Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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Overview

We are a leading global supplier of automation equipment for test and industrial applications. We design, develop, manufacture and sell automatic test systems used to test semiconductors, wireless products, data storage and complex electronics systems in many industries including consumer electronics, wireless, automotive, industrial, computing, communications, and aerospace and defense industries. Our industrial automation products include collaborative robotic arms, autonomous mobile robots (“AMRs”) and advanced robotic control software used by global manufacturing, logistics and light industrial customers to improve quality, increase manufacturing and material handling efficiency and decrease manufacturing and logistics costs. Our automatic test equipment and industrial automation products and services include:

	•		semiconductor test (“Semiconductor Test”) systems;

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

	•		wireless test (“Wireless Test”) systems; and

	•		industrial automation (“Industrial Automation”) products.

The market for our test products is concentrated with a limited number of significant customers accounting for a substantial portion of the purchases of test equipment. A few customers drive significant demand for our test products both through direct sales and sales to the customers’ supply partners. We expect that sales of our test products will continue to be concentrated with a limited number of significant customers for the foreseeable future.

We have grown our Industrial Automation business through acquisitions, including Mobile Industrial Robots A/S (“MiR”), a leading maker of collaborative autonomous mobile robots (“AMRs”) for industrial applications, in 2018 and AutoGuide, LLC (“AutoGuide”), a maker of high payload AMRs, in 2019. The market for our industrial automation products is dependent on the adoption of new automation technologies by large manufacturers as well as small and medium enterprises (SMEs) throughout the world. In 2020, our Industrial Automation businesses were negatively impacted by the global industrial downturn as well as the

COVID-19

pandemic.

In 2020, revenue in our test businesses exceeded our plan as a result of Semiconductor Test demand by our largest customer, early 5G test investments and strength in our System Test businesses. The revenue of our Industrial Automation business was below our plan. In 2021, we expect strong momentum in our test businesses and return to growth for Industrial Automation.

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

Impact of the

COVID-19

Pandemic on our Business

The novel coronavirus

(COVID-19)

pandemic has resulted in government authorities implementing numerous measures in an effort to contain the spread of the virus, such as travel bans and restrictions, limitations on gatherings or social distancing requirements, quarantines,

shelter-in-place

orders, and business limitations and shutdowns. These measures have impacted our

day-to-day

operations and disrupted our business, workforce and operations, as well as the operations of our customers, contract manufacturers and suppliers. We are continuing to monitor the rapidly evolving situation regarding the

COVID-19

pandemic and the availability and impact of vaccinations. However, we are unable to accurately predict the full impact of

COVID-19,

which will depend on future developments that are highly uncertain and cannot be predicted with accuracy, including, but not limited to, any new surges in areas where we do business, the availability of vaccinations, any further government actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume.

Health and Safety

In response to the

COVID-19

pandemic, we have taken proactive, aggressive action to protect the health and safety of our employees, customers, contract manufacturers and suppliers and we have complied with all government orders around the globe. The spread of

COVID-19

has caused us to modify our business practices, including implementing social distancing protocols, suspending employee travel, requiring most employees to work remotely, cancelling physical participation in meetings, and extensively and frequently disinfecting our workspaces. Around the world, the majority of our employees are working from home. However, some of our engineering, operations, supply line and customer support teams must be

on-site

at our or our customers’

facilities. We are providing those

on-site

employees with the necessary protective resources and procedures to minimize their exposure risk. We may take further actions as may be required or recommended by government authorities or that we determine are in the best interests of our employees, customers, contract manufacturers and suppliers.

Operations

We believe the

COVID-19

pandemic, and the numerous measures implemented by authorities in response, has adversely impacted our results of operations, including by increasing costs and decreasing demand in our Industrial Automation businesses, but we cannot accurately estimate the amount of the impact to our 2020 financial results or to our future financial results. In addition, the pandemic has disrupted our contract manufacturers and suppliers, and has resulted in some instances in short-term cost increases to meet customer demand. While the duration and severity of the pandemic may further impact our workforce and operations, as well as those of our customers, contract manufacturers and suppliers, we expect that our manufacturing facilities will remain operational, at sufficient capacity to support production demand. We are monitoring our operations closely in an effort to avoid any potential productivity loss caused by responses to the

COVID-19

pandemic.

Supply

We have not experienced any significant impacts or interruptions to our supply chain as a result of the

COVID-19

pandemic. However, our suppliers have faced and may continue to face difficulties maintaining operations in light of government-ordered restrictions, including social distancing requirements and

shelter-in-place

mandates. Our supply chain team, and our suppliers, overcame numerous supply, production, and logistics obstacles in 2020, but there is no assurance we or they will be able to do so in the future. Although we regularly monitor the financial health of companies in our supply chain, financial hardship on our suppliers or

sub-suppliers

caused by the

COVID-19

pandemic could disrupt our ability to obtain components required to manufacture our products, adversely affecting our operations and in some instances result in higher costs and delays, both for obtaining components and shipping finished goods to customers, which could harm our profitability, make our products less competitive, or cause our customers to seek alternative suppliers.

