filings.toolsItem 8. Financial Statements and Supplementary Data
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Item 8. Financial Statements and Supplementary Data
| --- | --- |
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, 2019 and 2018, and the related consolidated statements of operations, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2019, including the related notes and schedule of valuation and qualifying accounts for each of the three years in the period ended December 31, 2019 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, 2019, 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, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019 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, 2019, based on criteria established in
Internal Control - Integrated Framework
(2013) issued by the COSO.
Changes in Accounting Principles
As discussed in Note B to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019 and 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.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Acquisition of AutoGuide, LLC - Valuation of Contingent Consideration and Developed Technology Intangible Asset
As described in Notes B, D and H to the consolidated financial statements, the Company completed its acquisition of AutoGuide, LLC on November 13, 2019. The total purchase price of approximately $81.7 million included $57.8 million of cash paid and $24.0 million in fair value of contingent consideration, which was determined by management using the Monte Carlo simulation model. The valuation of the contingent consideration is dependent on the following assumptions: forecasted revenues, revenue volatility, earnings before interest and taxes, and discount rate. As part of the preliminary purchase price allocation, management recorded $24.6 million for the acquired developed technology intangible asset at fair value using the income approach. Management’s significant assumption utilized in the approach was the forecasted revenues.
The principal considerations for our determination that performing procedures relating to the valuation of contingent consideration and the acquired developed technology intangible asset in the AutoGuide, LLC acquisition is a critical audit matter are (i) there was a high degree of auditor judgment and subjectivity in applying procedures relating to the fair value measurement of the contingent consideration and the acquired developed technology intangible asset due to the significant amount of judgment by management when developing the fair value estimates, (ii) significant audit effort was required in evaluating the significant assumptions relating to the estimates, including forecasted revenues, revenue volatility, earnings before interest and taxes, and discount rate for the contingent consideration, and the forecasted revenues for the acquired developed technology intangible asset, and (iii) the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing procedures and evaluating the audit evidence obtained.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the acquisition accounting, including controls over management’s valuation of contingent consideration and the acquired developed technology intangible asset. These procedures also included, among others, (i) reading the purchase agreement, (ii) evaluating the appropriateness of the approaches and reasonableness of the significant assumptions used by management in developing the fair value for the contingent consideration and acquired developed technology intangible asset, including the forecasted revenues, revenue volatility, earnings before interest and taxes, and discount rate for the contingent consideration and the forecasted revenues for the acquired developed technology intangible asset, and (iii) testing the completeness, accuracy and relevance of the underlying data used in the approaches. Evaluating whether the significant assumptions used were reasonable involved evaluating historical results and consistency with external industry and market data. Professionals with specialized skill and knowledge were used to assist in the evaluation of the appropriateness of management’s Monte Carlo simulation model for the contingent consideration and the income approach for the acquired developed technology intangible asset, as well as the reasonableness of certain significant assumptions, including the discount rate.
Goodwill Impairment Assessment – Mobile Industrial Robots Reporting Unit
As described in Notes B and L to the consolidated financial statements, the Company’s consolidated goodwill balance was $416.4 million as of December 31, 2019, and the goodwill associated with the Mobile Industrial Robots reporting unit was $123.6 million. Management assesses goodwill for impairment at least annually in the fourth quarter, as of December 31, on a reporting unit basis, or more frequently when events and circumstances occur indicating that the recorded goodwill may be impaired. As disclosed by management, if the book value of a reporting unit exceeds its fair value, the implied fair value of goodwill is compared with the carrying amount of goodwill. If the carrying amount of goodwill exceeds the implied fair value of goodwill, an impairment charge is recorded in an amount equal to that excess. Management determines the fair value of a reporting unit using the results derived from an income approach and a market approach, and weighting the fair value determined under each approach to determine an estimated fair value for a reporting unit. Management’s estimate of fair value for the Mobile Industrial Robots reporting unit, using the income approach, utilized the following significant assumptions: forecasted revenues, discount rate and earnings before interest and taxes. The determination of fair value of the Mobile Industrial Robots reporting unit using the market approach utilized the following significant assumptions: revenue multiples from comparable companies.
The principal considerations for our determination that performing procedures relating to the goodwill impairment assessment of the Mobile Industrial Robots reporting unit is a critical audit matter are (i) there was a high degree of auditor judgment and subjectivity in applying procedures relating to the fair value measurement of the reporting unit due to the significant judgment by management when developing the fair value measurement of the reporting unit, (ii) significant audit effort was required in performing procedures and evaluating the audit evidence obtained relating to management’s fair value estimate and significant assumptions, including forecasted revenues, discount rate, and earnings before interest and taxes for the income approach and revenue multiples from comparable companies for the market approach, and (iii) the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessment, including controls over the valuation of the Mobile Industrial Robots reporting unit. These procedures also included, among others, testing management’s process for developing the fair value estimate, evaluating the appropriateness of the income approach and market approach, including the weighting of estimated fair value between the two approaches, testing the completeness, accuracy and relevance of underlying data used in the valuation approaches and evaluating the significant assumptions used by management, including forecasted revenues, discount rate,
earnings before interest and taxes, and revenue multiples from comparable companies. Evaluating management’s assumptions related to the forecasted revenues and earnings before interest and taxes involved assessing whether the assumptions used by management were reasonable considering the past performance of the reporting unit and the consistency of the assumptions with evidence obtained in other areas of the audit. Evaluating the market approach involved assessing whether the revenue multiples used by management were reasonable by comparing to revenue multiples for comparable companies. Professionals with specialized skill and knowledge were used to assist in the evaluation of the Company’s income approach and market approach, including the weighting of estimated fair value between the two approaches and certain significant assumptions, including the discount rate.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
March 2, 2020
We have served as the Company’s auditor since 1968.
TERADYNE, INC.
CONSOLIDATED BALANCE SHEETS
| 2019 | 2018 | |||||||
| (in thousands, except per share information) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 773,924 | $ | 926,752 | ||||
| Marketable securities | 137,303 | 190,096 | ||||||
| Accounts receivable, less allowance for doubtful accounts of $1,736 and $1,673 in 2019 and 2018, respectively | 362,368 | 291,267 | ||||||
| Inventories, net | 196,691 | 153,541 | ||||||
| Prepayments and other current assets | 188,598 | 170,826 | ||||||
| Total current assets | 1,658,884 | 1,732,482 | ||||||
| Property, plant and equipment, net | 320,216 | 279,821 | ||||||
| Operating lease right-of-use assets, net | 57,539 | — | ||||||
| Marketable securities | 104,490 | 87,731 | ||||||
| Deferred tax assets | 75,185 | 70,848 | ||||||
| Retirement plans assets | 18,457 | 16,883 | ||||||
| Other assets | 10,332 | 11,509 | ||||||
| Acquired intangible assets, net | 125,480 | 125,482 | ||||||
| Goodwill | 416,431 | 381,850 | ||||||
| Total assets | $ | 2,787,014 | $ | 2,706,606 | ||||
| LIABILITIES | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 126,617 | $ | 100,688 | ||||
| Accrued employees’ compensation and withholdings | 163,883 | 148,566 | ||||||
| Deferred revenue and customer advances | 104,876 | 77,711 | ||||||
| Other accrued liabilities | 70,871 | 78,272 | ||||||
| Operating lease liabilities | 19,476 | — | ||||||
| Contingent consideration | 9,106 | 34,865 | ||||||
| Income taxes payable | 44,200 | 36,185 | ||||||
| Total current liabilities | 539,029 | 476,287 | ||||||
| Retirement plans liabilities | 134,471 | 117,456 | ||||||
| Long-term deferred revenue and customer advances | 45,974 | 32,750 | ||||||
| Long-term contingent consideration | 30,599 | 35,678 | ||||||
| Deferred tax liabilities | 14,070 | 20,662 | ||||||
| Long-term other accrued liabilities | 19,535 | 37,547 | ||||||
| Long-term operating lease liabilities | 45,849 | — | ||||||
| Long-term income taxes payable | 82,642 | 83,891 | ||||||
| Debt | 394,687 | 379,981 | ||||||
| Total liabilities | 1,306,856 | 1,184,252 | ||||||
| Commitments and contingencies (Note M) | ||||||||
| SHAREHOLDERS’ EQUITY | ||||||||
| Common stock, $0.125 par value, 1,000,000 shares authorized, 166,410 and 175,522 shares issued and outstanding at December 31, 2019 and 2018, respectively | 20,801 | 21,940 | ||||||
| Additional paid-in capital | 1,720,129 | 1,671,645 | ||||||
| Accumulated other comprehensive los s | (18,854 | ) | (13,040 | ) | ||||
| Accumulated deficit | (241,918 | ) | (158,191 | ) | ||||
| Total shareholders’ equity | 1,480,158 | 1,522,354 | ||||||
| Total liabilities and shareholders’ equity | $ | 2,787,014 | $ | 2,706,606 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
TERADYNE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
| Years Ended December 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| (in thousands, except per share amounts) | ||||||||||||
| Revenues: | ||||||||||||
| Products | $ | 1,887,674 | $ | 1,729,621 | $ | 1,784,695 | ||||||
| Services | 407,291 | 371,181 | 351,911 | |||||||||
| Total revenues | 2,294,965 | 2,100,802 | 2,136,606 | |||||||||
| Cost of revenues: | ||||||||||||
| Cost of products | 782,047 | 727,138 | 760,967 | |||||||||
| Cost of services | 173,089 | 153,270 | 154,186 | |||||||||
| Total cost of revenues (exclusive of acquired intangible assets amortization shown separately below) | 955,136 | 880,408 | 915,153 | |||||||||
| Gross profit | 1,339,829 | 1,220,394 | 1,221,453 | |||||||||
| Operating expenses: | ||||||||||||
| Selling and administrative | 437,084 | 390,669 | 348,913 | |||||||||
| Engineering and development | 322,824 | 301,505 | 307,305 | |||||||||
| Acquired intangible assets amortization | 40,147 | 39,191 | 30,530 | |||||||||
| Restructuring and other | (13,880 | ) | 15,232 | 9,362 | ||||||||
| Total operating expenses | 786,175 | 746,597 | 696,110 | |||||||||
| Income from operations | 553,654 | 473,797 | 525,343 | |||||||||
| Non-operating (income) expenses: | ||||||||||||
| Interest income | (24,785 | ) | (26,704 | ) | (17,805 | ) | ||||||
| Interest expense | 23,145 | 31,269 | 21,663 | |||||||||
| Other (income) expense, net | 29,522 | 1,431 | (2,927 | ) | ||||||||
| Income before income taxes | 525,772 | 467,801 | 524,412 | |||||||||
| Income tax provision | 58,304 | 16,022 | 266,720 | |||||||||
| Net income | $ | 467,468 | $ | 451,779 | $ | 257,692 | ||||||
| Net income per common share: | ||||||||||||
| Basic | $ | 2.74 | $ | 2.41 | $ | 1.30 | ||||||
| Diluted | $ | 2.60 | $ | 2.35 | $ | 1.28 | ||||||
| Weighted average common shares—basic | 170,425 | 187,672 | 198,069 | |||||||||
| Weighted average common shares—diluted | 179,459 | 192,605 | 201,641 | |||||||||
| Cash dividend declared per common share | $ | 0.36 | $ | 0.36 | $ | 0.28 | ||||||
The accompanying notes are an integral part of the consolidated financial statements.
TERADYNE, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| Years Ended December 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| (in thousands) | ||||||||||||
| Net income | $ | 467,468 | $ | 451,779 | $ | 257,692 | ||||||
| Other comprehensive income, net of tax: | ||||||||||||
| Foreign currency translation adjustment, net of tax of $0, $0, $0 | (10,991 | ) | (28,442 | ) | 37,840 | |||||||
| Available-for-sale marketable securities: | ||||||||||||
| Unrealized gains (losses) on deb t securities arising during period, net of tax of $1,659, $(722), $1,903, respectively | 6,015 | (2,110 | ) | 1,863 | ||||||||
| Less: Reclassification adjustment for (gains) losses included in net income, net of tax of $(192), $(21), $(297), respectively | (690 | ) | 1,337 | (441 | ) | |||||||
| 5,325 | (773 | ) | 1,422 | |||||||||
| Defined benefit pension and post-retirement plans: | ||||||||||||
| Amortization of prior service benefit included in net periodic pension and post-retirement benefit , net of tax $(43), $(71), $(154), respectively | (148 | ) | (245 | ) | (272 | ) | ||||||
| Other comprehensive (loss) income | (5,814 | ) | (29,460 | ) | 38,990 | |||||||
| Comprehensive income | $ | 461,654 | $ | 422,319 | $ | 296,682 | ||||||
The accompanying notes are an integral part of the consolidated financial statements.
