260,451		174,876
United States		282,869		252,516		221,948
Europe		223,207		163,715		117,671
Korea		163,224		206,819		147,882
Japan		158,281		169,093		135,978
Malaysia		122,797		124,048		103,472
Singapore		108,618		101,085		73,172
Philippines		77,996		105,850		54,705
Thailand		59,184		29,566		43,097
Rest of the World		39,362		36,432		27,373

	$	2,100,802	$	2,136,606	$	1,753,250

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

In 2018, no single customer accounted for more than 10% of total consolidated revenue. In 2017 and 2016, one customer of Teradyne’s Semiconductor Test segment accounted for 13% and 12%, respectively, of total consolidated revenues. In 2016, a different customer of Teradyne’s Semiconductor Test segment accounted for 12% of total consolidated revenues. Teradyne estimates consolidated revenues driven by a single OEM customer, combining direct sales to that customer with sales to the customer’s outsourced semiconductor assembly and test providers (“OSATs”), accounted for approximately 13%, 22%, and 26% of Teradyne’s consolidated revenues in 2018, 2017, and 2016, respectively.

Long-lived assets by geographic area:


	United States		Foreign(1)		Total
	(in thousands)
December 31, 2018	$	209,368	$	70,453	$	279,821
December 31, 2017	$	198,855	$	69,592	$	268,447

(1)	As of December 31, 2018 and 2017, long-lived assets attributable to Singapore were $19.4 million and $23.6 million, respectively.

S. STOCK REPURCHASE PROGRAM

In January 2015, Teradyne’s Board of Directors authorized a stock repurchase program for up to $500 million of common stock. In 2016, Teradyne repurchased 6.8 million shares of common stock at an average price of $21.39, for a total cost of $146 million. The cumulative repurchases as of December 31, 2016 totaled 22.5 million shares of common stock for $446 million at an average price per share of $19.87.

In December 2016, Teradyne’s Board of Directors cancelled the January 2015 stock repurchase program and approved a new $500 million share repurchase authorization which commenced on January 1, 2017. The cumulative repurchases as of December 31, 2017 totaled 5.8 million shares of common stock for $200 million at an average price per share of $34.30.

In January 2018, Teradyne’s Board of Directors cancelled the December 2016 stock repurchase program and authorized a new stock repurchase program for up to $1.5 billion of common stock. The cumulative repurchases as of December 31, 2018 totaled 21.6 million shares of common stock for $823.5 million at an average price per share of $38.06. Teradyne intends to repurchase $500 million in 2019.

T. SUBSEQUENT EVENTS

In January 2019, Teradyne’s Board of Directors declared a quarterly cash dividend of $0.09 per share to be paid on March 22, 2019 to shareholders of record as of February 22, 2019.

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.

SUPPLEMENTARY INFORMATION

(Unaudited)

The following sets forth certain unaudited consolidated quarterly statements of operations data for each of Teradyne’s last eight quarters. In management’s opinion, this quarterly information reflects all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement for the periods presented. Such quarterly results are not necessarily indicative of future results of operations and should be read in conjunction with the audited consolidated financial statements of Teradyne and the notes thereto included elsewhere herein.


	2018
	1st Quarter			2nd Quarter			3rd Quarter			4th Quarter
	(1)			(2)(5)			(3)(5)			(4)(5)
	(in thousands, except per share amounts)
Revenues:
Products	$	403,925		$	434,051		$	470,994		$	420,652
Services		83,542			92,878			95,854			98,906

Total revenues		487,467			526,929			566,848			519,558
Cost of revenues:
Cost of products		180,958			180,777			195,339			170,064
Cost of services		36,677			38,818			37,816			39,959

Total cost of revenues (exclusive of acquired intangible assets amortization shown separately below)		217,635			219,595			233,155			210,023

Gross profit		269,832			307,334			333,693			309,535

Operating expenses:
Selling and administrative		90,505			99,410			100,202			100,552
Engineering and development		74,408			75,342			77,049			74,706
Acquired intangible assets amortization		7,698			9,793			11,142			10,558
Restructuring and other		(313	)		2,389			1,710			11,446

Total operating expenses		172,298			186,934			190,103			197,262

Income (loss) from operations		97,534			120,400			143,590			112,273
Non-operating (income) expense:
Interest income		(5,981	)		(5,427	)		(6,213	)		(9,083	)
Interest expense		6,890			5,639			5,557			13,182
Other (income) expense, net		805			176			3,405			(2,954	)

Income (loss) before income taxes		95,820			120,012			140,841			111,128
Income tax provision (benefit)		8,846			18,975			20,863			(32,662	)

Net income (loss)	$	86,974		$	101,037		$	119,978		$	143,790

Net income (loss) per common share—basic	$	0.45		$	0.53		$	0.65		$	0.80

Net income (loss) per common share—diluted	$	0.43		$	0.52		$	0.63		$	0.79

Cash dividend declared per common share	$	0.09		$	0.09		$	0.09		$	0.09

(1)	Restructuring and other includes a $3.5 million gain for the decrease in the fair value of the Universal Robots contingent consideration liability, partially offset by $2.5 million of acquisition related expenses and compensation and $2.4 million of employee severance charges.