Demand

The

COVID-19

pandemic has significantly increased economic uncertainty in our markets. Demand for our Test products was strong throughout 2020. While there was incremental softening in the automotive sector in 2020, there was strengthening demand in mobility, 5G, and memory test. Our Industrial Automation business, however, experienced a significant decline in demand through first half of 2020 due to

COVID-19

related shutdowns affecting global manufacturing but demand recovered in the second half of 2020 from the low point in the second quarter. The

COVID-19

pandemic could cause further global economic disruption that could cause demand for our products to decline, which would adversely affect our business.

Liquidity

Although there is continued uncertainty related to the impact of the

COVID-19

pandemic on our future results, we believe our business model and our current cash reserves leave us well-positioned to manage our business through this crisis. We have a strong balance sheet as well as an operating model that we believe is capable of flexing up and down with extreme demand swings while still remaining profitable. Based on our analysis, we believe our existing balances of cash and cash equivalents and our currently anticipated operating cash flows will be sufficient to meet our working capital needs and other capital and liquidity requirements for the next twelve months. However, due to the uncertainty related to the future impact of the

COVID-19

pandemic,

in order to bolster our liquidity position, on May 1, 2020 we entered into a credit agreement providing for a three-year, senior secured revolving credit facility of $400 million as further described in Note J: “Debt.” As of February 22, 2020, we have not borrowed any funds under the credit facility.

We are continuing to monitor the evolving situation regarding the

COVID-19

pandemic, the availability of vaccinations where we do business and guidance from government authorities around the world. In these circumstances, there may be developments outside our control requiring us to adjust our operating plan. As a result, given the uncertain nature of this situation, we are not able to accurately predict the full extent of the impact of

COVID-19

on our business, financial condition, results of operations, liquidity, or cash flows in the future. In addition, see Part II—Item 1A, “Risk Factors,” included herein for updates to our risk factors regarding risks associated with the

COVID-19

pandemic.

Critical Accounting Policies and Estimates

We have identified the policies discussed below as critical to understanding our business and our results of operations and financial condition. The impact and any associated risks related to these policies on our business operations is discussed throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations where such policies affect our reported and expected financial results.

Due to

the COVID-19

pandemic, there has been uncertainty and disruption in the global economy and our markets. We are not aware of any specific event or circumstance that would require an update to our estimates or judgments or a revision of the carrying value of our assets or liabilities as of February 22, 2021, the date of issuance of this Annual Report on

Form 10-K.

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

Revenue from Contracts with Customers

In accordance with ASC 606, “

Revenue from Contracts with Customers” (“ASC 606”)

, we recognize revenues, when or as control is transferred to a customer. Our determination of revenue is dependent upon a five step process outlined below.

	•		We account 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.

	•		We periodically enter into contracts with customers in which a customer may purchase a combination of goods and services, such as products with extended warranty obligations. We determine 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.

	•		We consider the amount stated on the face of the purchase order to be the transaction price. We do not have variable consideration which could impact the stated purchase price agreed to by us and the customer.

	•		Transaction price is allocated to each individual performance obligation based on the standalone selling price of that performance obligation. We use standalone transactions when available to value each performance obligation. If standalone transactions are not available, we 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, we first determine if the transaction meets any of three criteria for over time recognition. If the transaction meets the criteria for over time recognition, we recognize revenue as the good or service is delivered. We use 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, we will recognize revenue at a point in time based on an assessment of the five criteria for transfer of control. We have concluded that revenue should be recognized when shipped or delivered based on contractual terms. Typically, acceptance of our products and services is a formality as we deliver similar systems, instruments and robots to standard specifications. In cases where acceptance is not deemed a formality, we will defer revenue recognition until customer acceptance.

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.

Retirement and Postretirement Plans

We recognize net actuarial gains and losses and the change in the fair value of the plan assets in our operating results in the year in which they occur or upon any interim remeasurement of the plans. We calculate 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.

In March 2017, the Financial Accounting Standards Board (“FASB”) issued ASU

2017-07,

“Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and

Net Periodic Postretirement Benefit Cost

.” We 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, we continue 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.

Inventories

Inventories are stated at the lower of cost using a standard costing system which approximates cost based on a

first-in,

first-out

basis or net realizable value. On a quarterly basis, we use consistent methodologies to evaluate all inventories for net realizable value. We record a provision for both excess and obsolete inventory when such

write-downs or write-offs are identified through the quarterly review process. The inventory valuation is based upon assumptions about future demand, product mix, and possible alternative uses.

Equity Incentive and Stock Purchase Plans

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

Compensation—Stock Compensation.

” Upon adoption of ASU

2016-09,

“Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,”

in the first quarter of 2017, we made an accounting policy election to continue accounting for forfeitures by applying an estimated forfeiture rate and recognizing compensation costs only for those stock- based compensation awards expected to vest. In accordance with ASU

2016-09,

excess tax benefits or tax deficiencies are recognized as a discrete tax benefit or discrete tax expense to the current income tax provision in our consolidated statements of operations and are reported as cash flows from operating activities. All cash payments made to taxing authorities on the employees’ behalf for withheld shares are presented as financing activities on the statement of cash flows. In 2020, 2019 and 2018, we recognized a discrete tax benefit of $9.6 million, $4.9 million and $7.6 million, respectively, related to net excess tax benefit.

Income Taxes

Deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The measurement of deferred tax assets is reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax assets will not be realized. We performed the required assessment of positive and negative evidence regarding the realization of the net deferred tax assets in accordance with ASC 740, “

Accounting for Income Taxes.