TERADYNE, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
| Common Stock Shares | Common Stock Par Value | Additional Paid-in Capital | Accumulated Other Comprehensive (Loss) Income | Retained Earnings (Accumulated Deficit) | Total Shareholders’ Equity | |||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||
| Year Ended December 31, 2016 | 199,177 | $ | 24,897 | $ | 1,593,684 | $ | (20,214 | ) | $ | 230,292 | $ | 1,828,659 | ||||||||||||
| Net issuance of common stock under stock-based plans | 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 | ) | ||||||||||||||||
| Tax benefit related to stock options and restricted stock units | 39,081 | 39,081 | ||||||||||||||||||||||
| Cash dividends ($0.07 per share) | (55,478 | ) | (55,478 | ) | ||||||||||||||||||||
| Net income | 257,692 | 257,692 | ||||||||||||||||||||||
| Other comprehensive income | 38,990 | 38,990 | ||||||||||||||||||||||
| Year Ended December 31, 2017 | 195,548 | 24,444 | 1,638,413 | 18,776 | 272,013 | 1,953,646 | ||||||||||||||||||
| Net issuance of common stock under stock-based plans | 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 ($0.09 per share) | (67,367 | ) | (67,367 | ) | ||||||||||||||||||||
| Net income | 451,779 | 451,779 | ||||||||||||||||||||||
| Other comprehensive loss | (29,460 | ) | (29,460 | ) | ||||||||||||||||||||
| Reclassification of unrealized gains on equity securities | (3,125 | ) | 3,125 | — | ||||||||||||||||||||
| Reclassification of tax effects resulting from the Tax Reform Act | 769 | (769 | ) | — | ||||||||||||||||||||
| Cumulative effect of changes in accounting principle related to revenue recognition | 12,679 | 12,679 | ||||||||||||||||||||||
| Year Ended December 31, 2018 | 175,522 | 21,940 | 1,671,645 | (13,040 | ) | (158,191 | ) | 1,522,354 | ||||||||||||||||
| Net issuance of common stock under stock-based plans | 1,784 | 223 | 10,399 | 10,622 | ||||||||||||||||||||
| Stock-based compensation expense | 38,085 | 38,085 | ||||||||||||||||||||||
| Repurchase of common stock | (10,896 | ) | (1,362 | ) | (489,840 | ) | (491,202 | ) | ||||||||||||||||
| Cash dividends ($0.09 per share) | (61,355 | ) | (61,355 | ) | ||||||||||||||||||||
| Net income | 467,468 | 467,468 | ||||||||||||||||||||||
| Other comprehensive loss | (5,814 | ) | (5,814 | ) | ||||||||||||||||||||
| Year Ended December 31, 2019 | 166,410 | $ | 20,801 | $ | 1,720,129 | $ | (18,854 | ) | $ | (241,918 | ) | $ | 1,480,158 | |||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
TERADYNE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Years Ended December 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| (in thousands) | ||||||||||||
| Cash flows from operating activities: | ||||||||||||
| Net income | $ | 467,468 | $ | 451,779 | $ | 257,692 | ||||||
| Adjustments to reconcile net income from operations to net cash provided by operating activities: | ||||||||||||
| Depreciation | 70,834 | 67,415 | 66,122 | |||||||||
| Amortization | 49,821 | 45,809 | 41,953 | |||||||||
| Stock-based compensation | 37,897 | 33,577 | 34,097 | |||||||||
| Deferred taxes | (9,456 | ) | 28,340 | 37,105 | ||||||||
| Provision for excess and obsolete inventory | 15,244 | 11,242 | 8,844 | |||||||||
| Investment impairment | 15,000 | — | — | |||||||||
| Contingent consideration fair value adjustment | (19,257 | ) | 987 | 7,820 | ||||||||
| (Gains) losses on investments | (6,033 | ) | 3,494 | (878 | ) | |||||||
| Retirement plans actuarial losses ( gain s) | 8,176 | (3,316 | ) | (6,624 | ) | |||||||
| Property insurance recovery, net | — | — | (4,309 | ) | ||||||||
| Other | 766 | 1,083 | 1,585 | |||||||||
| Changes in operating assets and liabilities, net of businesses acquired: | ||||||||||||
| Accounts receivable | (70,440 | ) | (17,938 | ) | (80,584 | ) | ||||||
| Inventories | (27,408 | ) | (29,498 | ) | 44,960 | |||||||
| Prepayments and other assets | (23,784 | ) | (58,402 | ) | 2,254 | |||||||
| Accounts payable and other liabilit ies | 49,279 | 13,693 | 43,574 | |||||||||
| Deferred revenue and customer advances | 39,313 | 13,379 | 4,984 | |||||||||
| Retirement plan contributions | (5,086 | ) | (4,334 | ) | (5,902 | ) | ||||||
| Income taxes | (13,584 | ) | (80,429 | ) | 173,802 | |||||||
| Net cash provided by operating activities | 578,750 | 476,881 | 626,495 | |||||||||
| Cash flows from investing activities: | ||||||||||||
| Purchases of property, plant and equipment | (134,642 | ) | (114,379 | ) | (105,375 | ) | ||||||
| Proceeds from government subsidy for property, plant and equipment | — | 7,920 | — | |||||||||
| Purchases of marketable securities | (662,701 | ) | (918,744 | ) | (1,391,917 | ) | ||||||
| Proceeds from maturities of marketable securities | 611,927 | 1,270,439 | 701,681 | |||||||||
| Proceeds from sales of marketable securities | 105,586 | 846,122 | 527,746 | |||||||||
| Proceeds from insurance | 2,912 | 1,126 | 5,064 | |||||||||
| Purchase of investment and acquisition of businesses, net of cash acquired | (79,742 | ) | (169,474 | ) | — | |||||||
| Net cash (used for) provided by investing activities | (156,660 | ) | 923,010 | (262,801 | ) | |||||||
| Cash flows from financing activities: | ||||||||||||
| Issuance of common stock under stock purchase and stock option plans | 29,312 | 20,973 | 24,493 | |||||||||
| Repurchase of common stock | (500,000 | ) | (823,478 | ) | (200,304 | ) | ||||||
| Dividend payments | (61,305 | ) | (67,322 | ) | (55,447 | ) | ||||||
| Payments related to net settlement of employee stock compensation awards | (14,741 | ) | (20,023 | ) | (12,881 | ) | ||||||
| Payments of contingent consideration | (27,615 | ) | (13,571 | ) | (1,050 | ) | ||||||
| Net cash used for financing activities | (574,349 | ) | (903,421 | ) | (245,189 | ) | ||||||
| Effects of exchange rate changes on cash and cash equivalents | (569 | ) | 439 | 3,454 | ||||||||
| (Decrease) Increase in cash and cash equivalents | (152,828 | ) | 496,909 | 121,959 | ||||||||
| Cash and cash equivalents at beginning of year | 926,752 | 429,843 | 307,884 | |||||||||
| Cash and cash equivalents at end of year | $ | 773,924 | $ | 926,752 | $ | 429,843 | ||||||
| Supplementary disclosure of cash flow information: | ||||||||||||
| Cash paid for: | ||||||||||||
| Interest | $ | 5,996 | $ | 6,205 | $ | 6,446 | ||||||
| Income taxes | $ | 81,410 | $ | 72,811 | $ | 53,775 |
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; |
|---|
| • | industrial automation (“Industrial Automation”) products; |
|---|
| • | defense/aerospace (“Defense/Aerospace”) test instrumentation and systems, storage test (“Storage Test”) systems, and circuit-board test and inspection (“Production Board Test”) systems (collectively these products represent “System Test”); and |
|---|
| • | wireless test (“Wireless Test”) systems. |
|---|
On February 26, 2018, Teradyne acquired Energid Technologies Corporation (“Energid”) for a total purchase price of approximately $27.6 million.
Energid’s technology enables and simplifies the programming of complex robotic motions used in a wide variety of end markets, ranging from heavy industry to healthcare, utilizing both traditional robots and collaborative robots.
Energid is included in Teradyne’s Industrial Automation segment.
On April 25, 2018, Teradyne acquired Mobile Industrial Robots ApS (“MiR”), a Danish limited liability company
.
MiR is
a
leading maker of collaborative autonomous mobile robots (“AMRs”) for industrial applications. The total purchase price was approximately $197.68 million, which included cash paid
of
approximately
$145.2 million
a
nd
$52.6 million
in fair value
of contingent consideration payable upon achievement of certain thresholds and targets for revenue and earnings before interest and taxes through 2020.
Contingent consideration for 2018 was $30.8 million and was paid in March 2019. Contingent consideration for 2019 was $9.1 million and is expected to be paid in March 2020.
The maximum payment for the remaining MiR contingent consideration that could be paid is $63.2 million.
MiR
is
included in
Teradyne
’s Industrial Automation segment.
On January 30, 2019, Teradyne acquired all of the issued and outstanding shares of Lemsys SA (“Lemsys”) for a total purchase price of approximately $9.1 million. Lemsys strengthens Teradyne’s position in the electrification of vehicles, solar and wind power, and industrial applications. Lemsys is included in Teradyne’s Semiconductor Test segment.
On June 3, 2019, Teradyne invested $15.0 million in RealWear, Inc. (“RealWear”). RealWear, a private company, develops and sells advanced wearable technology including industrial, hands-free, head-mounted augmented reality devices that make the workplace safer and more productive. On February 28, 2020, RealWear’s debt holder demanded repayment of its $25.0 million loan to RealWear. As a result, in the fourth quarter of 2019, Teradyne recorded an impairment charge of $15.0 million to reduce its investment in RealWear to zero as of December 31, 2019.
On November 1
, 2019
,
Teradyne acquired 100% of the
membership interests
of AutoGuide, LLC (“AutoGuide”), a maker of high
payload AMRs, an emerging and fast growing segment of the global forklift market
.
T
he total purchase price was approximately $81.7 million, which included cash paid of approximately
$57.8 million and $24.0 million
in fair value of contingent consideration payable upon achievement of certain performance targets, extending potentially through 2022. The maximum contingent consideration that could be paid
is $106.9
million. AutoGuide’s AMRs are used for material transport of payloads up to
4,500
kg in manufacturing, warehouse and logistics applications. These products complement MiR’s lower payload products. AutoGuide is included in our 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,
contingent
consideration liabil
ities
,
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 Standard 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.
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.
| • | 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. |
|---|
| • | 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. |
|---|
| • | 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. |
|---|
| • | 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. |
|---|
| • | 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. |
|---|
Performance Obligations
Products
Teradyne products consist 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, industrial automation products and wireless test systems. Teradyne’s hardware is recognized at a point in time upon transfer of control to the customer.
Services
Teradyne services consist of extended warranties, training and application support, service agreement, post contract customer support (“PCS”) and replacement parts. Each service is recognized based on relative standalone selling price. Extended warranty, training and support, service agreements and PCS are recognized over time based on the period of service. Replacement parts are recognized at a point in time upon transfer of control to the customer.
Teradyne does not allow customer returns or provide refunds to customers for any products or services. Teradyne products include 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. Cost related to warranty are included in cost of revenues when product revenues are recognized.
As of December 31, 2019 and 2018, deferred revenue and customer advances consisted of the following and are included in the short and long-term deferred revenue and customer advances:
| 2019 | 2018 | |||||||
| (in thousands) | ||||||||
| Maintenance , service and training | $ | 63,815 | $ | 58,362 | ||||
| Extended warranty | 30,677 | 27,422 | ||||||
| Customer advances, undelivered elements and other | 56,358 | 24,677 | ||||||
| Total deferred revenue and customer advances | $ | 150,850 | $ | 110,461 | ||||
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, 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 | |||
| Acquisition | 14 | |||
| Accruals for warranties issued during the period | 14,106 | |||
| Accruals related to pre-existing warranties | 4,026 | |||
| Settlements made during the period | (17,059 | ) | ||
| Balance at December 31, 2019 | $ | 8,996 |
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, 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 | |||
| Deferral of new extended warranty revenue | 23,271 | |||
| Recognition of extended warranty deferred revenue | (20,016 | ) | ||
| Balance at December 31, 2019 | $ | 30,677 | ||
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 $143.6 million and $52.2 million during 2019 and 2018, respectively. Factoring fees for the sales of receivables
are
recorded in interest expense and
are
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, 2019 and 2018. 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.
Investment in Other Company
Teradyne holds an investment in a private company that develops and sells advanced wearable technology. Teradyne does not have the ability to exert significant influence over the company. The investment was recorded at cost and is evaluated for impairment or an indication of changes in fair value resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer on a quarterly basis. See Note D: “Acquisitions and Investment in Other Company.”
Prepayments
Prepayments consist of the following and are included in prepayments and other current assets on the balance sheet:
| 2019 | 2018 | |||||||
| (in thousands) | ||||||||
| Contract manufacturer and supplier prepayments | $ | 143,392 | $ | 131,642 | ||||
| Prepaid taxes | 8,046 | 9,646 | ||||||
| Prepaid maintenance and other services | 8,503 | 8,487 | ||||||
| Other prepayments | 16,753 | 12,744 | ||||||
| Total prepayments | $ | 176,694 | $ | 162,519 | ||||
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
,
the retrospective adoption of this standard decreased income from operations by $
5.0
million
, 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.
Business Combination
Teradyne recognizes the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The fair value of identifiable intangible assets is based on detailed cash flow valuations that use information and assumptions provided by management. Teradyne estimates the fair value of contingent consideration at the time of the acquisition using all pertinent information known to us at the time to assess the probability of payment of contingent amounts or through the use of a Monte Carlo simulation model. Teradyne allocates any excess purchase price over the fair value of the net tangible and intangible assets acquired and liabilities assumed to goodwill. The assumptions used in the valuations for our acquisitions may differ materially from actual results depending on performance of the acquired businesses and other factors. While Teradyne believes the assumptions used were appropriate, different assumptions in the valuation of assets acquired and liabilities assumed could have a material impact on the timing and extent of impact on our statements of operations. Goodwill is assigned to reporting units as of the date of the related acquisition.
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 , equipment and 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, 2019, 2018, and 2017 was $5.0 million, $3.8 million, and $3.6 million, respectively.
Leases
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2016-02,
“Leases (Topic 842)”
(“Topic 842”), which requires a lessee to record a
right-of-use
(“ROU”) asset and a lease liability on the balance sheet for operating leases with terms longer than twelve months. Teradyne adopted this standard and the related amendments (collectively “ASC 842”) on January 1, 2019 and utilized the modified retrospective approach provided by ASU
2018-11,
“Leases (Topic 842): Targeted
Improvements,”
that allowed for a cumulative effect adjustment in the period of adoption. Under this method of adoption, the comparative information in the consolidated financial statements has not been revised and continues to be reported under the previously applicable lease accounting guidance (ASC 840). Teradyne also utilized the package of practical expedients permitted under the transition guidance which included the carry-forward of historical lease classification. Adoption of ASC 842 resulted in recording ROU assets and lease liabilities of approximately $50.1 million and $54.3 million, respectively. Operating lease liabilities were calculated using the discount rate on January 1, 2019. The adoption of ASC 842 did not have a material impact on beginning retained earnings, the consolidated statement of operations, cash flows, or earnings per share.
Under ASC 842, a contract is or contains a lease when Teradyne has the right to control the use of an identified asset. Teradyne determines if an arrangement is a lease at inception of the contract, which is the date on which the terms of the contract are agreed to and the agreement creates enforceable rights and obligations.
The commencement date of the lease is the date that the lessor makes an underlying asset available for use by Teradyne. As of December 31, 2019, Teradyne does not have material leases that have not yet commenced.
Teradyne determines if the lease is
an
operating or finance
lease
at the lease commencement date based upon the terms of the lease and the nature of the asset. The lease term used to calculate the lease liability includes options to extend or terminate the lease when it is reasonably certain that the option will be exercised.
For leases commencing after January 1, 2019, the lease liability is measured at the present value of future lease payments, discounted using the discount rate for the lease at the commencement date. As Teradyne is typically unable to determine the implicit rate, Teradyne uses an incremental borrowing rate based on the lease term and economic environment at commencement date. Teradyne initially measures payments based on an index by using the applicable rate at lease commencement. Variable payments that do not depend on an index are not included in the lease liability and are recognized as they are incurred. The ROU asset is initially measured as the amount of lease liability, adjusted for any initial lease costs, prepaid lease payments, and reduced by any lease incentives.
Teradyne’s contracts often include
non-lease
components such as common area maintenance. Teradyne elected the practical expedient to account for the lease and
non-lease
components as a single lease component. For leases with a term of one year or less Teradyne has elected not to record the lease asset or liability. The lease payments are recognized in the consolidated statement of earnings on a straight-line basis over the lease term. Teradyne includes lease costs within cost of revenues and operating expenses. See Note I: “Leases.”
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 2019, 2018 and 2017, Teradyne recognized a discrete tax benefit of $4.9 million, $7.6 million and $6.3 million, respectively, 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 $16.6 million, $15.4 million and $9.1 million in 2019, 2018 and 2017, respectively.
Translation of
Non-U.S.
Currencies
The functional currency for all
non-U.S.
subsidiaries is the U.S. dollar, except for Universal Robots, MiR and Lemsys 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 Universal Robots, MiR and Lemsys, assets and liabilities are translated into U.S. dollars using exchange rates in effect at the end of the period. Revenues 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) on the balance sheet.
Net foreign exchange gains and losses resulting from remeasurement are included in other (income) expense, net. For the years ended December 31, 2019, 2018, and 2017, (gains) losses from the remeasurement of the monetary assets and liabilities denominated in foreign currencies were $(1.6) million, $(2.5) million, and $2.9 million, respectively.