(2)	Restructuring and other includes a $5.0 million gain for the decrease in the fair value of the Universal Robots contingent consideration liability, partially offset by $3.9 million of employee severance charges and $0.8 million of acquisition related expenses and compensation.

(3)	Restructuring and other includes $1.7 million of employee severance charges, $0.8 million of acquisition related expenses and compensation, partially offset by a $0.8 million gain for the decrease in the fair value of the Universal Robots contingent consideration liability.

(4)	Restructuring and other includes a $17.7 million fair value adjustment to increase the MiR acquisition contingent consideration, $0.8 million of employee severance charges, and $0.5 million acquisition related expenses and compensation, partially offset by a $7.4 million gain for the decrease in the fair value of the Universal Robots contingent consideration liability.

(5)	Teradyne recorded pension and post retirement net actuarial (gains) losses of $(0.1) million, $0.3 million and $(3.5) million for the second, third and fourth quarter in 2018, respectively. See Note B: “Accounting Policies” for a discussion of Teradyne’s accounting policy.


	2017
	1st Quarter			2nd Quarter			3rd Quarter			4th Quarter
	(1)			(2)(5)			(3)			(4)(5)
	(in thousands, except per share amounts)
Revenues:
Products	$	373,204		$	610,356		$	412,854		$	388,282
Services		83,709			86,545			90,524			91,133

Total revenues		456,913			696,901			503,378			479,415
Cost of revenues:
Cost of products		154,883			267,752			169,661			168,672
Cost of services		37,014			38,511			38,848			39,813

Total cost of revenues (exclusive of acquired intangible assets amortization shown separately below)		191,897			306,263			208,509			208,485

Gross profit		265,016			390,638			294,869			270,930

Operating expenses:
Selling and administrative		84,792			90,111			86,130			87,880
Engineering and development		75,978			82,270			76,986			72,070
Acquired intangible assets amortization		7,952			8,166			7,028			7,384
Restructuring and other		2,511			2,288			(4,407	)		8,970

Total operating expenses		171,233			182,835			165,737			176,304

Income from operations		93,783			207,803			129,132			94,626
Non-operating (income) expense:
Interest income		(3,520	)		(3,292	)		(4,517	)		(6,476	)
Interest expense		5,402			5,509			5,372			5,380
Other (income) expense, net		(115	)		(1,291	)		840			(2,362	)

Income before income taxes		92,016			206,877			127,437			98,084
Income tax provision		6,795			31,901			24,017			204,007

Net income (loss)	$	85,221		$	174,976		$	103,420		$	(105,923	)

Net income (loss) per common share—basic	$	0.43		$	0.88		$	0.52		$	(0.54	)

Net income (loss) per common share—diluted	$	0.42		$	0.87		$	0.52		$	(0.54	)

Cash dividend declared per common share	$	0.07		$	0.07		$	0.07		$	0.07

(1)	Restructuring and other includes a $1.3 million charge for a lease impairment of a Wireless Test facility in Sunnyvale, CA, a $0.6 million fair value adjustment to increase the Universal Robots acquisition contingent consideration, and $0.6 million of employee severance charges.

(2)	Restructuring and other includes a $1.5 million charge for a fair value adjustment to increase the Universal Robots acquisition contingent consideration, and $0.8 million of employee severance charges.

(3)

Restructuring and other includes $5.1 million of property insurance recovery related to the Japan earthquake, a $0.4 million credit related to previously impaired lease termination of a Wireless Test facility in Sunnyvale, CA, and a $0.3 million credit for the decrease in the fair value of the Universal Robots contingent consideration liability, partially offset by $0.8 million of Japan earthquake related expenses and $0.6 million of employee severance charges.

(4)	Restructuring and other includes a $6.0 million fair value adjustment to increase the Universal Robots acquisition contingent consideration, $1.8 million of employee severance charges, and $1.1 million of charges for impairment of fixed assets.

(5)	Teradyne recorded pension and post retirement net actuarial gains of $2.8 million and $3.8 million for the second and fourth quarter in 2017, respectively. See Note B: “Accounting Policies” for a discussion of Teradyne’s accounting policy.

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