” This assessment included the evaluation of scheduled reversals of deferred tax liabilities, estimates of projected future taxable income and

tax-planning

strategies. Although realization is not assured, based on our assessment, we concluded that it is more likely than not that such assets, net of the existing valuation allowance, will be realized.

Investments

We account for our investments in debt and equity securities in accordance with the provisions of

ASC 320-10,

“

Investments—Debt and Equity Securities.

” On a quarterly basis, we review our investments to identify and evaluate those that have an indication of a potential other-than-temporary impairment. Factors considered in determining whether a loss is other-than-temporary include:

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

	•		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.

Investment in Other Companies

We account for investments in other companies at cost and evaluate 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.

Financial Assets and Financial Liabilities

In January 2016, the FASB issued ASU

2016-01,

“

Financial Instruments—Overall (Subtopic

825-10):

Recognition and Measurement of Financial Assets and Financial Liabilities.

” We 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 marketable securities be accounted for directly in earnings. Previously, the changes in fair value of equity marketable securities were recorded in accumulated other comprehensive income on the balance sheet. We continue 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.

Credit Losses

In June 2016, the FASB issued

ASU 2016-13,

“Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This standard introduced the expected credit losses methodology for the measurement of credit losses on financial assets that are not measured at fair value through net income and replaces the “incurred loss” model with an “expected credit loss” model that requires consideration of a broader range of information to estimate expected credit losses over the lifetime of the asset. We adopted this standard on January 1, 2020 on a modified retrospective basis. The adoption of

ASU 2016-13

did not have a material impact on our consolidated statement of operations, balance sheets, cash flows, or earnings per share.

Goodwill, Intangible and Long-Lived Assets

On January 26, 2017, the Financial Accounting Standards Board (“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. We adopted this standard on January 1, 2020, on a prospective basis. The adoption of

ASU 2017-04

did not have a material impact on the consolidated statement of operations, cash flows, or earnings per share. We assess goodwill for impairment at least annually in the fourth quarter, as of December 31, on a reporting unit basis, or more frequently, when events and circumstances occur indicating that the recorded goodwill may be impaired. Under

ASU 2017-04,

goodwill impairment will be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance will remain largely unchanged. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. The

same one-step

impairment test will be applied to goodwill at all reporting units, even those with zero or negative carrying amounts. Entities will be required to disclose the amount of goodwill at reporting units with zero or negative carrying amounts. No goodwill impairment was identified in 2020, 2019 and 2018.

We assess the impairment of intangible and long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important in the determination of an impairment include significant underperformance relative to historical or projected future operating results, significant changes in the manner that we use the acquired asset and significant negative industry or economic trends.

Business Combination

We recognize 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 flows valuations that use information and assumptions provided by management. We estimate 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. We allocate 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 we believe 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.

Results of Operations

Information pertaining to fiscal year 2018 results of operations, including a

year-to-year

comparison against fiscal year 2019, was included in our Annual Report on Form

10-K

for the year ended December 31, 2019 under Part II, Item 7, “Management’s Discussion and Analysis of Financial Position and Results of Operations,” which was filed with the SEC on March 2, 2020. This information is incorporated by reference herein.

The following table sets forth the percentage of total net revenues included in our consolidated statements of operations:

		Years Ended December 31,
		2020				2019
Percentage of revenues:
Revenues:
Products			86.2	%			82.3	%
Services			13.8				17.7
Total revenues			100.0				100.0
Cost of revenues:
Cost of products			37.1				34.1
Cost of services			5.7				7.5
Total cost of revenues (exclusive of acquired intangible assets amortization shown separately below)			42.8				41.6
Gross profit			57.2				58.4
Operating expenses:
Selling and administrative			14.9				19.0
Engineering and development			12.0				14.1
Acquired intangible assets amortization			1.0				1.7
Restructuring and other			(0.4	)			(0.6	)
Total operating expenses			27.5				34.3
Income from operations			29.7				24.1
Non-operating (income) expenses:
Interest income			(0.2	)			(0.7	)
Interest expense			0.8				1.0
Other (income) expense, net			0.3				1.0
Income before income taxes			28.9				22.9
Income tax provision			3.7				2.5
Net income			25.1	%			20.4	%

Revenues

Revenues for our reportable segments were as follows:

		2020				2019				2019-2020 Dollar Change
						(in millions)
Semiconductor Test		$	2,259.6			$	1,552.6			$	707.0
System Test			409.7				287.5				122.2
Industrial Automation			279.7				298.1				(18.4	)
Wireless Test			173.0				157.3				15.7
Corporate and Other			(0.6	)			(0.5	)			(0.1	)
		$	3,121.5			$	2,295.0			$	826.5

The increase in Semiconductor Test revenues of $707.0 million, or 45.5%, was driven primarily by an increase in semiconductor mobility test sales resulting from increased complexity of cell phone silicon which drives demand for testers, and an increase in memory test sales of flash and DRAM testers. The increase in System Test revenues of $122.2 million, or 42.5%, was primarily due to higher sales in Storage Test of system level and hard disk drive testers, and higher sales in Defense/Aerospace test instrumentation and systems, partially offset by lower sales in Production Board Test due to lower automotive electronics demand. The decrease in Industrial Automation revenues of $18.4 million, or 6.2%, was primarily due to lower demand for collaborative robotic arms in the automotive and manufacturing markets amplified by the impacts of

COVID-19.