These amounts do not reflect the corresponding (gains) losses from foreign exchange contracts. See Note H: “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. This pronouncement is not expected to have a material impact on Teradyne’s financial position, results of operations and statements of cash flows.
D. ACQUISITIONS AND INVESTMENT IN OTHER COMPANY
Acquisitions
AutoGuide LLC
On November 1
, 2019, Teradyne acquired 100% of the
me
mbership interests
of AutoGuide, LLC (“AutoGuide”), a maker of high-payload AMRs, based in Chelmsford, MA, an emerging and fast growing segment of the global forklift market
.
The total purchase price was approximately $81.7 million, which included cash paid of approximately $57.8 million
and
$
24.0
million
in fair value of contingent consideration payable upon achievement of certain performance targets, extending potentially through 2022. At December 31, 2019, the maximum contingent consideration that could be paid
is
$
106.9
million.
The contingent consideration is payable upon achievement
o
f certain thresholds and targets for revenue and earnings before interest and taxes for periods from January 1, 2019 to December 31, 2020, January 1, 2019
t
o December 31, 202
, and January 1, 2019 to December 31, 202
.
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 AutoGuide 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. AutoGuide’s AMRs are used for material transport of payloads up to 4,500 kg in manufacturing, warehouse and logistics applications. These products complement MiR’s lower payload products and expand the Industrial Automation segment
, which is a
key c
omponent of Teradyne
’
s
growth strateg
y.
The preliminary allocation of the total purchase price to AutoGuide’s net tangible assets and identifiable intangible assets was based on their estimated preliminary fair values as of the acquisition date. The excess of the purchase price over the identifiable intangible assets and net tangible assets in the amount
of $41.4 million was allocated to goodwill, which is deductible for tax purposes. AutoGuide’s results have been included in Teradyne’s Industrial Automation segment from the date of acquisition.
The following table represents the preliminary allocation of the purchase price:
| Purchase Price Allocation | ||||
| (in thousands) | ||||
| Goodwill | $ | 41,372 | ||
| Intangible assets | 37,660 | |||
| Tangible assets acquired and liabilities assumed: | ||||
| Other c urrent assets | 3,661 | |||
| Non-current assets | 1,227 | |||
| Accounts payable and current liabilities | (1,223 | ) | ||
| Long-term other liabilities | (949 | ) | ||
| Total purchase price | $ | 81,748 | ||
Teradyne estimated the fair value of intangible assets using the income approach. Forecasted revenues is the key assumption for estimating the fair value. 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 | $ | 24,590 | 6.0 | |||||
| Customer relationships | 7,360 | 6.0 | ||||||
| Trademarks and tradenames | 5,450 | 7.0 | ||||||
| Backlog | 260 | 0.3 | ||||||
| Total intangible assets | $ | 37,660 | 6.1 | |||||
For the period from November 13, 2019 to December 31, 2019, AutoGuide contributed $
1.4
million of revenues and had a $
(0.9)
million loss before income taxes.
Lemsys SA
On January 30, 2019, Teradyne acquired all of the issued and outstanding shares of Lemsys SA (“Lemsys”) for a total purchase price of approximately $
9.1
million. Lemsys strengthens Teradyne’s position in the electrification of vehicles, solar
and wind power
,
and
industrial applications. The Lemsys acquisition was accounted for as a business combination and, accordingly, the results have been included in Teradyne’s Semiconductor Test segment from the date of acquisition. Teradyne’s final allocation of the purchase price was goodwill of $
1.4
million, which is not deductible for tax purposes, acquired intangible assets of $
4.6
million with an average estimated useful life of
5.2
years, and $
3.1
million of net tangible assets. The acquisition was not material to Teradyne’s consolidated financial statements.
Mobile Industrial Robots
On April 25, 2018, Teradyne acquired all
of
the issued and outstanding shares of MiR, a Danish limited liability company located in Odense, Denmark. MiR is
a
leading maker of collaborative autonomous mobile robots for industrial applications.
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.
Contingent consideration for the period from January 1, 2018 to December 31, 2018 was $31.0 million and was paid in March 2019. Contingent consideration for the period from January 1, 201
to December 31, 2019 was
$
9.1
million
, based on the results during the period and modifi
ca
tion
of t
he earn
-
out structure
,
and is expected to be paid in March 2020.
At December 31, 2019, the remaining maximum amount of contingent consideration that could be paid is $63.2 million.
The valuation of the contingent consideration is dependent on the following assumptions: forecasted revenues, revenue volatility, earnings before interest and taxes, and discount rate. These assumptions were estimated based on a review of the historical and projected results.
The MiR acquisition was accounted for as a business combination and, accordingly, the results have been included in Teradyne’s consolidated results of operations from the date of acquisition. MiR’s products will help expand the Industrial Automation segment, which is a key component of 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.
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 consolidated financial statements.
Pro Forma Information
The following unaudited pro forma information gives effect to the acquisition of AutoGuide as if the acquisition occurred on January 1, 2018 and 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, 2019 | December 31, 2018 | |||||||
| (in thousands, except per share amounts) | ||||||||
| Revenues | $ | 2,303,737 | $ | 2,111,373 | ||||
| Net income | $ | 464,602 | $ | 442,082 | ||||
| Net income per common share: | ||||||||
| Basic | $ | 2.73 | $ | 2.36 | ||||
| Diluted | $ | 2.59 | $ | 2.30 | ||||
Pro forma results for the year ended December 31, 2019 were adjusted to exclude $1.2 million of AutoGuide acquisition related costs and $0.1 million of AutoGuide
non-recurring
expense related to fair value adjustment to acquisition-date inventory.
Pro forma results for the year ended December 31, 2018 were adjusted to include $1.2 million of AutoGuide acquisition related costs and $0.4 million of AutoGuide
non-recurring
expense related to fair value adjustment to acquisition-date inventory.
Pro forma results for the year ended December 31, 2018 were adjusted to exclude $2.9 million of MiR acquisition related costs and $0.4 million of MiR
non-recurring
expense related to fair value adjustment to acquisition-date inventory.
Investment in Other Company
On June 3, 2019, Teradyne invested $15.0
million in RealWear, Inc. (“RealWear”). RealWear, a private company, develops and sells advanced wearable technology including industrial, hands-free, head-mounted augmented reality devices that make the workplace safer and more productive. The investment was recorded at cost and is evaluated for impairment or an indication of changes in fair value resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer on a quarterly basis. On February 28, 2020, RealWear’s debt holder demanded repayment of its $25.0 million loan to RealWear. As a result, in the fourth quarter of 2019, Teradyne recorded an impairment charge of $15.0 million to reduce its investment in RealWear to zero as of December 31, 2019.
E. REVENUE
Disaggregation of Revenue
The following table provides information about disaggregated revenue by timing of revenue recognition, primary geographical market, and major product lines.
| Semiconductor Test | Industrial Automation | System Test | Wireless Test | Corporate and Other | Total | |||||||||||||||||||||||||||||||||||
| System on-a-chip | Memory | Universal Robots | Mobile Industrial Robots | AutoGuide | Energid | |||||||||||||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||||||||||||
| For the Year Ended December 31, 2019 (1) | ||||||||||||||||||||||||||||||||||||||||
| Timing of Revenue Recognition | ||||||||||||||||||||||||||||||||||||||||
| Point in Time | $ | 1,070,375 | $ | 247,221 | $ | 244,515 | $ | 44,329 | $ | 1,144 | $ | — | $ | 237,686 | $ | 148,322 | $ | (515 | ) | $ | 1,993,077 | |||||||||||||||||||
| Over Time | 216,065 | 18,910 | 3,952 | 74 | 234 | 3,891 | 49,769 | 8,993 | — | 301,888 | ||||||||||||||||||||||||||||||
| Total | $ | 1,286,440 | $ | 266,131 | $ | 248,467 | $ | 44,403 | $ | 1,378 | $ | 3,891 | $ | 287,455 | $ | 157,315 | $ | (515 | ) | $ | 2,294,965 | |||||||||||||||||||
| Geographical Market | ||||||||||||||||||||||||||||||||||||||||
| Asia Pacific | $ | 1,152,881 | $ | 238,714 | $ | 67,806 | $ | 9,513 | $ | — | $ | 221 | $ | 132,826 | $ | 126,549 | $ | — | $ | 1,728,510 | ||||||||||||||||||||
| Americas | 73,257 | 23,826 | 70,165 | 14,438 | 1,378 | 1,761 | 129,840 | 24,234 | (515 | ) | 338,384 | |||||||||||||||||||||||||||||
| Europe, Middle East and Africa | 60,302 | 3,591 | 110,496 | 20,452 | — | 1,909 | 24,789 | 6,532 | — | 228,071 | ||||||||||||||||||||||||||||||
| Total | $ | 1,286,440 | $ | 266,131 | $ | 248,467 | $ | 44,403 | $ | 1,378 | $ | 3,891 | $ | 287,455 | $ | 157,315 | $ | (515 | ) | $ | 2,294,965 | |||||||||||||||||||
| For the Year Ended December 31, 2018 (1) | ||||||||||||||||||||||||||||||||||||||||
| Timing of Revenue Recognition | ||||||||||||||||||||||||||||||||||||||||
| Point in Time | $ | 1,010,493 | $ | 259,366 | $ | 231,895 | $ | 24,115 | $ | — | $ | 553 | $ | 167,418 | $ | 122,536 | $ | (1,205 | ) | $ | 1,815,171 | |||||||||||||||||||
| Over Time | 208,456 | 14,102 | 2,200 | — | — | 2,689 | 48,714 | 9,470 | — | 285,631 | ||||||||||||||||||||||||||||||
| Total | $ | 1,218,949 | $ | 273,468 | $ | 234,095 | $ | 24,115 | $ | — | $ | 3,242 | $ | 216,132 | $ | 132,006 | $ | (1,205 | ) | $ | 2,100,802 | |||||||||||||||||||
| Geographical Market | ||||||||||||||||||||||||||||||||||||||||
| Asia Pacific | $ | 1,067,879 | $ | 245,264 | $ | 58,381 | $ | 5,950 | $ | — | $ | 111 | $ | 90,989 | $ | 107,872 | $ | — | $ | 1,576,446 | ||||||||||||||||||||
| Americas | 78,498 | 17,353 | 68,938 | 7,326 | — | 1,540 | 96,763 | 19,166 | (1,205 | ) | 288,379 | |||||||||||||||||||||||||||||
| Europe, Middle East and Africa | 72,572 | 10,851 | 106,776 | 10,839 | — | 1,591 | 28,380 | 4,968 | — | 235,977 | ||||||||||||||||||||||||||||||
| Total | $ | 1,218,949 | $ | 273,468 | $ | 234,095 | $ | 24,115 | $ | — | $ | 3,242 | $ | 216,132 | $ | 132,006 | $ | (1,205 | ) | $ | 2,100,802 | |||||||||||||||||||
| (1) | Includes $8.4 million and $12.0 million in 2019 and 2018, respectively, for leases of Teradyne’s systems recognized outside of ASC 606: “Revenue from Contracts with Customers.” |
|---|
Contract Balances
For the year
s
ended December 31, 2019 and 2018, Teradyne recognized $65.6 million and $69.9 million, respectively
,
that was previously included within the deferred revenue and customer advances balances. This revenue primarily relates to undelivered hardware, extended warranties, training, application support, and post contract support. Each of these represents a distinct performance obligation. Teradyne expects to recognize 70% of the remaining performance obligation in the next 12 months, 26% in
1-3
years, and the remainder thereafter.
F. INVENTORIES
Inventories, net consisted of the following at December 31, 2019 and 2018:
| 2019 | 2018 | |||||||
| (in thousands) | ||||||||
| Raw material | $ | 118,595 | $ | 89,365 | ||||
| Work-in-process | 32,695 | 31,014 | ||||||
| Finished g oods | 45,401 | 33,162 | ||||||
| $ | 196,691 | $ | 153,541 | |||||
Inventory reserves for the years ended December 31, 2019 and 2018 were $103.6 million and $100.8 million, respectively.
G. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, net consisted of the following at December 31, 2019 and 2018:
| 2019 | 2018 | |||||||
| (in thousands) | ||||||||
| Land | $ | 16,561 | $ | 16,561 | ||||
| Buildings | 107,282 | 105,935 | ||||||
| Machinery , equipment and s oftware | 834,970 | 752,722 | ||||||
| Furniture and fixtures | 29,157 | 27,432 | ||||||
| Leasehold improvements | 59,378 | 52,536 | ||||||
| Construction in progress | 2,537 | 6,276 | ||||||
| 1,049,885 | 961,462 | |||||||
| Less: accumulated depreciation | 729,669 | 681,641 | ||||||
| $ | 320,216 | $ | 279,821 | |||||
Depreciation of property, plant and equipment for the years ended December 31, 2019, 2018, and 2017 was $70.8 million, $67.4 million, and $66.1 million, respectively. As of December 31, 2019 and 2018, the gross book value included in machinery and equipment for internally manufactured test systems being leased by customers was $5.4 million and $5.5 million, respectively. As of December 31, 2019 and 2018, the accumulated depreciation on these test systems was $5.1 million and $5.2 million, respectively.
H. 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 and debt mutual funds 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, 2019 and 2018, there were no transfers in or out of Level 1, Level 2, or Level 3 financial instruments.
Realized gains recorded in 2019, 2018, and 2017 were $1.3 million, $4.0 million, and $1.1 million, respectively. Realized losses recorded in 2019, 2018, and 2017 were $0.2 million, $1.6 million, and $0.3 million, respectively. Realized gains are included in interest income and realized losses are included in interest expense.
Unrealized gains on equity securities recorded during the years ended December 31, 2019 and 2018 were $5.3 million and $1.4 million, respectively. Unrealized losses on equity securities recorded during the years ended December 31, 2019 and 2018 were $0.4 million and $7.4 million, respectively. Unrealized gains on equity securities are included in interest income and unrealized 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.
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, 2019 and 2018:
| December 31, 2019 | ||||||||||||||||
| 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 | $ | 311,975 | $ | — | $ | — | $ | 311,975 | ||||||||
| Cash equivalents | 410,285 | 51,664 | — | 461,949 | ||||||||||||
| Available for sale securities: | ||||||||||||||||
| Corporate debt securities | — | 97,307 | — | 97,307 | ||||||||||||
| Commercial paper | — | 54,149 | — | 54,149 | ||||||||||||
| U.S. Treasury securities | — | 42,382 | — | 42,382 | ||||||||||||
| U.S. government agency securities | — | 9,952 | — | 9,952 | ||||||||||||
| Debt mutual funds | 6,888 | — | — | 6,888 | ||||||||||||
| Certificates of deposit and time deposits | — | 4,751 | — | 4,751 | ||||||||||||
| Non-U.S. government securities | — | 592 | — | 592 | ||||||||||||
| Equity securities: | ||||||||||||||||
| Equity mutual funds | 25,772 | — | — | 25,772 | ||||||||||||
| Total | $ | 754,920 | $ | 260,797 | $ | — | $ | 1,015,717 | ||||||||
| Derivative assets | — | 528 | — | 528 | ||||||||||||
| Total | $ | 754,920 | $ | 261,325 | $ | — | $ | 1,016,245 | ||||||||
| Liabilities | ||||||||||||||||
| Contingent consideration | $ | — | $ | — | $ | 39,705 | $ | 39,705 | ||||||||
| Derivative liabilities | — | 203 | — | 203 | ||||||||||||
| Total | $ | — | $ | 203 | $ | 39,705 | $ | 39,908 | ||||||||
Reported as follows:
| (Level 1) | (Level 2) | (Level 3) | Total | |||||||||||||
| (in thousands) | ||||||||||||||||
| Assets | ||||||||||||||||
| Cash and cash equivalents | $ | 722,260 | $ | 51,664 | $ | — | $ | 773,924 | ||||||||
| Marketable securities | — | 137,303 | — | 137,303 | ||||||||||||
| Long-term marketable securities | 32,660 | 71,830 | — | 104,490 | ||||||||||||
| Prepayments | — | 528 | — | 528 | ||||||||||||
| Total | $ | 754,920 | $ | 261,325 | $ | — | $ | 1,016,245 | ||||||||
| Liabilities | ||||||||||||||||
| Other current liabilities | $ | — | $ | 203 | $ | — | $ | 203 | ||||||||
| Contingent consideration | — | — | 9,106 | 9,106 | ||||||||||||
| Long-term contingent consideration | — | — | 30,599 | 30,599 | ||||||||||||
| Total | $ | — | $ | 203 | $ | 39,705 | $ | 39,908 | ||||||||
| 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: | ||||||||||||||||
| Equity 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 | ||||||||||||
| $ | 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 | ||||||||||||
| $ | — | $ | 514 | $ | 70,543 | $ | 71,057 | |||||||||
Changes in the fair value of Level 3 contingent consideration for the years ended December 31, 2019 and 2018 were as follows:
| Contingent Consideration | ||||
| (in thousands) | ||||
| Balance at December 31, 2017 | $ | 45,102 | ||
| Acquisition of MiR | 52,547 | |||
| Foreign currency impact | (3,540 | ) | ||
| Payments ( 1 ) | (24,553 | ) | ||
| Fair value adjustment ( 2 ) | 987 | |||
| Balance at December 31, 2018 | 70,543 | |||
| Acquisition of AutoGuide | 23,976 | |||
| Foreign currency impact | (967 | ) | ||
| Payments (3) | (34,590 | ) | ||
| Fair value adjustment (4) | (19,257 | ) | ||
| Balance at December 31, 2019 | $ | 39,705 |
| (1) | During the year ended December 31, 201 8 , Teradyne paid $ 24.6 million of contingent consideration for the earn-out in connection with the acquisition of Un iversal Robots. |
|---|
| (2) | 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 de creased by $ 16.7 million primarily due to a de crease in forecasted revenues. |
|---|
| (3) | During the year ended December 31, 201 9 , Teradyne paid $ 30.8 million and $3.8 million of contingent consideration for the earn-out s in connection with the acquisition s of MiR a n d Universal Robots , respectively . |
|---|
| (4) | During the year ended December 31, 201 9 , the fair value of contingent consideration for the earn-out in connection with the acquisition of MiR was de creased by $ 22.2 million primarily due to a de crease in forecasted revenues partially offset by the impact from modification of the earn-out structure. During the year ended December 31, 201 9 , the fair value of contingent consideration for the earn-out in connection with the acquisition of Auto G uide was in creased by $ 3.0 million primarily due to a n in c rease 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, 2019 Fair Value | Valuation Technique | Unobservable Inputs | Weighted Average | ||||||||||||
| (in thousands) | ||||||||||||||||
| Contingent c onsideration (AutoGuide) | $ | 26,952 | Monte Carlo simulation | Revenue Volatility | 11.5 % | |||||||||||
| Discount Rate | 2.6 % | |||||||||||||||
| Contingent c onsideration (MiR) | $ | 12,753 (1) | Monte Carlo simulation | Revenue Volatility | 14.0 % | |||||||||||
| Discount Rate | 0.2 % |
| (1) | Contingent consideration related to MiR of $ 9.1 million is expected to be paid in March 20 20 . |
|---|
As of December 31, 2019, the significant unobservable inputs used in the Monte Carlo simulation to fair value the
AutoGuide
and 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, 2019, the maximum amount of contingent consideration that could be paid in connection with the acquisition of
AutoGuide
is $
106.9
million. The
earn-out
periods end on
December 31, 2020, December 31, 2021 and December 31, 2022
.
As of December 31, 2019, the remaining maximum amount of contingent consideration that could be paid in connection with the acquisition of MiR is $63.2 million. The
remaining
earn-out
period ends
on December 31, 2020.
The carrying amounts and fair values of Teradyne’s financial instruments at December 31, 2019 and 2018 were as follows:
| December 31, 2019 | December 31, 2018 | |||||||||||||||
| Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||||
| (in thousands) | ||||||||||||||||
| Assets | ||||||||||||||||
| Cash and cash equivalents | $ | 773,924 | $ | 773,924 | $ | 926,752 | $ | 926,752 | ||||||||
| Marketable securities | 241,793 | 241,793 | 277,827 | 277,827 | ||||||||||||
| Derivative assets | 528 | 528 | 79 | 79 | ||||||||||||
| Liabilities | ||||||||||||||||
| Contingent consideration | 39,705 | 39,705 | 70,543 | 70,543 | ||||||||||||
| Derivative liabilities | 203 | 203 | 514 | 514 | ||||||||||||
| Convertible debt (1) | 394,687 | 1,010,275 | 379,981 | 547,113 |
| (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, 2019 and 2018:
| December 31, 2019 | ||||||||||||||||||||
| Available-for-Sale | ||||||||||||||||||||
| Cost | Unrealized Gain | Unrealized (Loss) | Fair Market Value | Fair Market Value of Investments with Unrealized Losses | ||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Corporate debt securities | $ | 93,267 | $ | 4,081 | $ | (41 | ) | $ | 97,307 | $ | 2,009 | |||||||||
| Commercial paper | 54,124 | 26 | (1 | ) | 54,149 | 1,391 | ||||||||||||||
| U.S. Treasury securities | 42,167 | 431 | (216 | ) | 42,382 | 17,556 | ||||||||||||||
| U.S. government agency securities | 9,942 | 14 | (4 | ) | 9,952 | 3,043 | ||||||||||||||
| Debt mutual funds | 6,753 | 135 | — | 6,888 | — | |||||||||||||||
| Certificates of deposit and time deposits | 4,751 | — | — | 4,751 | — | |||||||||||||||
| Non-U.S. government securities | 592 | — | — | 592 | — | |||||||||||||||
| $ | 211,596 | $ | 4,687 | $ | (262 | ) | $ | 216,021 | $ | 23,999 | ||||||||||
Reported as follows:
| Cost | Unrealized Gain | Unrealized (Loss) | Fair Market Value | Fair Market Value of Investments with Unrealized Losses | ||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Marketable securities | $ | 137,144 | $ | 160 | $ | (1 | ) | $ | 137,303 | $ | 2,922 | |||||||||
| Long-term marketable securities | 74,452 | 4,527 | (261 | ) | 78,718 | 21,077 | ||||||||||||||
| $ | 211,596 | $ | 4,687 | $ | (262 | ) | $ | 216,021 | $ | 23,999 | ||||||||||
| December 31, 2018 | ||||||||||||||||||||
| Available-for-Sale | ||||||||||||||||||||
| Cost | Unrealized Gain | Unrealized (Loss) | Fair Market Value | Fair Market Value of Investments with Unrealized Losses | ||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| U.S. Treasury securities | $ | 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 | ||||||||||
As of December 31, 2019, the fair market value of investments with unrealized losses
les
s than one
year totaled
$23.6 million.
As of December 31, 2018, the fair market value of investments with unrealized losses totaled $192.0 million. Of this value, $28.5 million had unrealized losses of $1.6 million greater than one year and $163.5 million had unrealized losses of $1.4 million for less than one year.
Teradyne reviews its investments to identify and evaluate investments that have an indication of possible impairment. Based on this review, Teradyne determined that the unrealized losses related to these investments at December 31, 2019 and 2018,
were
not
other than
temporary.
The
contractual
maturities of investments in
available-for-sale
marketable securities held at December 31, 2019 were as follows:
| Cost | Fair Value | |||||||
| (in thousands) | ||||||||
| Due within one year | $ | 137,144 | $ | 137,303 | ||||
| Due after 1 year through 5 years | 15,264 | 15,351 | ||||||
| Due after 5 years through 10 years | 14,436 | 14,576 | ||||||
| Due after 10 years | 37,999 | 41,903 | ||||||
| Total | $ | 204,843 | $ | 209,133 | ||||
Contractual maturities of investments in available-for-sale marketable securities held at December 31, 2019 exclude $6.9 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, 2019 and 2018, 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, 2019 | December 31, 2018 | |||||||||||||||||||||||
| Buy Position | Sell Position | Net Total | Buy Position | Sell Position | Net Total | |||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||
| Japanese Yen | $ | (29.3 | ) | $ | — | $ | (29.3 | ) | $ | (35.0 | ) | $ | — | $ | (35.0 | ) | ||||||||
| Taiwan Dollar | (18.4 | ) | — | (18.4 | ) | (11.2 | ) | — | (11.2 | ) | ||||||||||||||
| Korean Won | (10.7 | ) | — | (10.7 | ) | (9.6 | ) | — | (9.6 | ) | ||||||||||||||
| British Pound Sterling | (3.8 | ) | — | (3.8 | ) | (1.4 | ) | — | (1.4 | ) | ||||||||||||||
| Euro | — | 47.8 | 47.8 | — | 82.2 | 82.2 | ||||||||||||||||||
| Singapore Dollar | — | 25.3 | 25.3 | — | 15.7 | 15.7 | ||||||||||||||||||
| Philippine Peso | — | 5.2 | 5.2 | — | 5.2 | 5.2 | ||||||||||||||||||
| Chinese Yuan | — | 4.4 | 4.4 | — | 2.8 | 2.8 | ||||||||||||||||||
| Total | $ | (62.2 | ) | $ | 82.7 | $ | 20.5 | $ | (57.2 | ) | $ | 105.9 | $ | 48.7 | ||||||||||
The fair value of the outstanding contracts was a
gain of $0.3 million and a
loss of $0.4 million, respectively, at December 31, 2019 and 2018.
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, 2019 and 2018:
| Balance Sheet Location | December 31, 2019 | December 31, 2018 | ||||||||
| (in thousands) | ||||||||||
| Derivatives not designated as hedging instruments: | ||||||||||
| Foreign exchange contracts | Prepayments | $ | 528 | $ | 79 | |||||
| Foreign exchange contracts | Other current liabilities | (203 | ) | (514 | ) | |||||
| Total | $ | 325 | $ | (435 | ) | |||||
The following table summarizes the effect of derivative instruments in the statements of operations recognized for the years ended December 31, 2019, 2018, and 2017.
| Location of (Gains) Losses Recognized in Statement of Operations | December 31, 2019 | December 31, 2018 | December 31, 2017 | ||||||||||||
| (in thousands) | |||||||||||||||
| Derivatives not designated as hedging instruments: | |||||||||||||||
| Foreign exchange contracts | Other (income) expense, net | $ | 5,960 | $ | 7,386 | $ | (1,133 | ) |
| (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, 2019 and 2018, net gains from the remeasurement of monetary assets and liabilities denominated in foreign currencies were $ 1.6 million and $ 2.5 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 J: “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 10%
or
more
of Teradyne’s accounts receivable balance as of December 31, 2019 and 2018.
I. LEASES
On January 1, 2019, Teradyne adopted ASC 842 using the modified retrospective approach. Under this method of adoption, the comparative information in the consolidated financial statements has not been revised
and continues to be reported under the previously applicable lease accounting guidance (ASC 840). Adoption of ASC 842 resulted in recording ROU assets and lease liabilities of approximately $50.1 million and $54.3 million, respectively. The adoption of ASC 842 did not have a material impact on beginning retained earnings, the consolidated statement of operations, cash flows, or earnings per share.
Teradyne has facility and auto leases, which are accounted for as operating leases. Teradyne’s facility leases are primarily used for administrative functions, research and development, manufacturing, and storage and distribution. Remaining lease terms range from less than one year to
twelve
years.
Total lease expense for the year ended December 31, 2019 was $35.6 million and included $11.1 million of variable lease costs and $2.6 million of costs related to short-term leases
,
which are not recorded on the consolidated balance sheets.
At December 31, 2019, the weighted average remaining lease term and weighted average discount rate for operating leases was 4.5 years and 5.0%, respectively.
Supplemental cash flow information related to leases was as follows:
| For the Year Ended | ||||
| December 31, 2019 | ||||
| (in thousands) | ||||
| Cash paid for amounts included in the measurement of lease liabilities included in operating cash flows | $ | 19,400 | ||
| Right-of-use assets obtained in exchange for new lease obligations | 26,739 |
Maturities of lease liabilities as of December 31, 2019 were as follows:
| Operating Lease | ||||
| (in thousands) | ||||
| 2020 | $ | 21,874 | ||
| 2021 | 17,638 | |||
| 2022 | 12,944 | |||
| 2023 | 6,496 | |||
| 2024 | 5,106 | |||
| Thereafter | 8,388 | |||
| Total lease payments | 72,446 | |||
| Less imputed interest | (7,121 | ) | ||
| Total lease liabilities | $ | 65,325 | ||
As of December 31, 2018, future
non-cancelable
rent obligations as determined under ASC 840 were as follows:
| Operating Lease | ||||
| (in thousands) | ||||
| 2019 | $ | 19,570 | ||
| 2020 | 18,293 | |||
| 2021 | 13,578 | |||
| 2022 | 9,693 | |||
| 2023 | 5,449 | |||
| Thereafter | 9,472 | |||
| Total lease payments | $ | 76,055 | ||
J. 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
,
2023
, unless earlier repurchased or converted. The Notes bear interest
at
a rate of
1.25
% per year
payable semiannually in arrears on June 15 and December 15 of each year
. The Notes will be convertible at the option of the
noteholders
at any time prior to the close of business on the business day immediately preceding
September 15, 2023
, only under the following circumstances:
(1)
during any calendar quarter beginning after March
,
2017
(and only during such calendar quarter), if the closing sale price of
Teradyne
’s common stock, for at least
trading days (whether or not consecutive) during a period of
consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than
% 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
% 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
,
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
,
2019
, the conversion price was approximately $
31.62
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 $31.62. 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, 2019, the strike price of the warrants was approximately $39.68 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, 2019, debt issuance costs were approximately $4.3 million.
The below tables represents the key components of Teradyne’s convertible senior notes:
| December 31, 2019 | December 31, 2018 | |||||||
| (in thousands) | ||||||||
| Debt p rincipal | $ | 460,000 | $ | 460,000 | ||||
| Unamortized discount | 65,313 | 80,019 | ||||||
| Net c arrying amount of convertible debt | $ | 394,687 | $ | 379,981 | ||||
| For the year ended | ||||||||
| December 31, 2019 | December 31, 2018 | |||||||
| (in thousands) | ||||||||
| Contractual interest expense on the coupon | $ | 5,750 | $ | 5,750 | ||||
| Amortization of the discount component and debt issue fees recognized as interest expense | 14,706 | 13,995 | ||||||
| Total interest expense on the convertible debt | $ | 20,456 | $ | 19,745 | ||||
As of December 31, 2019, the unamortized discount was $65.3 million, which will be amortized over four years using the effective interest rate method. The carrying amount of the equity component was $100.8 million. As of December 31, 2019, the conversion price was approximately $31.
per share and if converted the value of the notes was $992.0 million.