The increase in Wireless Test revenues of $15.7 million, or 10.0%, was primarily due to increased sales of 5G, WiFi 6 and WiFi 6E testers.

Our reportable segments accounted for the following percentages of consolidated revenues:

		2020				2019
Semiconductor Test			72	%			68	%
System Test			13				13
Industrial Automation			9				13
Wireless Test			6				7
			100	%			100	%

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

		2020				2019
Taiwan			38	%			21	%
China			15				22
Korea			13				10
United States			10				15
Europe			7				10
Japan			5				8
Thailand			4				4
Singapore			2				4
Malaysia			2				3
Philippines			2				2
Rest of the World			2				2
			100	%			100	%

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

The breakout of product and service revenues was as follows:

		2020				2019				2019-2020 Dollar Change
		(in millions)
Product revenues		$	2,690.9			$	1,887.7			$	803.2
Service revenues			430.6				407.3				23.3
		$	3,121.5			$	2,295.0			$	826.5

Our product revenues increased $803.2 million, or 42.5%, primarily due to higher sales in Semiconductor Test mobility test segment, higher sales of flash and DRAM testers, higher sales in Storage Test of system level and hard disk drive testers, and higher sales in Wireless Test of 5G, WiFi 6 and WiFi 6E testers, partially offset by a decrease in sales in Industrial Automation. Service revenues increased $23.3 million or 5.7%.

In 2020, revenues from Taiwan Semiconductor Manufacturing Company Ltd., a customer of our Semiconductor Test segment, accounted for 15% of our consolidated revenues. In 2019, no single direct customer accounted for more than 10% of our consolidated revenues. In 2020 and 2019, our five largest direct customers in aggregate accounted for 36% and 27% of our consolidated revenues, respectively.

We estimate consolidated revenues driven by one OEM customer, combining direct sales to that customer with sales to the customer’s OSATs, accounted for approximately 25% and 10% of our consolidated revenues in 2020 and 2019, respectively. We estimate 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 3% and 11% of our consolidated revenues in 2020 and 2019, respectively.

Gross Profit

		2020				2019				2019-2020 Dollar / Point Change
		(dollars in millions)
Gross profit		$	1,785.7			$	1,339.8			$	445.9
Percent of total revenues			57.2	%			58.4	%			(1.2	)

Gross profit as a percent of total revenues decreased by 1.2 points, primarily due to product mix in Semiconductor Test.

The breakout of product and service gross profit was as follows:

		2020				2019				2019-2020 Dollar / Point Change
		(dollars in millions)
Product gross profit		$	1,533.4			$	1,105.6			$	427.8
Percent of product revenues			57.0	%			58.6	%			(1.6	)
Service gross profit		$	252.3			$	234.2			$	18.1
Percent of service revenues			58.6	%			57.5	%			1.1

We assess the carrying value of our inventory on a quarterly basis by estimating future demand and comparing that demand against

on-hand

and

on-order

inventory positions. Forecasted revenues information is obtained from the sales and marketing groups and incorporates factors such as backlog and future consolidated

revenues. This quarterly process identifies obsolete and excess inventory. Obsolete inventory, which represents items for which there is no demand, is fully reserved. Excess inventory, which represents inventory items that are not expected to be consumed during the next twelve quarters for our Semiconductor Test, Industrial Automation and System Test segments and next four quarters for our Wireless Test segment, is written-down to estimated net realizable value.

During the year ended December 31, 2020, we recorded an inventory provision of $17.5 million included in cost of revenues, primarily due to downward revisions to previously forecasted demand levels for certain products. Of the $17.5 million of total excess and obsolete provisions, $11.0 million was related to Semiconductor Test, $4.8 million was related to Wireless Test, $0.9 million was related to System Test, and $0.8 million was related to Industrial Automation.

During the year ended December 31, 2019, we recorded an inventory provision of $15.2 million included in cost of revenues, primarily due to downward revisions to previously forecasted demand levels for certain products. Of the $15.2 million of total excess and obsolete provisions, $8.7 million was related to Semiconductor Test, $4.0 million was related to Wireless Test, $2.0 million was related to System Test, and $0.5 million was related to Industrial Automation.

During the years ended December 31, 2020 and 2019, we scrapped $7.7 million and $9.2 million of inventory, respectively, and sold $2.3 million and $3.2 million of previously written-down or

written-off

inventory, respectively. As of December 31, 2020, we had inventory related reserves for amounts which had been written-down or

written-off

totaling $110.6 million. We have no

pre-determined

timeline to scrap the remaining inventory.

Selling and Administrative

Selling and administrative expenses were as follows:

		2020				2019				2019-2020 Change
		(dollars in millions)
Selling and administrative		$	464.8			$	437.1			$	27.7
Percent of total revenues			14.9	%			19.0	%

The increase of $27.7 million in selling and administrative expenses was primarily due to higher variable compensation.

Engineering and Development

Engineering and development expenses were as follows:

		2020				2019				2019-2020 Change
		(dollars in millions)
Engineering and development		$	375.0			$	322.8			$	52.1
Percent of total revenues			12.0	%			14.1	%

The increase of $52.1 million in engineering and development expenses was primarily due to higher variable compensation and higher spending across all segments.