Revolving Credit Facility
On June 27, 2019, Teradyne terminated its credit agreement, which Teradyne entered into with Barclays Bank PLC on April 27, 2015. The terminated credit agreement
, which w
as und
r
a
w
n
at ter
mination
,
provided for
a
five-year
,
senior secured revolving credit facility of up
to
$
million
.
K. 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 Gain s (Losses) on Marketable Securities | Retirement Plans Prior Service Credit | Total | |||||||||||||
| (in thousands) | ||||||||||||||||
| 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 f rom 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 | ) | |||||||||
| Other comprehensive (loss) income before reclassifications, net of tax of $0, $1,659, $0 | (10,991 | ) | 6,015 | — | (4,976 | ) | ||||||||||
| Amounts reclassified from accumulated other comprehensive income, net of tax of $0, $(192), $(43) | — | (690 | ) | (148 | ) | (838 | ) | |||||||||
| Net current period other comprehensive (loss) income, net of tax of $0, $1,467, $(43) | (10,991 | ) | 5,325 | (148 | ) | (5,814 | ) | |||||||||
| Balance at December 31, 2019, net of tax of $0, $946, $(1,124) | $ | (23,514 | ) | $ | 3,480 | $ | 1,180 | $ | (18,854 | ) | ||||||
| (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, 2019, 2018, and 2017, were as follows:
| Details about Accumulated Other Comprehensive Income Components | For the year ended | Affected Line Item in the Statements of Operations | ||||||||||||||
| December 31, 2019 | December 31, 2018 | December 31, 2017 | ||||||||||||||
| (in thousands) | ||||||||||||||||
| Available-for-sale marketable securities | ||||||||||||||||
| Unrealized gains (losses), net of tax of $192, $21, $297 | $ | 690 | $ | (1,337 | ) | $ | 441 | Interest income (expense) | ||||||||
| Defined benefit pension and postretirement plans: | ||||||||||||||||
| Amortization of prior service benefit, net of tax of $43, $71, $154 | 148 | 245 | 272 | (a) | ||||||||||||
| Total reclassifications, net of tax of $235, $92, $451 | $ | 838 | $ | (1,092 | ) | $ | 713 | Net income | ||||||||
| (a) | The amortization of prior service credit is included in the computation of net periodic pension cost and postretirement benefit; see Note P: “Retirement Plans.” |
|---|
L. 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
, weighting the fair
value determined under each approach to determine an estimated fair value
for a report
ing unit
. 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 fourth quarter of 201
, Teradyne performed the annual goodwill impairment test. Teradyne completed step one of the
two-step
impairment test for the Universal Robots
, MiR and Energid
reporting
units
. Teradyne completed step zero for the Wireless Test
,
Defense/Aerospace and
AutoGuide
reporting units. There was no impairment as a result of the annual test performed in the fourth quarter of 201
.
Based on Teradyne’s December 31, 2019 goodwill impairment test, the MiR reporting unit’s estimated fair value exceeded its carrying value by 14%. The MiR goodwill amount is $123.6 million as of December 31, 2019. Key assumptions in the goodwill valuation model are forecasted revenues, discount rate, earnings before interest and taxes, and revenue multiples from comparable companies. A change in any of these key assumptions could result in the reporting unit being impaired in a future period.
In the fourth quarter of 201
, 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
,
MiR
,
and Energi
d
reporting units. There was no impairment as a result of the annual test performed in the fourth quarter of 201
.
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.
The changes in the carrying amount of goodwill by reportable segments for the years ended December 31, 2019 and 2018 are as follows:
| Industrial Automation | Wireless Test | Semiconductor Test | System Test | Total | ||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Balance at December 31, 2017: | ||||||||||||||||||||
| Goodwill | $ | 233,519 | $ | 361,819 | $ | 260,540 | $ | 158,699 | $ | 1,014,577 | ||||||||||
| Accumulated impairment losses | — | (353,843 | ) | (260,540 | ) | (148,183 | ) | (762,566 | ) | |||||||||||
| 233,519 | 7,976 | — | 10,516 | 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 | 361,819 | 260,540 | 158,699 | 1,144,416 | |||||||||||||||
| Accumulated impairment losses | — | (353,843 | ) | (260,540 | ) | (148,183 | ) | (762,566 | ) | |||||||||||
| 363,358 | 7,976 | — | 10,516 | 381,850 | ||||||||||||||||
| Lemsys acquisition | — | — | 1,428 | — | 1,428 | |||||||||||||||
| Auto G uide acquisition | 41,372 | — | — | — | 41,372 | |||||||||||||||
| Foreign currency translation adjustment | (8,247 | ) | — | 28 | — | (8,219 | ) | |||||||||||||
| Balance at December 31, 2019: | ||||||||||||||||||||
| Goodwill | 396,483 | 361,819 | 261,996 | 158,699 | 1,178,997 | |||||||||||||||
| Accumulated impairment losses | — | (353,843 | ) | (260,540 | ) | (148,183 | ) | (762,566 | ) | |||||||||||
| $ | 396,483 | $ | 7,976 | $ | 1,456 | $ | 10,516 | $ | 416,431 | |||||||||||
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.
There were no events or circumstances indicating that the carrying value of intangible and long-lived assets may not be recoverable in 2019
, 2018
and
2017
.
Amortizable intangible assets consist of the following and are included in intangible assets, net on the balance sheets:
| December 31, 2019 | ||||||||||||||||
| Gross Carrying Amount (1 ) (2) | Accumulated Amortization (2) | Foreign Currency Translation Adjustment | Net Carrying Amount | |||||||||||||
| (in thousands) | ||||||||||||||||
| Developed technology | $ | 361,787 | $ | (279,000 | ) | $ | (5,709 | ) | $ | 77,078 | ||||||
| Customer relationships | 75,669 | (59,077 | ) | (455 | ) | 16,137 | ||||||||||
| Tradenames and trademarks | 70,120 | (36,671 | ) | (1,184 | ) | 32,265 | ||||||||||
| Backlog | 260 | (260 | ) | — | — | |||||||||||
| Total intangible assets | $ | 507,836 | $ | (375,008 | ) | $ | (7,348 | ) | $ | 125,480 | ||||||
| December 31, 2018 | ||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | 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 | ||||||
| (1) | Includes intangible assets acquired in 2019, $37.7 million from the AutoGuide acquisition and $4.6 million from the Lemsys acquisition. |
|---|
| (2) | In 2019, $32.7 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, 2019, 2018, and 2017, was $40.1 million, $39.2 million, and $30.5 million, respectively. Estimated intangible assets amortization expense for each of the five succeeding fiscal years is as follows:
| Year | Amortization Expense | |||
| (in thousands) | ||||
| 2020 | $ | 30,606 | ||
| 2021 | 20,593 | |||
| 2022 | 19,700 | |||
| 2023 | 19,226 | |||
| 2024 | 18,921 | |||
| Thereafter | 16,434 |
M.
COMMITMENTS
AND CONTINGENCIES
Purchase Commitments
As of December 31, 2019,
Teradyne
had entered into
non-cancelable
purchase commitments for certain components and materials. The purchase commitments covered by the agreements aggregate to approximately $415.6 million, of which $412.9 million is for less than one year.
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
course of
business, Teradyne warrants that its products will substantially perform in accordance with its standard published specifications in effect at the time of delivery. Most warranties have a
one-year
duration commencing from installation. A provision is recorded upon revenue recognition to cost of revenue for estimated warranty expense based upon historical experience. When Teradyne receives revenue for extended warranties beyond the standard duration,
the revenue
is deferred and recognized on a straight
-
line basis over the contract period. Related costs are expensed as incurred. As of December 31, 2019 and 2018
,
Teradyne had a product warranty accrual of $9.0 million and $7.9 million, respectively, included in other accrued liabilities, and revenue deferrals related to extended warranties of $30.7 million and $27.4 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, 2019, and 2018, except for product warranty, Teradyne has not recorded any liabilities for these guarantees and obligations because the amount would be immaterial.
N. NET INCOME PER COMMON SHARE
The following table sets forth the computation of basic and diluted net income per common share:
| 2019 | 2018 | 2017 | ||||||||||
| (in thousands, except per share amounts) | ||||||||||||
| Net income for basic and diluted net income per share | $ | 467,468 | $ | 451,779 | $ | 257,692 | ||||||
| Weighted average common shares-basic | 170,425 | 187,672 | 198,069 | |||||||||
| Effect of dilutive potential common shares: | ||||||||||||
| Incremental shares from assumed conversion of convertible notes (1) | 4,909 | 2,749 | 1,298 | |||||||||
| Convertible note hedge warrant shares (2) | 2,698 | 485 | 112 | |||||||||
| Restricted stock units | 1,236 | 1,385 | 1,800 | |||||||||
| Stock options | 178 | 278 | 335 | |||||||||
| Employee stock purchase rights | 13 | 36 | 27 | |||||||||
| Dilutive potential common shares | 9,034 | 4,933 | 3,572 | |||||||||
| Weighted average common shares-diluted | 179,459 | 192,605 | 201,641 | |||||||||
| Net income per common share-basic | $ | 2.74 | $ | 2.41 | $ | 1.30 | ||||||
| Net income per common share-diluted | $ | 2.60 | $ | 2.35 | $ | 1.28 | ||||||
| (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 $31.62, 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 $39.68, 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.
O. RESTRUCTURING AND OTHER
During the year ended December 31, 2019, Teradyne recorded
a gain
of $
22.2
million
for the
decrease
in the fair value of the MiR contingent consideration liability
, parti
a
lly o
ffset by
a
$3.0 million
increase in the fair value
of the
AutoGuide contingent consideration
liability
,
$2.9 million
of severance charges related to headcount reductions primarily in Semiconductor Test and
Industrial Automation, and $2.5
million for acquisition related expenses and compensation
.
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.
P. RETIREMENT PLANS
ASC 715
,
“
Compensation—Retirement Benefits,
” requires an employer with defined benefit plans or other postretirement benefit plans to recognize an asset or a liability on its balance sheet for the overfunded or underfunded status of the plans as defined by ASC 715. The pension asset or liability represents a difference between the fair value of the pension plan’s assets and the projected benefit obligation at December 31. Teradyne uses a December 31 measurement date for all 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:
| 2019 | 2018 | |||||||||||||||
| United States | Foreign | United States | Foreign | |||||||||||||
| (in thousands) | ||||||||||||||||
| Assets and Obligations | ||||||||||||||||
| Change in benefit obligation: | ||||||||||||||||
| Projected benefit obligation: | ||||||||||||||||
| Beginning of year | $ | 178,237 | $ | 39,146 | $ | 363,026 | $ | 39,353 | ||||||||
| Service cost | 1,608 | 751 | 2,196 | 786 | ||||||||||||
| Interest cost | 7,189 | 691 | 8,940 | 687 | ||||||||||||
| Actuarial loss (gain) | 24,447 | 4,520 | (30,136 | ) | 773 | |||||||||||
| Benefits paid | (7,690 | ) | (836 | ) | (14,793 | ) | (741 | ) | ||||||||
| Retiree annuity purchase | — | — | (151,341 | ) | — | |||||||||||
| Liability loss due to settlement | — | — | 345 | — | ||||||||||||
| Non-U.S. currency movement | — | (320 | ) | — | (1,712 | ) | ||||||||||
| End of year | 203,791 | 43,952 | 178,237 | 39,146 | ||||||||||||
| Change in plan assets: | ||||||||||||||||
| Fair value of plan assets: | ||||||||||||||||
| Beginning of year | 144,301 | 1,400 | 324,506 | 1,307 | ||||||||||||
| Company contributions | 2,805 | 923 | 2,587 | 822 | ||||||||||||
| Actual return on plan assets | 27,516 | 64 | (16,658 | ) | 50 | |||||||||||
| Benefits paid | (7,690 | ) | (836 | ) | (14,793 | ) | (741 | ) | ||||||||
| Retiree annuity purchase | — | — | (151,341 | ) | — | |||||||||||
| Non-U.S. currency movement | — | 35 | — | (38 | ) | |||||||||||
| End of year | 166,932 | 1,586 | 144,301 | 1,400 | ||||||||||||
| Funded status | $ | (36,859 | ) | $ | (42,366 | ) | $ | (33,936 | ) | $ | (37,746 | ) | ||||
The following table provides amounts recorded within the account line items of the statements of financial position as of December 31:
| 2019 | 2018 | |||||||||||||||
| United States | Foreign | United States | Foreign | |||||||||||||
| (in thousands) | ||||||||||||||||
| Retirement plans assets | $ | 18,457 | $ | — | $ | 16,883 | $ | — | ||||||||
| Accrued employees’ compensation and withholdings | (2,826 | ) | (922 | ) | (2,676 | ) | (852 | ) | ||||||||
| Retirement plans liabilities | (52,490 | ) | (41,444 | ) | (48,143 | ) | (36,894 | ) | ||||||||
| Funded status | $ | (36,859 | ) | $ | (42,366 | ) | $ | (33,936 | ) | $ | (37,746 | ) | ||||
The following table provides amounts recognized in accumulated other comprehensive income as of December 31:
| 2019 | 2018 | |||||||||||||||
| United States | Foreign | United States | Foreign | |||||||||||||
| (in thousands) | ||||||||||||||||
| Deferred taxes related to prior service cost recognized in other comprehensive income | $ | 560 | $ | — | $ | 560 | $ | — | ||||||||
The accumulated benefit obligation for the United States defined benefit pension plans was $198.2 million and $172.8 million at December 31, 2019 and 2018, respectively. The accumulated benefit obligation for foreign defined benefit pension plans was $39.9 million and $35.6 million at December 31, 2019 and 2018, respectively.
Information for pension plans with an accumulated benefit obligation in excess of plan assets as of December 31:
| 2019 | 2018 | |||||||||||||||
| United States | Foreign | United States | Foreign | |||||||||||||
| (in millions) | ||||||||||||||||
| Projected benefit obligation | $ | 55.3 | $ | 44.0 | $ | 50.8 | $ | 39.1 | ||||||||
| Accumulated benefit obligation | 53.2 | 39.9 | 48.6 | 35.6 | ||||||||||||
| Fair value of plan assets | — | 1.6 | — | 1.4 |
Expense
For the years ended December 31, 2019, 2018, and 2017, Teradyne’s net periodic pension
cost
(income) was comprised of the following:
| 2019 | 2018 | 2017 | ||||||||||||||||||||||
| United States | Foreign | United States | Foreign | United States | Foreign | |||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||
| Components of Net Periodic Pension Cost (Income): | ||||||||||||||||||||||||
| Service cost | $ | 1,608 | $ | 751 | $ | 2,196 | $ | 786 | $ | 2,239 | $ | 818 | ||||||||||||
| Interest cost | 7,189 | 691 | 8,940 | 687 | 13,151 | 852 | ||||||||||||||||||
| Expected return on plan assets | (6,042 | ) | (29 | ) | (9,049 | ) | (19 | ) | (12,008 | ) | (165 | ) | ||||||||||||
| Amortization of prior service cost | — | — | 58 | — | 70 | — | ||||||||||||||||||
| Net actuarial loss (gain) | 2,973 | 4,485 | (4,429 | ) | 743 | (6,712 | ) | (310 | ) | |||||||||||||||
| Settlement loss | — | — | 345 | — | — | — | ||||||||||||||||||
| Total net periodic pension cost (income) | $ | 5,728 | $ | 5,898 | $ | (1,939 | ) | $ | 2,197 | $ | (3,260 | ) | $ | 1,195 | ||||||||||
| Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income: | ||||||||||||||||||||||||
| Reversal of amortization items: | ||||||||||||||||||||||||
| Prior service cost | — | — | (58 | ) | — | (70 | ) | — | ||||||||||||||||
| Total recognized in other comprehensive income | — | — | (58 | ) | — | (70 | ) | — | ||||||||||||||||
| Total recognized in net periodic pension cost (income) and other comprehensive income | $ | 5,728 | $ | 5,898 | $ | (1,997 | ) | $ | 2,197 | $ | (3,330 | ) | $ | 1,195 | ||||||||||
Weighted Average Assumptions to Determine Net Periodic Pension Cost at January 1:
| 2019 | 2018 | 2017 | ||||||||||||||||||||||
| United States | Foreign | United States | Foreign | United States | Foreign | |||||||||||||||||||
| Discount rate | 4.1 | % | 1.8 | % | 3.4 | % | 1.8 | % | 3.9 | % | 1.8 | % | ||||||||||||
| Expected return on plan assets | 4.3 | 2.0 | 4.3 | 1.5 | 4.0 | 2.0 | ||||||||||||||||||
| Salary progression rate | 2.5 | 2.5 | 2.3 | 2.7 | 2.6 | 2.7 |
Weighted Average Assumptions to Determine Pension Obligations at December 31:
| 2019 | 2018 | |||||||||||||||
| United States | Foreign | United States | Foreign | |||||||||||||
| Discount rate | 3.0 | % | 1.1 | % | 4.1 | % | 1.8 | % | ||||||||
| Salary progression rate | 2.6 | 2.5 | 2.5 | 2.6 |
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 2019 for the U.S. Qualified Pension Plan (“U.S. Plan”).
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.
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 3.10% at December 31, 2019,
down
from 4.15% at December 31, 2018.
Plan Assets
As of December 31, 2019, the fair value of Teradyne’s pension plans’ assets totaled $168.5 million of which $166.9 million was related to the U.S. Plan and $1.6 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, 2019 and 2018:
| 2019 | 2018 | |||||||||||||||
| United States | Foreign | United States | Foreign | |||||||||||||
| Fixed income securities | 94.0 | % | — | % | 94.0 | % | — | % | ||||||||
| Equity securities | 5.0 | — | 5.0 | — | ||||||||||||
| Other | 1.0 | 100.0 | 1.0 | 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. Long Government Bond Index | 14 | ||||
| High yield fixed income | Barclays U.S. High Yield 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, 2019, there were no transfers of pension assets in or out of Level 1, Level 2, and Level 3. During the year ended December 31, 2018, $2.7 million of pension assets were transferred out of Level 3 to Level 2.
The fair value of pension plan assets by asset category and by level at December 31, 2019 and December 31, 2018 were as follows:
| December 31, 2019 | ||||||||||||||||||||||||||||||||
| 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 | $ | — | $ | 133,792 | $ | — | $ | 133,792 | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
| U.S. government securities | — | 23,186 | — | 23,186 | — | — | — | — | ||||||||||||||||||||||||
| Global equity | — | 8,344 | — | 8,344 | — | — | — | — | ||||||||||||||||||||||||
| Other | — | — | — | — | — | 1,586 | — | 1,586 | ||||||||||||||||||||||||
| Cash and cash equivalents | 1,610 | — | — | 1,610 | — | — | — | — | ||||||||||||||||||||||||
| Total | $ | 1,610 | $ | 165,322 | $ | — | $ | 166,932 | $ | — | $ | 1,586 | $ | — | $ | 1,586 | ||||||||||||||||
| 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 | ||||||||||||||||
Changes in the fair value of Level 3 group annuity insurance contracts for the year ended December 31, 2018
were
as follows:
| Group Annuity Insurance Contracts | ||||
| (in thousands) | ||||
| Balance at December 31, 2017 | $ | 3,166 | ||
| Transfer out of level 3 | (2,658 | ) | ||
| Purchase s o f r etiree annuity insurance c ontracts | (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 2019, Teradyne contributed $2.8 million to the U.S. supplemental executive defined benefit pension plan and $0.9 million to certain qualified plans for
non-U.S.
subsidiaries. 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. In
2020
, contributions to the U.S. supplemental executive defined benefit pension plan and certain qualified plans from
non-U.S.
subsidiaries will be approximately $2.8 million and $1.0 million, respectively.
Expected Future Pension Benefit Payments
Future benefit payments are expected to be paid as follows:
| United States | Foreign | |||||||
| (in thousands) | ||||||||
| 2020 | $ | 8,027 | $ | 1,237 | ||||
| 2021 | 8,416 | 985 | ||||||
| 2022 | 9,163 | 982 | ||||||
| 2023 | 9,785 | 1,258 | ||||||
| 2024 | 10,558 | 1,098 | ||||||
| 2025-2029 | 59,665 | 6,129 |
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:
| 2019 | 2018 | |||||||
| (in thousands) | ||||||||
| Assets and Obligations | ||||||||
| Change in benefit obligation: | ||||||||
| Projected benefit obligation: | ||||||||
| Beginning of year | $ | 9,256 | $ | 6,177 | ||||
| Service cost | 41 | 39 | ||||||
| Interest cost | 347 | 196 | ||||||
| Actuarial loss | 717 | 25 | ||||||
| Benefits paid | (1,358 | ) | (889 | ) | ||||
| Special termination benefits | — | 3,708 | ||||||
| End of year | 9,003 | 9,256 | ||||||
| Change in plan assets: | ||||||||
| Fair value of plan assets: | ||||||||
| Beginning of year | — | — | ||||||
| Company contributions | 1,358 | 889 | ||||||
| Benefits paid | (1,358 | ) | (889 | ) | ||||
| End of year | — | — | ||||||
| Funded status | $ | (9,003 | ) | $ | (9,256 | ) | ||
The following table provides amounts recorded within the account line items of financial position as of December 31:
| 2019 | 2018 | |||||||
| (in thousands) | ||||||||
| Accrued employees’ compensation and withholdings | $ | (1,231 | ) | $ | (1,310 | ) | ||
| Retirement plans liability | (7,772 | ) | (7,946 | ) | ||||
| Funded status | $ | (9,003 | ) | $ | (9,256 | ) | ||
The following table provides amounts recognized in accumulated other comprehensive income as of December 31:
| 2019 | 2018 | |||||||
| (in thousands) | ||||||||
| Prior service credit, before tax | $ | (58 | ) | $ | (249 | ) | ||
| Deferred taxes | (1,684 | ) | (1,641 | ) | ||||
| Total recognized in other comprehensive income, net of tax | $ | (1,742 | ) | $ | (1,890 | ) | ||
Expense
For the years ended December 31, 2019, 2018, and 2017, Teradyne’s net periodic postretirement benefit cost (income) was comprised of the following:
| 2019 | 2018 | 2017 | ||||||||||
| (in thousands) | ||||||||||||
| Components of Net Periodic Postretirement Benefit Cost (income): | ||||||||||||
| Service cost | $ | 41 | $ | 39 | $ | 34 | ||||||
| Interest cost | 347 | 196 | 201 | |||||||||
| Amortization of prior service credit | (191 | ) | (373 | ) | (496 | ) | ||||||
| Net actuarial loss | 717 | 25 | 398 | |||||||||
| Special termination benefits | — | 3,708 | 591 | |||||||||
| Total net periodic postretirement benefit cost | 914 | 3,595 | 728 | |||||||||
| Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income: | ||||||||||||
| Prior service cost | — | — | — | |||||||||
| Reversal of amortization items: | ||||||||||||
| Prior service credit | 191 | 373 | 496 | |||||||||
| Total recognized in other comprehensive income | 191 | 373 | 496 | |||||||||
| Total recognized in net periodic postretirement cost and other comprehensive income | $ | 1,105 | $ | 3,968 | $ | 1,224 | ||||||
Weighted Average Assumptions to Determine Net Periodic Postretirement Benefit Income as of January 1:
| 2019 | 2018 | 2017 | ||||||||||
| Discount rate | 4.0 | % | 3.4 | % | 3.9 | % | ||||||
| Initial health care cost trend rate | 7.5 | 7.9 | 7.3 | |||||||||
| Ultimate health care cost trend rate | 4.5 | 4.5 | 5.0 | |||||||||
| Year in which ultimate health care cost trend rate is reached | 2026 | 2026 | 2023 |
Weighted Average Assumptions to Determine Postretirement Benefit Obligation as of December 31:
| 2019 | 2018 | 2017 | ||||||||||
| Discount rate | 3.0 | % | 4.0 | % | 3.4 | % | ||||||
| Initial medical trend | 7.1 | 7.5 | 7.9 | |||||||||
| Ultimate health care trend | 4.5 | 4.5 | 4.5 | |||||||||
| Medical cost trend rate decrease to ultimate rate in year | 2026 | 2026 | 2026 |
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, 2019 would have the following effects:
| 1 Percentage Point Increase | 1 Percentage Point Decrease | |||||||
| (in thousands) | ||||||||
| Effect on total service and interest cost components | $ | 6 | $ | (6 | ) | |||
| Effect on postretirement benefit obligations | 139 | (133 | ) |
Expected Future Benefit Payments
Future benefit payments are expected to be paid as follows:
| Benefit Payments | ||||
| (in thousands) | ||||
| 2020 | $ | 1,231 | ||
| 2021 | 1,171 | |||
| 2022 | 958 | |||
| 2023 | 789 | |||
| 2024 | 662 | |||
| 2025-2029 | 1,965 |
Q. STOCK-BASED COMPENSATION
Stock Compensation Plans
On July 17, 2019 (the “Retirement Date”), former Chief Financial Officer Gregory Beecher retired as Vice President and Senior Advisor of Teradyne, and Teradyne entered into an agreement (the “Retirement Agreement”) with Mr. Beecher. Under the Retirement Agreement, Mr. Beecher’s unvested time-based restricted stock units and stock options granted prior to 2019 were modified to allow continued vesting; unvested time-based restricted stock units and stock options granted in 2019 were modified to allow continued vesting through January 31, 2023 (the
“Non-Competition
Period”) in a
pro-rated
amount based on the number of days that Mr. Beecher was employed during 2019; unvested, performance-based restricted stock units awarded in 2019 will vest on the date the amount of shares underlying the performance-based restricted stock units are determined in a
pro-rated
amount of shares based on the number of days that Mr. Beecher was employed during 2019; vested options or options that vest during the
Non-Competition
Period may be exercised for the remainder of the applicable option term. During 2019, Teradyne recorded a stock based compensation expense of $2.1 million related to the Retirement Agreement.
Under Teradyne’s stock compensation plans, Teradyne grants
time-based
restricted stock units
,
performance-based restricted stock units,
stock
option
s
and employees are eligible to purchase Teradyne’s common stock through its Employee Stock Purchase Plan (“ESPP”).
Time-based restricted stock unit awards granted to employees vest in equal annual installments over four years. Restricted stock unit awards granted to
non-employee
directors vest
after
a
one-y
ear
p
eriod,
with
100%
o
f
t
he
award
vesting
on the earlier of (a) the first anniversary of the grant date or (b) the date of the following year’s Annual Meeting of Shareholders. Teradyne expenses the cost of the restricted stock unit awards subject to time
-
based vesting, which is determined to be the fair market value of the shares at the date of grant, ratably over the period during which the restrictions lapse.
P
erformance
-
based restricted stock units (“PRSUs”)
granted
to
Teradyne’
s
executive officers
may
have
a performance metric based on relative total shareholder return (“TSR”). Teradyne’s three-year TSR performance is measured against the New York Stock Exchange (“NYSE”) Composite Index. The final number of TSR PRSUs that vest will vary based upon the level of performance achieved from 200% to 0% of the target shares capped at four times the grant date value for grants prior to 2019. 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.
PRSUs
granted to
Teradyne’s
executive officers
may also have
a performance metric based on three-year cumulative
non-GAAP
profit before interest and tax (“PBIT”) as a percent of Teradyne’s revenue.
Non-GAAP
PBIT is a financial measure equal to GAAP income from operations less restructuring and other, 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
shorter of the
three-year service period
or the period from the grant date to the date described in the retirement provisions below. Compensation expense for employees meeting the retirement provisions prior to the grant date will be recognized in full on the date of grant
. Compensation expense is recognized based on the number of units that are earned based upon the three-year Teradyne PBIT as a percent of Teradyne’s revenue, provided the executive officer remains an employee at the end of the three-year period subject to the retirement and termination eligibility provisions noted below.
If a PRSU recipient’s employment ends prior to the determination of the performance percentage due to (1) permanent disability or death or (2) retirement or termination other than for cause, after attaining both at least age sixty and at least ten years of service, then all or a portion of the recipient’s PRSUs (based on the actual performance percentage achieved on the determination date) will vest on the date the performance percentage is determined. Except as set forth in the preceding sentence, no PRSUs will vest if the executive officer is no longer an employee at the end of the three-year period.
Stock options to purchase Teradyne’s common stock at 100% of the fair market value on the grant date vest in equal annual installments over four years from the grant date and have a maximum term of seven years.
During 2019, 2018 and 2017, Teradyne granted 0.8 million, 0.6 million and 0.8 million of service-based restricted stock unit awards to employees at a weighted average grant date fair value of $37.65, $45.92 and $28.19, respectively.
During 2019, 2018 and 2017, 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 $48.03, $35.81 and $34.48, respectively.
During 2019, 2018 and 2017, Teradyne granted
0.1 million TSR PRSUs, with a grant date fair value of $51.51, $54.85 and $35.66 respectively. The fair value was estimated using the Monte Carlo simulation model with the following assumptions:
| 2019 | 2018 | 2017 | ||||||||||
| Risk-free interest rate | 2.6 | % | 2.2 | % | 1.5 | % | ||||||
| Teradyne volatility-historical | 31.9 | % | 26.8 | % | 26.6 | % | ||||||
| NYSE Composite Index volatility-historical | 11.9 | % | 12.4 | % | 13.4 | % | ||||||
| Dividend yield | 1.0 | % | 0.8 | % | 1.0 | % |
Expected volatility was based on the historical volatility of Teradyne’s stock and the NYSE Composite Index for
each of
the 2019, 2018 and 2017 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
each of the grants
. Dividend yield was based upon an estimated annual dividend amount of $0.36 per share for 2019
and
2018 and $0.28 per share for 2017
,
divided by Teradyne’s stock price on the grant date of $37.95 for the 2019
grants
, $47.70 for the 2018
grants
and $28.56 for 2017
grants
.
During 2019, 2018 and 2017, Teradyne granted 0.1 million
of
PBIT PRSUs with a grant date fair value of $36.88, $46.62 and $27.72, respectively.