Restructuring and Other

During the year ended December 31, 2020, we recorded a $19.7 million gain for the decrease in the fair value of the AutoGuide contingent consideration liability, and a $3.5 million gain for the decrease in the fair

value of the MiR contingent consideration liability, partially offset by a $4.0 million contract termination settlement charge, $2.5 million of acquisition related compensation and expenses, $2.3 million of severance charges primarily in Industrial Automation, and $1.2 million of other expenses.

During the year ended December 31, 2019, we recorded a $22.2 million gain for the decrease in the fair value of the MiR contingent consideration liability, partially offset by a $3.0 million gain for the increase in the fair value of the AutoGuide contingent consideration, $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.

The remaining accrual for severance of $0.5 million is reflected in the accrued employees’ compensation and withholdings on the balance sheet and is expected to be paid by March 2021.

Interest and Other

		2020				2019				2019-2020 Change
						(in millions)
Interest income		$	(6.0	)		$	(17.0	)		$	11.0
Interest expense			24.2				22.2				2.0
Other (income) expense, net			9.2				22.6				(13.5	)

Interest income decreased by $11.0 million primarily due to lower interest rates in 2020 compared to 2019. Interest expense increased by $2.0 million primarily due to interest expense related to our convertible senior notes and revolving credit facility costs. Other (income) expense, net decreased by $13.5 million primarily due to a $15.0 million charge for the impairment of the investment in RealWear in 2019, partially offset by a $2.1 million increase in pension actuarial losses from $8.2 million losses in 2019 to $10.3 million losses in 2020.

Income (Loss) Before Income Taxes

		2020				2019				2019-2020 Change
		(in millions)
Semiconductor Test		$	739.7			$	417.0			$	322.7
System Test			152.1				93.5				58.6
Wireless Test			42.0				35.6				6.4
Industrial Automation			(24.0	)			(5.9	)			(18.1	)
Corporate and Other (1)			(8.7	)			(14.4	)			5.7
		$	901.0			$	525.8			$	375.3

(1)	Included in Corporate and Other are: contingent consideration adjustments, investment impairment, employee severance charges, interest (income) and expense, net foreign exchange (gains) and losses, pension and postretirement plan actuarial (gains) and losses and settlement charges, intercompany eliminations, and certain acquisition related charges and compensation.

The increase in income before income taxes in Semiconductor Test was driven primarily by an increase in semiconductor mobility test sales resulting from increased complexity of cell phone silicon which drives demand for testers, and an increase in memory test sales of flash and DRAM testers. The increase in income before income taxes in System Test was primarily due to higher sales in Storage Test of system level and hard disk drive testers, and higher sales in Defense/Aerospace test of instrumentation and systems, partially offset by lower sales in Production Board due to lower automotive electronics demand. The increase in income before income taxes in Wireless Test was primarily due to increased sales of 5G, WiFi 6 and WiFi 6E testers. The decrease in income before income taxes in Industrial Automation was primarily due to lower demand for collaborative robotic arms in the automotive and manufacturing markets amplified by the impacts of

COVID-19.

Income Taxes

Income tax expense for 2020, 2019 and 2018 totaled $116.9 million, $58.3 million and $16.0 million, respectively. The effective tax rate for 2020, 2019 and 2018 was 13.0%, 11.1% and 3.4%, respectively.

The increase in the effective tax rate from 2019 to 2020 is primarily attributable to a reduction in the benefit from releases of reserves for uncertain tax positions and a reduction in the benefit from foreign tax credits. These increases in expense were partially offset by a decrease in the transition tax on the mandatory deemed repatriation of foreign earnings and shift in the geographic distribution of income, which increases the income subject to taxation in lower tax rate jurisdictions relative to higher tax rate jurisdictions.

In the fourth quarter of 2017, we recorded $186.0 million of additional income tax expense which represented our best estimate of the impact of the Tax Reform Act in accordance with our 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 benefit of $10.3 million associated with the impact of correlative adjustments on uncertain tax positions. In accordance with the requirements of SEC Staff Accounting Bulletin (“SAB”) No. 118, “Income Tax Accounting Implications of the Tax Cuts and Jobs Act”, in the fourth quarter of 2018, we completed our analysis of the effect of the Tax Reform Act based on the application of the guidance available as of December 31, 2018 and recorded $49.5 million of net income tax benefit. The net benefit consisted of $51.7 million of benefit resulting from a reduction in the estimate of the

one-time

transition tax on the mandatory deemed repatriation of foreign earnings and an expense of $2.2 million associated with the impact of correlative adjustments on uncertain tax positions.

The increase in the effective tax rate from 2018 to 2019 is primarily attributable to increases in expense associated with U.S. global intangible

low-taxed

income and U.S. 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, an increase in the benefit from foreign tax credits and the benefit from a net reduction in reserves for uncertain tax positions.

We qualify 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, 2020, 2019 and 2018 were $29.9 million or $0.16 per diluted share, $15.1 million or $0.08 per diluted share and $11.9 million or $0.06 per diluted share, respectively. In November 2020, we entered into an agreement with the Singapore Economic Development Board which extended our Singapore tax holiday under substantially similar terms to the agreement which expired on December 31, 2020. The new tax holiday is scheduled to expire on December 31, 2025.

Contractual Obligations

The following table reflects our contractual obligations as of December 31, 2020:

		Payments Due by Period
		Total				Less than 1 year				1-3 years				3-5 years				More than 5 years				Other
		(in thousands)
Purchase obligations		$	603,464			$	592,058			$	11,406			$	—			$	—			$	—
Convertible debt			459,971				37,397				422,574				—				—				—
Retirement plans contributions			156,592				5,551				10,598				10,426				130,017				—
Transition tax payable (1)			82,820				7,889				15,795				34,540				24,596				—
Operating lease obligations			71,457				22,631				27,371				13,839				7,616				—
Interest on long term debt			15,928				5,364				10,564				—				—				—
Fair value of contingent consideration			7,227				—				7,227				—				—				—
Other long-term liabilities reflected on the balance sheet under GAAP (2)			88,532				—				51,165				6,787				407				30,173
Total		$	1,485,991			$	670,890			$	556,700			$	65,592			$	162,636			$	30,173

(1)	Represents the transition tax liability associated with our accumulated foreign earnings as a result of enactment of the Tax Reform Act on December 22, 2017.

(2)	Included in other long-term liabilities are liabilities for customer advances, extended warranty, uncertain tax positions, deferred tax liabilities and other obligations. For certain long-term obligations, we are unable to provide a reasonably reliable estimate of the timing of future payments relating to these obligations and therefore we included these amounts in the column marked “Other.”

Liquidity and Capital Resources

Our cash, cash equivalents and marketable securities balance increased by $539 million in 2020 to $1,554 million.

Operating activities during 2020 provided cash of $868.9 million. Changes in operating assets and liabilities used cash of $69.4 million. This was due to a $202.3 million increase in operating assets and a $132.9 million increase in operating liabilities.

The increase in operating assets was due to a $129.5 million increase in accounts receivable due to increased sales, an $8.4 million increase in inventories, and a $64.4 million increase in prepayments and other assets.

The increase in operating liabilities was due to a $54.7 million increase in accrued employee compensation, a $40.0 million increase in deferred revenue and customer advance payments, a $25.2 million increase in income taxes, a $12.8 million increase in other accrued liabilities, and a $5.7 million increase in accounts payable, partially offset by $5.4 million of retirement plan contributions.

Investing activities during 2020 used cash of $569.8 million, due to $900.2 million used for purchases of marketable securities, and $185.0 million used for purchases of property, plant and equipment, partially offset by $480.0 million and $35.0 million in proceeds from maturities and sales of marketable securities, respectively, and proceeds from life insurance of $0.5 million related to the cash surrender value from the cancellation of Teradyne owned life insurance policy.

Financing activities during 2020 used cash of $158.3 million, due to $88.5 million used for the repurchase of 1.5 million shares of common stock at an average price of $58.33 per share, $66.5 million used for dividend payments, $23.0 million used for payments related to net settlement of employee stock compensation awards, and $8.9 million used for payment related to MiR acquisition contingent consideration, partially offset by $28.5 million from the issuance of common stock under employee stock purchase and stock option plans.

Operating activities during 2019 provided cash of $578.8 million. Changes in operating assets and liabilities used cash of $51.7 million. This was due to a $121.6 million increase in operating assets and a $69.9 million increase in operating liabilities.

The increase in operating assets was due to a $70.4 million increase in accounts receivable due to increased sales, a $27.4 million increase in inventories, and a $23.8 million increase in prepayments and other assets.

The increase in operating liabilities was due to a $39.3 million increase in deferred revenue and customer advance payments, a $24.8 million increase in accounts payable, a $15.3 million increase in accrued employee compensation and a $9.2 million increase in other accrued liabilities, partially offset by a $13.6 million decrease in income taxes, and $5.1 million of retirement plan contributions.

Investing activities during 2019 used cash of $156.7 million, due to $662.7 million used for purchases of marketable securities, $134.6 million used for purchases of property, plant and equipment, $57.8 million, net of cash acquired, used for the acquisition of AutoGuide, $15.0 million used for an investment in RealWear, and $7.0 million, net of cash acquired, used for the acquisition of Lemsys, partially offset by $611.9 million and $105.6 million in proceeds from maturities and sales of marketable securities, respectively, and proceeds from life insurance of $2.9 million related to the cash surrender value from the cancellation of Teradyne owned life insurance policies.

Financing activities during 2019 used cash of $574.3 million, due to $500.0 million used for the repurchase of 10.9 million shares of common stock at an average price of $45.89 per share, $61.3 million used for dividend payments, $27.6 million used for payments related to MiR and Universal Robots acquisition contingent consideration and $14.7 million used for payments related to net settlement of employee stock compensation awards, partially offset by $29.3 million from the issuance of common stock under employee stock purchase and stock option plans.

In January 2020, May 2020, August 2020 and November 2020, our Board of Directors declared a quarterly cash dividend of $0.10 per share. Total dividend payments in 2020 were $66.5 million.

In January 2019, May 2019, August 2019 and November 2019, our Board of Directors declared a quarterly cash dividend of $0.09 per share. Total dividend payments in 2019 were $61.3 million.

In January 2021, our Board of Directors declared a quarterly cash dividend of $0.10 per share to be paid on March 19, 2021 to shareholders of record as of February 19, 2021. Payment of future cash dividends are subject to the discretion of our Board of Directors and will depend, among other things, upon our earnings, capital requirements and financial condition.