During
2019
,
2018
and
2017
,
Teradyne
granted
0.1
million of service-based stock options to executive officers at a weighted average grant date fair value of $
10.64
,
$
12.17
and $
7.13
, respectively.
The fair value of stock options was estimated using the Black-Scholes option-pricing model with the following assumptions:
| 2019 | 2018 | 2017 | ||||||||||
| Expected life (years) | 5.0 | 5.0 | 5.0 | |||||||||
| Risk-free interest rate | 2.5 | % | 2.4 | % | 2.0 | % | ||||||
| Volatility-historical | 30.1 | % | 26.4 | % | 27.8 | % | ||||||
| Dividend yield | 1.00 | % | 0.80 | % | 1.00 | % |
Teradyne determined the stock
options’
expected life based upon historical exercise data for executive officers, the age of
the executive officers
and the terms of the stock option
grant
. Volatility was determined using historical volatility for a period equal to the expected life. The
risk-free
interest rate was determined using the U.S. Treasury yield curve in effect at the time of grant. Dividend yield was based upon an estimated annual dividend amount of $0.36 per share divided by Teradyne’s stock price on the grant date of $37.95 for the 2019 grants, $47.70 for the 2018 grants and $28.56 for the 2017 grants.
Stock compensation plan activity for the years 2019, 2018, and 2017, is as follows:
| 2019 | 2018 | 2017 | ||||||||||
| (in thousands) | ||||||||||||
| Restricted Stock Units: | ||||||||||||
| Non-vested at January 1 | 2,454 | 3,174 | 3,778 | |||||||||
| Awarded | 1,139 | 790 | 939 | |||||||||
| Vested | (1,237 | ) | (1,382 | ) | (1,434 | ) | ||||||
| Forfeited | (87 | ) | (128 | ) | (109 | ) | ||||||
| Non-vested at December 31 | 2,269 | 2,454 | 3,174 | |||||||||
| Stock Options: | ||||||||||||
| Outstanding at January 1 | 506 | 531 | 926 | |||||||||
| Granted | 102 | 69 | 111 | |||||||||
| Exercised | (280 | ) | (94 | ) | (501 | ) | ||||||
| Forfeited | (7 | ) | — | — | ||||||||
| Expired | (2 | ) | — | (5 | ) | |||||||
| Outstanding at December 31 | 319 | 506 | 531 | |||||||||
| Vested and expected to vest at December 31 | 319 | 506 | 531 | |||||||||
| Exercisable at December 31 | 85 | 256 | 233 | |||||||||
Total shares available for the years 2019, 2018, and 2017:
| 2019 | 2018 | 2017 | ||||||||||
| (in thousands) | ||||||||||||
| Shares available: | ||||||||||||
| Available for grant at January 1 | 7,874 | 8,605 | 9,546 | |||||||||
| Options granted | (102 | ) | (69 | ) | (111 | ) | ||||||
| Options forfeited | 7 | — | — | |||||||||
| Restricted stock units awarded | (1,139 | ) | (790 | ) | (939 | ) | ||||||
| Restricted stock units forfeited | 87 | 128 | 109 | |||||||||
| Available for grant at December 31 | 6,727 | 7,874 | 8,605 | |||||||||
Weighted average restricted stock unit award date fair value information for the years 2019, 2018, and 2017
,
is as follows:
| 2019 | 2018 | 2017 | ||||||||||
| Non-vested at January 1 | $ | 29.22 | $ | 21.71 | $ | 18.27 | ||||||
| Awarded | 39.08 | 45.99 | 28.91 | |||||||||
| Vested | 23.59 | 20.20 | 17.90 | |||||||||
| Forfeited | 35.60 | 24.67 | 20.35 | |||||||||
| Non-vested at December 31 | $ | 35.58 | $ | 29.22 | $ | 21.71 |
Restricted stock unit awards aggregate intrinsic value information at December 31 for the years 2019, 2018
,
and 2017 is as follows:
| 2019 | 2018 | 2017 | ||||||||||
| (in thousands) | ||||||||||||
| Vested | $ | 46,110 | $ | 63,688 | $ | 40,649 | ||||||
| Outstanding | 154,752 | 77,015 | 132,875 | |||||||||
| Expected to vest | 152,374 | 77,187 | 130,594 |
Restricted stock units weighted average remaining contractual terms (in years) information at December 31 for the years 2019, 2018,
and
2017 is as follows:
| 2019 | 2018 | 2017 | ||||||||||
| Outstanding | 1.02 | 0.92 | 1.00 | |||||||||
| Expected to vest | 1.02 | 0.91 | 0.99 |
Weighted average stock options exercise price information for the year ended December 31, 2019 is as follows:
| 2019 | ||||
| Outstanding at January 1 | $ | 19.06 | ||
| Options granted | 37.95 | |||
| Options exercised | 13.20 | |||
| Options forfeited | 36.75 | |||
| Options cancelled | 1.48 | |||
| Outstanding at December 31 | 29.91 | |||
| Exercisable at December 31 | 14.97 |
The total cash received from employees as a result of employee stock options exercises during the years ended December 31, 2019, 2018, and 2017, was $3.7 million, $1.0 million and $6.8 million, respectively. In connection with these exercises, the tax benefit realized by Teradyne for the years ended December 31, 2019, 2018, and 2017, was $2.0 million, $0.4 million, and $2.5 million, respectively.
Stock option aggregate intrinsic value information for the years ended December 31, 2019, 2018, and 2017 is as follows:
| 2019 | 2018 | 2017 | ||||||||||
| (in thousands) | ||||||||||||
| Exercised | $ | 9,232 | $ | 2,960 | $ | 8,035 | ||||||
| Outstanding | 12,218 | 7,359 | 14,831 | |||||||||
| Vested and expected to vest | 7,701 | 7,359 | 14,831 | |||||||||
| Exercisable | 4,517 | 5,905 | 9,076 |
Stock options weighted average remaining contractual terms (in years) information at December 31, for the years 2019, 2018, and 2017 is as follows:
| 2019 | 2018 | 2017 | ||||||||||
| Outstanding | 4.2 | 3.6 | 4.1 | |||||||||
| Vested and expected to vest | 5.0 | 3.6 | 4.1 | |||||||||
| Exercisable | 2.1 | 2.4 | 2.8 |
As of December 31, 2019, total unrecognized expense related to
non-vested
restricted stock unit awards and stock options was $45 million, and is expected to be recognized over a weighted average period of 1.8 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 2019, 0.3 million shares of common stock were issued to employees who participated in the plan during the first half of 2019 at the price of $40.72 per share. In January 2020, Teradyne issued 0.2 million shares of common stock to employees who participated in the plan during the second half of 2019 at the price of $57.96 per share.
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.
As of December 31, 2019, there were 1.8 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, 2019, 2018, and 2017:
| 2019 | 2018 | 2017 | ||||||||||
| (in thousands) | ||||||||||||
| Cost of revenues | $ | 3,480 | $ | 3,129 | $ | 3,212 | ||||||
| Engineering and development | 9,913 | 9,181 | 9,370 | |||||||||
| Selling and administrative | 24,504 | 21,267 | 21,515 | |||||||||
| Stock-based compensation | 37,897 | 33,577 | 34,097 | |||||||||
| Income tax benefit | (8,360 | ) | (12,036 | ) | (10,462 | ) | ||||||
| Total stock-based compensation expense after income taxes | $ | 29,537 | $ | 21,541 | $ | 23,635 | ||||||
R. 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 2019, 2018 and 2017, 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
sponsors
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, 2019 and 2018, was $32.7 million and $24.4 million, respectively, and is included in retirement plan liabilities. Teradyne
contributes to
defined
contributions
savings plans for its foreign employees. Under Teradyne’s savings plans, amounts charged to the statements of operations for the years ended December 31, 2019, 2018, and 2017 were $20.9 million, $19.4 million, and $16.8 million, respectively.
S. 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:
| 2019 | 2018 | 2017 | ||||||||||
| (in thousands) | ||||||||||||
| Income before income taxes | ||||||||||||
| U.S. | $ | 192,442 | $ | 189,691 | $ | 76,699 | ||||||
| Non-U.S. | 333,330 | 278,110 | 447,713 | |||||||||
| $ | 525,772 | $ | 467,801 | $ | 524,412 | |||||||
| Provision (benefit) for income taxes | ||||||||||||
| Current: | ||||||||||||
| U.S. Federal | $ | 19,297 | $ | (59,122 | ) | $ | 162,679 | |||||
| Non-U.S. | 52,810 | 45,083 | 64,313 | |||||||||
| State | (4,347 | ) | 1,721 | 2,623 | ||||||||
| 67,760 | (12,318 | ) | 229,615 | |||||||||
| Deferred: | ||||||||||||
| U.S. Federal | (4,522 | ) | 29,252 | 43,687 | ||||||||
| Non-U.S. | (8,007 | ) | (1,243 | ) | (6,476 | ) | ||||||
| State | 3,073 | 331 | (106 | ) | ||||||||
| (9,456 | ) | 28,340 | 37,105 | |||||||||
| Total provision for income taxes | $ | 58,304 | $ | 16,022 | $ | 266,720 | ||||||
Income tax expense for 2019
,
2018 and 2017 totaled $58.3
million
, $16.0
million
and $266.7 million, respectively. The effective tax rate for 2019, 2018 and 2017 was 11.1%, 3.4% and 50.9%, 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 $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.
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 increase in the effective tax rate from 2018 to 2019 is primarily attributable to increases in expense associated with GILTI and the transition tax on the mandatory deemed repatriation of foreign earnings. These increases in expense were partially offset by increased benefit from the U.S. foreign derived intangible income deduction, foreign tax credits and a net reduction of reserves for uncertain tax positions.
On July 27, 2015, in Altera Corp. (“Altera”) v. Commissioner, the U.S. Tax Court issued an opinion invalidating the regulations relating to the treatment of stock-based compensation expense in an intercompany cost-sharing arrangement. A final decision was issued by the Tax Court in December 2015. The IRS appealed the decision in June 2016. On July 24, 2018, the U.S. Court of Appeals for the Ninth Circuit (“Ninth Circuit”) issued a decision that was subsequently withdrawn and a reconstituted panel conferred on the appeal. On June 7, 2019, the Ninth Circuit upheld the cost-sharing regulations. On November 12, 2019 the Ninth Circuit denied Altera’s petition for rehearing of its case. As a result, during the fourth quarter of 2019, Teradyne recognized a tax expense of approximately $6.3 million related to the inclusion of stock-based compensation in its intercompany cost-sharing arrangement.
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
for
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.
A reconciliation of the effective tax rate for the years 2019, 2018 and 2017 is as follows:
| 2019 | 2018 | 2017 | ||||||||||
| U.S. statutory federal tax rate | 21.0 | % | 21.0 | % | 35.0 | % | ||||||
| U.S. global intangible low-taxed income | 6.2 | 0.3 | — | |||||||||
| U.S. transition tax | 1.9 | (10.5 | ) | 28.7 | ||||||||
| State income taxes, net of federal tax benefit | 0.5 | 0.1 | (0.4 | ) | ||||||||
| Foreign tax credits | (5.9 | ) | (2.2 | ) | (2.2 | ) | ||||||
| Uncertain tax positions | (4.3 | ) | 1.0 | 1.7 | ||||||||
| Foreign taxes | (4.0 | ) | (2.0 | ) | (16.3 | ) | ||||||
| U.S. foreign derived intangible income | (2.6 | ) | (1.8 | ) | — | |||||||
| U.S. research and development credit | (1.8 | ) | (2.2 | ) | (1.6 | ) | ||||||
| Equity compensation | (0.7 | ) | (1.2 | ) | (0.8 | ) | ||||||
| Impact of rate change on deferred taxes | — | 0.3 | 6.9 | |||||||||
| Domestic production activities deduction | — | — | (0.3 | ) | ||||||||
| Other, net | 0.8 | 0.6 | 0.2 | |||||||||
| 11.1 | % | 3.4 | % | 50.9 | % | |||||||
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, 2019, 2018 and 2017 were $15.1 million or $
0.08
per diluted share, $
11.9
million or $0.06 per diluted share and $24.8 million or $0.12 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, 2019 and 2018 were as follows:
| 2019 | 2018 | |||||||
| (in thousands) | ||||||||
| Deferred tax assets | ||||||||
| Tax credits | $ | 79,480 | $ | 69,091 | ||||
| Accruals | 25,424 | 23,449 | ||||||
| Pension liabilities | 24,459 | 20,826 | ||||||
| Inventory valuations | 18,572 | 18,514 | ||||||
| Deferred revenue | 7,622 | 9,130 | ||||||
| Equity compensation | 7,042 | 7,190 | ||||||
| Vacation accrual | 4,768 | 4,772 | ||||||
| Investment impairment | 3,292 | — | ||||||
| Net operating loss carryforwards | 2,705 | 3,658 | ||||||
| Marketable s ecurities | — | 962 | ||||||
| Other | 1,472 | 685 | ||||||
| Gross deferred tax assets | 174,836 | 158,277 | ||||||
| Less: valuation allowance | (77,177 | ) | (69,852 | ) | ||||
| Total deferred tax assets | $ | 97,659 | $ | 88,425 | ||||
| Deferred tax liabilities: | ||||||||
| Depreciation | $ | (18,238 | ) | $ | (14,028 | ) | ||
| Intangible assets | (16,705 | ) | (24,211 | ) | ||||
| Marketable securities | (1,601 | ) | — | |||||
| Total deferred tax liabilities | $ | (36,544 | ) | $ | (38,239 | ) | ||
| Net deferred assets | $ | 61,115 | $ | 50,186 | ||||
As of December 31, 2019 and 2018, Teradyne evaluated the likelihood that it would realize 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, 2019 and 2018, Teradyne maintained a valuation allowance for certain deferred tax assets of $77.2 million and $69.9 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, 2019, Teradyne had operating loss carryforwards that expire in the following years:
| State Operating Loss Carryforwards | Federal Operating Loss Carryforwards | Foreign Operating Loss Carryforwards | ||||||||||
| ( in t housands ) | ||||||||||||
| 2020 | $ | 269 | $ | — | $ | — | ||||||
| 2021 | 2,141 | — | — | |||||||||
| 2022 | 4,934 | — | — | |||||||||
| 2023 | 4,342 | — | — | |||||||||
| 2024 | 1,498 | — | — | |||||||||
| 2025-2029 | 7,673 | — | — | |||||||||
| 2030-2034 | 4,329 | — | 15 | |||||||||
| Beyond 2034 | 2,185 | 554 | 74 | |||||||||
| Non-expiring | 1,357 | — | 4,207 | |||||||||
| Total | $ | 28,728 | $ | 554 | $ | 4,296 | ||||||
Teradyne has approximately $108.4 million of tax credit carryforwards including federal business tax credits of approximately $2.1 million which expire in 2028
and 2029
,
and state tax credits of $106.3 million, of which $59.7 million do not expire and the remainder expires in the years 2020 through 2039.