In January 2020, our Board of Directors cancelled the January 2018 stock repurchase program and approved a new stock repurchase program for up to $1.0 billion in common stock. On April 1, 2020, we suspended the share repurchase program. In 2020, we repurchased 1.5 million shares of common stock for $88.5 million at an average price per share of $58.33. In 2019, we repurchased 10.9 million shares of common stock for $500.0 million at an average price per share of $45.89. The cumulative repurchases as of December 31, 2019, for the 2018 stock repurchase program, totaled 32.5 million shares of common stock for $1,323.0 million at an average price per share of $40.68. In January 2021, our Board of Directors cancelled the January 2020 repurchase program and approved a new repurchase program for up to $2.0 billion of common stock. Unless terminated by resolution of our Board of Directors, the repurchase program will expire when we have repurchased all shares authorized for repurchase under the share repurchase program. We intend to repurchase a minimum of $600 million in 2021.

While we declared a quarterly cash dividend and authorized a share repurchase program, we may reduce or eliminate the cash dividend or share repurchase program in the future. Future cash dividends and stock repurchases are subject to the discretion of our Board of Directors, which will consider, among other things, our earnings, capital requirements and financial condition.

On May 1, 2020, we entered into a credit agreement providing a three-year, senior secured revolving credit facility of $400 million. As of February 22, 2021, we have not borrowed any funds under the credit facility.

We believe our cash, cash equivalents and marketable securities balance will be sufficient to pay our quarterly dividend and meet our working capital and expenditure needs for at least the next twelve months. Inflation has not had a significant long-term impact on earnings. At this time, the

COVID-19

pandemic has not had an impact on our liquidity, but there is no assurance that continued impacts resulting from the pandemic will not have an adverse effect in the future.

Retirement Plans

ASC

715-20,

“

Compensation—Retirement Benefits—Defined Benefit Plans,

” requires an employer with defined benefit plans or other postretirement benefit plans to recognize an asset or a liability on its balance sheet for the overfunded or underfunded status of the plans as defined by ASC

715-20.

The pension asset or liability represents the difference between the fair value of the pension plans’ assets and the projected benefit obligation as of December 31. For other postretirement benefit plans, the liability is the difference between the fair value of the plan’s assets and the accumulated postretirement benefit obligation as of December 31.

For the year ended December 31, 2020, our pension expense, which includes the U.S. Qualified Pension Plan (“U.S. Plan”), certain qualified plans for

non-U.S.

subsidiaries, and a U.S. Supplemental Executive Defined Benefit Plan, was approximately $13.9 million. Pension expense is calculated based upon a number of actuarial assumptions. Discount rate and expected return on assets are two assumptions which are important elements of pension plan expense and asset/liability measurement. We evaluate our discount rate and expected rate of return on assets assumptions annually on a plan and country specific basis. We evaluate other assumptions related to demographic factors, such as retirement age, mortality and turnover periodically, and update them to reflect our experience and expectations for the future.

In developing the expected return on U.S. Plan assets assumption, we evaluated input from our investment manager and pension consultants, including their forecast of asset class return expectations. We believe that 3.0% was an appropriate rate of return on assets to use for 2020. The December 31, 2020 asset allocation for our U.S. Plan was 94% invested in fixed income securities, 5% invested in equity securities, and 1% invested in other securities. Our investment manager regularly reviews the actual asset allocation and periodically rebalances the portfolio to ensure alignment with our target allocations.

We recognize net actuarial gains and losses and the change in the fair value of plan assets in our operating results in the year in which they occur or upon any interim remeasurement of the plans. We calculate 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 that we utilized for determining future pension obligations for the U.S. Plan is based on the FTSE Pension Index adjusted for the U.S. Plan’s expected cash flows and was 2.3% at December 31, 2020, down from 3.1% at December 31, 2019. We estimate that in 2021 we will recognize approximately $0.9 million of pension expense for the U.S. Plan. The U.S. Plan pension expense estimate for 2021 is based on a 2.3% discount rate and a 2.4% return on assets. Future pension expense or income will depend on future investment performance, changes in future discount rates and various other factors related to the employee population participating in our pension plans.

As of December 31, 2020, our pension plans had no unrecognized pension prior service cost.

The assets of the U.S. Plan consist substantially of fixed income securities. U.S. Plan assets have decreased from $166.9 million at December 31, 2019 to $158.9 million at December 31, 2020, while the U.S. Plan’s

liability decreased from $148.5 million at December 31, 2019 to $141.4 million at December 31, 2020. In 2020, the decrease in plan assets and plan liability was primarily due to a retiree annuity purchase. In 2020, the accrued pension obligations for approximately 115 retiree participants were transferred to an insurance company and resulted in a $24.4 million reduction in the pension benefit obligation and pension assets. We recorded $2.2 million of pension actuarial loss and a settlement loss of $0.5 million related to the retiree group annuity transaction.

Our funding policy is to make contributions to our pension plans in accordance with local laws and to the extent that such contributions are tax deductible. During 2020, we made contributions of $3.1 million to the U.S. supplemental executive defined benefit pension plan, and $1.1 million to certain qualified plans for

non-U.S.

subsidiaries. In 2021, we expect to contribute approximately $3.3 million to the U.S. supplemental executive defined benefit pension plan. Contributions to be made in 2021 to certain qualified plans for

non-U.S.

subsidiaries are based on local statutory requirements and are estimated at approximately $1.1 million.

Equity Compensation Plans

In addition to our 1996 Employee Stock Purchase Plan discussed in Note Q:

“Stock-Based Compensation”

in Notes to Consolidated Financial Statements, we have a 2006 Equity and Cash Compensation Incentive Plan (the “2006 Equity Plan”) under which equity securities are authorized for issuance. The 2006 Equity Plan was initially approved by stockholders on May 25, 2006.

At our annual meeting of stockholders held May 21, 2013, our stockholders approved an amendment to the 2006 Equity Plan to increase the number of shares issuable thereunder by 10.0 million, for an aggregate of 32.0 million shares issuable thereunder, and our stockholders also approved an amendment to our 1996 Employee Stock Purchase Plan to increase the number of shares issuable thereunder by 5.0 million, for an aggregate of 30.4 million shares issuable thereunder. At our annual meeting of stockholders held May 12, 2015, our stockholders approved an amendment to the 2006 Equity Plan to extend its term until May 12, 2025.

The following table presents information about these plans as of December 31, 2020 (share numbers in thousands):

Plan category		Number of securities to be issued upon exercise of outstanding options, warrants and rights				Weighted-average exercise price of outstanding options, warrants and rights				Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column one)
Equity plans approved by shareholders			1,943	(1)		$	37.31				7,563	(2)
Equity plans not approved by shareholders (3)			6				3.77				—
Total			1,949				37.21				7,563

(1)	Includes 1,789,217 shares of restricted stock units that are not included in the calculation of the weighted average exercise price.

(2)	Consists of 6,122,630 securities available for issuance under the 2006 Equity Plan and 1,440,073 of securities available for issuance under the Employee Stock Purchase Plan.

(3)

In connection with the 2011 acquisition of LitePoint Corporation (the “LitePoint Acquisition”), we assumed the options granted under the LitePoint Corporation 2002 Stock Plan (the “LitePoint Plan”). Upon the consummation of the LitePoint Acquisition, these options were converted automatically into options to purchase an aggregate of 2,828,344 shares of our common stock. No additional awards were granted under the LitePoint Plan. As of December 31, 2020, there were outstanding options exercisable for an aggregate of 6,125 shares of our common stock pursuant to the LitePoint Plan, with a weighted average exercise price of $3.77 per share.

The purpose of the 2006 Equity Plan is to motivate employees, officers and directors by providing equity ownership and compensation opportunities in Teradyne. The aggregate number of shares available under the 2006 Equity Plan as of December 31, 2020 was 6,122,630 shares of our common stock. The 2006 Equity Plan authorizes the grant of stock-based awards in the form of

(1) non-qualified

and incentive stock options, (2) stock appreciation rights, (3) restricted stock awards and restricted stock unit awards, (4) phantom stock, and (5) other stock-based awards. Awards may be tied to time-based vesting schedules and/or performance-based vesting measured by reference to performance criteria chosen by the Compensation Committee of the Board of Directors, which administers the 2006 Equity Plan. Awards may be made to any employee, officer, consultant and advisor of Teradyne and our subsidiaries, as well as, to our directors. The maximum number of shares of stock-based awards that may be granted to one participant during any one fiscal year is 2,000,000 shares of common stock.

As of December 31, 2020, total unrecognized compensation expense related to

non-vested

restricted stock units and options was $44 million and is expected to be recognized over a weighted average period of 2.4 years.

Performance Graph

The following graph compares the change in our cumulative total shareholder return in our common stock with (i) the NYSE Composite Index and (ii) the Morningstar Semiconductor Equipment & Materials Industry Group (compiled by Morningstar, Inc.), and (iii) the Standard & Poor’s 500 Index. The comparison assumes $100.00 was invested on December 31, 2015 in our common stock and in each of the foregoing indices and assumes reinvestment of dividends, if any. Historic stock price performance is not necessarily indicative of future price performance. This is the last year that we will compare ourselves to the NYSE Composite Index. Going forward, we will compare ourselves to (i) Standard & Poor’s 500 Index, as a result of Teradyne being added, on September 21, 2020, to the Standard & Poor’s 500 Index, and (ii) the Morningstar Semiconductor Equipment & Materials Industry Group (compiled by Morningstar, Inc.)

Recently Issued Accounting Pronouncements

In August 2020, the FASB issued ASU

2020-06—“Debt—Debt

with Conversion and Other Options and Derivatives and Hedging—Contracts in Entity’s Own Equity,” which simplifies the accounting for convertible

debt instruments by reducing the number of accounting models and the number of embedded conversion features that could be recognized separately from the primary contract. This ASU requires a convertible debt instrument to be accounted for as a single liability measured at its amortized cost, as long as no other features require bifurcation and recognition as derivatives. This ASU requires an entity to use the

if-converted

method in the diluted earnings per share calculation for convertible instruments. This ASU will be effective for Teradyne on January 1, 2022, with early adoption permitted beginning on January 1, 2021. This ASU permits the use of either the modified retrospective or fully retrospective method of transition. Teradyne is evaluating the timing and effects of the adoption of this ASU on its financial statements.