Teradyne’s gross unrecognized tax benefits for the years ended December 31, 2019, 2018 and 2017 were as follows:
| 2019 | 2018 | 2017 | ||||||||||
| (in thousands) | ||||||||||||
| Beginning balance, as of January 1 | $ | 43,395 | $ | 36,263 | $ | 38,958 | ||||||
| Additions: | ||||||||||||
| Tax positions for current year | 1,322 | 4,716 | 8,208 | |||||||||
| Tax positions for prior years | 8,043 | 2,626 | 199 | |||||||||
| Reductions: | ||||||||||||
| Tax positions for prior years | (31,397 | ) | (153 | ) | (10,573 | ) | ||||||
| Expiration of statutes | (183 | ) | (57 | ) | (325 | ) | ||||||
| Settlements with tax authorities | — | — | (204 | ) | ||||||||
| Ending balance as of December 31 | $ | 21,180 | $ | 43,395 | $ | 36,263 | ||||||
Current year additions relate to federal and state research credits. Prior year additions primarily relate to
stock-based compensation
. Prior year reductions are primarily composed of federal and state reserves related to transfer pricing and research credits and resulted from the completion of the 2015 U.S. federal audit in the first quarter of 2019.
Of the $21.2 million of unrecognized tax benefits as of December 31, 2019, $12.7 million would impact the consolidated income tax rate if ultimately recognized. The remaining $8.5 million would impact deferred taxes if recognized.
Teradyne
does not anticipate a material change in the
balance of unrecognized tax benefits as of December 31, 2019
in the next twelve months
.
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, 2019 and 2018 amounted to $1.4 million and $0.3 million, respectively. For the years ended December 31, 2019, 2018 and 2017, expense of $1.1 million, expense 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, 2019, all material state and local income tax matters have been concluded through 2013, all material federal income tax matters have been concluded through
2015
and all material foreign income tax matters have been concluded through
2011
. 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, 2019, 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.
T. OPERATING SEGMENT, GEOGRAPHIC AND SIGNIFICANT CUSTOMER INFORMATION
Teradyne has four reportable segments (Semiconductor Test, Industrial Automation
,
System Test
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, 2019, 2018, and 2017 is as follows:
| Semiconductor Test | Industrial Automation | System Test | Wireless Test | Corporate And Other | Consolidated | |||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||
| 2019 | ||||||||||||||||||||||||
| Revenues | $ | 1,552,571 | $ | 298,139 | $ | 287,455 | $ | 157,315 | $ | (515 | ) | $ | 2,294,965 | |||||||||||
| Income (loss) before taxes (1)(2) | 416,973 | (5,916 | ) | 93,543 | 35,585 | (14,413 | ) | 525,772 | ||||||||||||||||
| Total assets (3) | 784,808 | 671,559 | 131,428 | 97,299 | 1,101,920 | 2,787,014 | ||||||||||||||||||
| Property additions | 112,145 | 9,076 | 3,059 | 10,362 | — | 134,642 | ||||||||||||||||||
| Depreciation and amortization expense | 59,197 | 40,904 | 5,518 | 5,365 | 9,671 | 120,655 | ||||||||||||||||||
| 2018 | ||||||||||||||||||||||||
| Revenues | $ | 1,492,417 | $ | 261,452 | $ | 216,132 | $ | 132,006 | $ | (1,205 | ) | $ | 2,100,802 | |||||||||||
| Income (loss) before taxes (1)(2) | 397,645 | 7,670 | 48,857 | 29,052 | (15,423 | ) | 467,801 | |||||||||||||||||
| Total assets (3) | 669,452 | 607,502 | 88,098 | 77,570 | 1,263,984 | 2,706,606 | ||||||||||||||||||
| Property additions | 94,496 | 11,188 | 3,469 | 5,226 | — | 114,379 | ||||||||||||||||||
| Depreciation and amortization expense | 58,095 | 36,755 | 6,430 | 5,328 | 6,616 | 113,224 | ||||||||||||||||||
| 2017 | ||||||||||||||||||||||||
| Revenues | $ | 1,662,549 | $ | 170,056 | $ | 192,135 | $ | 111,866 | $ | — | $ | 2,136,606 | ||||||||||||
| Income (loss) before taxes (1)(2) | 491,361 | 8,763 | 10,305 | 17,350 | (3,368 | ) | 524,411 | |||||||||||||||||
| Total assets (3) | 597,480 | 368,037 | 97,018 | 59,912 | 1,987,098 | 3,109,545 | ||||||||||||||||||
| Property additions | 87,920 | 7,044 | 5,976 | 4,435 | — | 105,375 | ||||||||||||||||||
| Depreciation and amortization expense | 58,901 | 25,711 | 6,646 | 5,392 | 11,425 | 108,075 |
| (1) | Included in Corporate and Other are: contingent consideration adjustments, investment impairment , pension and postretirement plans actuarial gains (losses), severance charges , property insurance recovery related to the Japan earthquake, 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. |
|---|
| (3) | Total assets are attributable to each segment. Corporate assets consist of cash and cash equivalents, marketable securities and certain other assets. |
|---|
Included in each segment are charges and credits in the following line items in the statements of operation
s
:
| For the Year Ended December 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| (in thousands) | ||||||||||||
| Semiconductor Test: | ||||||||||||
| Cost of revenues—inventory charge | $ | 8,731 | $ | 6,822 | $ | 4,606 | ||||||
| Restructuring and other—employee severance | 1,277 | 8,429 | 1,779 | |||||||||
| Restructuring and other—impairment of fixed assets | — | — | 1,124 | |||||||||
| Industrial Automation: | ||||||||||||
| Restructuring and other—employee severance | $ | 796 | $ | — | $ | 1,414 | ||||||
| Restructuring and other—acquisition related expenses and compensation | 741 | 1,163 | — | |||||||||
| Cost of revenues—inventory charge | 508 | 680 | — | |||||||||
| System Test: | ||||||||||||
| Cost of revenues—inventory charge | $ | 2,000 | $ | 1,175 | $ | 1,918 | ||||||
| Wireless: | ||||||||||||
| Cost of revenues—inventory charge | $ | 4,005 | $ | 2,565 | $ | 2,190 | ||||||
| Restructuring and other—lease impairment | — | — | 972 | |||||||||
| Corporate and Other: | ||||||||||||
| Restructuring and other—MiR contingent consideration adjustment | $ | (22,199 | ) | $ | 17,666 | $ | — | |||||
| Other (income) expense, net—investment impairment charge | 15,000 | — | — | |||||||||
| Restructuring and other—AutoGuide contingent consideration adjustment | 2,976 | — | — | |||||||||
| Selling and administrative—equity modification charge | 2,108 | — | — | |||||||||
| Restructuring and other—acquisition related expenses and compensation | 1,765 | 3,422 | — | |||||||||
| Restructuring and other—Universal Robots contingent consideration adjustment | — | (16,679 | ) | 7,820 | ||||||||
| Restructuring and other—property insurance recovery related to Japan earthquake | — | — | (5,064 | ) |
Information as to Teradyne’s revenues by country is as follows:
| 2019 | 2018 | 2017 | ||||||||||
| (in thousands) | ||||||||||||
| Revenues from customers (1): | ||||||||||||
| China | $ | 514,327 | $ | 348,942 | $ | 260,451 | ||||||
| Taiwan | 485,681 | 516,322 | 687,031 | |||||||||
| United States | 333,059 | 282,869 | 252,516 | |||||||||
| Korea | 239,504 | 163,224 | 206,819 | |||||||||
| Europe | 219,015 | 223,207 | 163,715 | |||||||||
| Japan | 175,322 | 158,281 | 169,093 | |||||||||
| Thailand | 87,503 | 59,184 | 29,566 | |||||||||
| Singapore | 84,111 | 108,618 | 101,085 | |||||||||
| Malaysia | 58,200 | 122,797 | 124,048 | |||||||||
| Philippines | 54,560 | 77,996 | 105,850 | |||||||||
| Rest of the World | 43,683 | 39,362 | 36,432 | |||||||||
| $ | 2,294,965 | $ | 2,100,802 | $ | 2,136,606 | |||||||
| (1) | Revenues attributable to a country are based on location of customer site. |
|---|
In 2019 and 2018, no single
direct
customer accounted for more than 10% of
Teradyne’
s
consolidated revenues. In 2017, revenues from Taiwan Semiconductor Manufacturing Company Ltd. accounted for 13% of
its
consolidated
revenues
. Taiwan Semiconductor Manufacturing Company Ltd. is a customer of
Teradyne’s Semiconductor Test segment. Teradyne estimates consolidated revenues driven by Huawei Technologies Co.
Ltd. (“Huawei”), combining direct sales to that customer with sales to the customer’s OSATs
,
accounted for approximately 11% and 4%
of
its
consolidated revenues in 2019 and 2018, respectively. Teradyne estimates consolidated revenues driven by another OEM customer, combining direct sales to that customer with sales to the customer’s OSATs (which include Taiwan Semiconductor Manufacturing Company Ltd.), accounted for approximately
%,
% and
% of
its
consolidated revenues in 2019, 2018 and 2017, respectively.
Long-lived assets by geographic area:
| United States | Foreign(1) | Total | ||||||||||
| (in thousands) | ||||||||||||
| December 31, 2019 | $ | 252,812 | $ | 124,943 | $ | 377,755 | ||||||
| December 31, 2018 | $ | 209,368 | $ | 70,453 | $ | 279,821 |
| (1) | As of December 31, 2019 and 2018, long-lived assets attributable to Singapore were $35.2 million and $19.4 million, respectively. |
|---|
U. STOCK REPURCHASE PROGRAM
In December 2016, Teradyne’s Board of Directors approved a $500.0 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 $200.0 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. In 2019, Teradyne repurchased 10.9 million shares of common stock for $500.0 million at an average price per share of $45.89. In 2018, Teradyne repurchased 21.6 million shares of common stock for $823.5 million at an average price per share of $38.06. The cumulative repurchases as of December 31, 2019 totaled 32.5 million shares of common stock for $1,323.0 million at an average price per share of $40.68.
In January 2020, Teradyne’s Board of Directors cancelled the January 2018 repurchase program and approved a new stock repurchase program for up to $1.0 billion of common stock. Teradyne intends to repurchase a minimum of $250.0 million in 2020
.
V. SUBSEQUENT EVENTS
In January
2020
, Teradyne’s Board of Directors declared a quarterly cash dividend of $0.10 per share to be paid on
March 20, 2020
to shareholders of record as of
February 21, 2020
.
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.
On February 28, 2020, RealWear’s debt holder demanded repayment of its $25.0 million loan to RealWear. As a result, in the fourth quarter of 2019, Teradyne recorded an impairment charge of $15.0 million to reduce its investment in RealWear to zero as of December 31, 2019.
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.
| 2019 | ||||||||||||||||
| 1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | |||||||||||||
| (1) | (2) | (3) | (4)(5) ( 6 ) | |||||||||||||
| (in thousands, except per share amounts) | ||||||||||||||||
| Revenues: | ||||||||||||||||
| Products | $ | 393,442 | $ | 457,511 | $ | 488,170 | $ | 548,552 | ||||||||
| Services | 100,657 | 106,667 | 93,868 | 106,098 | ||||||||||||
| Total revenues | 494,099 | 564,178 | 582,038 | 654,650 | ||||||||||||
| Cost of revenues: | ||||||||||||||||
| Cost of products | 165,368 | 193,299 | 197,196 | 226,184 | ||||||||||||
| Cost of services | 41,096 | 46,961 | 39,804 | 45,228 | ||||||||||||
| Total cost of revenues (exclusive of acquired intangible assets amortization shown separately below) | 206,464 | 240,260 | 237,000 | 271,412 | ||||||||||||
| Gross profit | 287,635 | 323,918 | 345,038 | 383,238 | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Selling and administrative | 102,013 | 108,811 | 109,166 | 117,092 | ||||||||||||
| Engineering and development | 76,791 | 81,434 | 77,804 | 86,794 | ||||||||||||
| Acquired intangible assets amortization | 10,634 | 10,083 | 9,647 | 9,784 | ||||||||||||
| Restructuring and other | 5,112 | (10,404 | ) | (6,500 | ) | (2,088 | ) | |||||||||
| Total operating expenses | 194,550 | 189,924 | 190,117 | 211,582 | ||||||||||||
| Income from operations | 93,085 | 133,994 | 154,921 | 171,656 | ||||||||||||
| Non-operating (income) expense: | ||||||||||||||||
| Interest income | (8,052 | ) | (5,430 | ) | (5,159 | ) | (6,145 | ) | ||||||||
| Interest expense | 5,713 | 5,800 | 5,682 | 5,950 | ||||||||||||
| Other (income) expense, net | 1,445 | 2,447 | 2,665 | 22,965 | ||||||||||||
| Income before income taxes | 93,979 | 131,177 | 151,733 | 148,886 | ||||||||||||
| Income tax (benefit) provision | (15,159 | ) | 33,780 | 15,873 | 23,811 | |||||||||||
| Net income | $ | 109,138 | $ | 97,397 | $ | 135,860 | $ | 125,075 | ||||||||
| Net income per common share—basic | $ | 0.63 | $ | 0.57 | $ | 0.80 | $ | 0.75 | ||||||||
| Net income per common share—diluted | $ | 0.62 | $ | 0.55 | $ | 0.75 | $ | 0.69 | ||||||||
| Cash dividend declared per common share | $ | 0.09 | $ | 0.09 | $ | 0.09 | $ | 0.09 | ||||||||
| (1) | Restructuring and other includes a $3.0 million fair value adjustment to increase the MiR acquisition contingent consideration, $1.3 million of acquisition related expenses and compensation and $0.8 million of employee severance charges. |
|---|
| (2) | Restructuring and other includes a $11.7 million gain for the decrease in the fair value of the MiR contingent consideration liability, partially offset by $0.8 million of employee severance charges and $0.5 million of acquisition related expenses and compensation. |
|---|
| (3) | Restructuring and other includes a $7.8 million gain for the decrease in the fair value of Mi R contingent consideration liability, partially offset by $0.8 million of employee severance charges and $0.5 million of acquisition related expenses an d compensa t ion . |
|---|
| (4) | Restructuring and other includes a $5.8 million gain for the decrease in the fair value adjustment to the MiR acquisition contingent consideration, partially offset by a $3.0 million fair value adjustment to increase the AutoGuide acquisition contingent consideration, $0.5 million of employee severance charges and $0.2 million of acquisition related expenses and compensation . |
|---|
| (5) | Teradyne recorded pension and post retirement net actuarial losses of $7.7 million for the fourth quarter in 2019. See Note B: “Accounting Policies” for a discussion of Teradyne’s accounting policy. |
|---|
| (6) | Other (income) expense, net includes a $15.0 million charge for the impairment of the investment in RealWear. |
|---|
| 2018 | ||||||||||||||||
| 1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | |||||||||||||
| (1) | (2) | (3) | (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 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 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 | $ | 86,974 | $ | 101,037 | $ | 119,978 | $ | 143,790 | ||||||||
| Net income per common share—basic | $ | 0.45 | $ | 0.53 | $ | 0.65 | $ | 0.80 | ||||||||
| Net income 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. |
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| (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. |
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| (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. |
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| (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. |
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| (5) | Teradyne recorded pension and post retirement net actuarial gains of $3.5 million for the fourth quarter in 2018. See Note B: “Accounting Policies” for a discussion of Teradyne’s accounting policy. |
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