Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended July 3, 201 July 3, 2011 1

OR

 

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

For the transition period from              to             

Commission File No. 001-06462

 

 

TERADYNE, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Massachusetts   04-2272148

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

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

978-370-2700

(Registrant’s Telephone Number, Including Area Code)

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files)    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of shares outstanding of the registrant’s only class of Common Stock as of August 8, 2011 was 186,184,101 shares.

 

 

 


Table of Contents

TERADYNE, INC.

INDEX

 

         Page No.  
PART I. FINANCIAL INFORMATION   

Item 1.

 

Financial Statements (unaudited):

  
 

Condensed Consolidated Balance Sheets as of July 3, 2011 and December 31, 2010

     3   
 

Condensed Consolidated Statements of Operations for the Three and Six Months Ended July 3, 2011 and July 4, 2010

     4   
 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended July  3, 2011 and July 4, 2010

     5   
 

Notes to Condensed Consolidated Financial Statements

     6   

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     24   

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

     37   

Item 4.

 

Controls and Procedures

     37   
PART II. OTHER INFORMATION   

Item 1.

 

Legal Proceedings

     38   

Item 1A.

 

Risk Factors

     38   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     39   

Item 6.

 

Exhibits

     39   

 

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Table of Contents

PART I

 

Item 1: Financial Statements

TERADYNE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

    July 3,
2011
    December 31,
2010
 
   

(in thousands,

except per share amounts)

 
ASSETS    

Current assets:

   

Cash and cash equivalents

  $ 455,398      $ 397,737   

Marketable securities

    453,942        409,061   

Accounts receivable, net of allowance for doubtful accounts of $4,097 and $3,752 at July 3, 2011 and December 31, 2010, respectively

    207,823        168,756   

Inventories:

   

Parts

    90,964        78,109   

Assemblies in process

    21,039        16,013   

Finished goods

    29,515        22,719   
 

 

 

   

 

 

 
    141,518        116,841   

Deferred tax assets

    22,801        22,730   

Prepayments and other current assets

    61,946        52,780   

Current assets from discontinued operations

    —          8,713   
 

 

 

   

 

 

 

Total current assets

    1,343,428        1,176,618   

Property, plant and equipment, at cost

    795,778        773,374   

Less: accumulated depreciation

    562,346        542,266   
 

 

 

   

 

 

 

Net property, plant and equipment

    233,432        231,108   

Long-term marketable securities

    281,978        248,696   

Retirement plan assets

    14,456        13,981   

Intangible assets, net

    108,357        122,941   

Other assets

    16,644        16,542   

Long-term assets from discontinued operations

    —          469   
 

 

 

   

 

 

 

Total assets

  $ 1,998,295      $ 1,810,355   
 

 

 

   

 

 

 
LIABILITIES    

Current liabilities:

   

Accounts payable

  $ 106,993      $ 81,142   

Accrued employees’ compensation and withholdings

    75,018        105,374   

Deferred revenue and customer advances

    98,723        105,568   

Other accrued liabilities

    59,889        57,145   

Accrued income taxes

    9,888        8,465   

Current debt

    2,475        2,450   

Current liabilities from discontinued operations

    —          3,560   
 

 

 

   

 

 

 

Total current liabilities

    352,986        363,704   

Long-term deferred revenue and customer advances

    50,064        71,558   

Retirement plan liabilities

    77,154        72,071   

Deferred tax liabilities

    9,973        9,849   

Long-term other accrued liabilities

    19,359        19,448   

Long-term debt

    154,821        150,182   

Long-term liabilities of discontinued operations

    —          1,355   
 

 

 

   

 

 

 

Total liabilities

    664,357        688,167   
 

 

 

   

 

 

 

Commitments and contingencies (Note O)

   
SHAREHOLDERS’ EQUITY    

Common stock, $0.125 par value, 1,000,000 shares authorized, 186,002 shares and 182,035 shares issued and outstanding at July 3, 2011 and December 31, 2010, respectively

    23,250        22,755   

Additional paid-in capital

    1,292,727        1,269,525   

Accumulated other comprehensive loss

    (124,094     (128,216

Retained earnings (accumulated deficit)

    142,055        (41,876
 

 

 

   

 

 

 

Total shareholders’ equity

    1,333,938        1,122,188   
 

 

 

   

 

 

 

Total liabilities and shareholders’ equity

  $ 1,998,295      $ 1,810,355   
 

 

 

   

 

 

 

The accompanying notes, together with the Notes to Consolidated Financial Statements included in Teradyne’s

Annual Report on Form 10-K for the year ended December 31, 2010, are an integral part of the condensed

consolidated financial statements.

 

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Table of Contents

TERADYNE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

    For the Three Months
Ended
    For the Six Months
Ended
 
    July 3,
2011
    July 4,
2010
    July 3,
2011
    July 4,
2010
 
    (in thousands, except per share amounts)  

Net revenues:

       

Products

  $ 341,316      $ 386,734      $ 657,035      $ 650,220   

Services

    69,203        58,537        130,645        114,389   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total net revenues

    410,519        445,271        787,680        764,609   

Cost of revenues:

       

Cost of products

    159,995        164,421        313,358        285,294   

Cost of services

    35,438        29,948        66,827        58,537   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenues

    195,433        194,369        380,185        343,831   
 

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    215,086        250,902        407,495        420,778   

Operating expenses:

       

Engineering and development

    47,393        49,341        95,370        97,278   

Selling and administrative

    57,481        57,730        115,710        112,417   

Acquired intangible asset amortization

    7,291        7,313        14,582        14,668   

Restructuring and other, net

    1,279        371        1,692        1,274   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    113,444        114,755        227,354        225,637   
 

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

    101,642        136,147        180,141        195,141   

Interest income

    1,403        3,681        2,690        4,523   

Interest expense and other

    (5,316     (7,755     (11,492     (13,662
 

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

    97,729        132,073        171,339        186,002   

Income tax provision

    7,839        9,543        13,325        14,373   
 

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

    89,890        122,530        158,014        171,629   

(Loss) Income from discontinued operations before income taxes

    —          (381     1,278        620   

Income tax benefit

    —          —          (267     —     
 

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) Income from discontinued operations

    —          (381     1,545        620   

(Loss) Gain on disposal of discontinued operations (net of income tax of $0, $0, $4,578, $0, respectively)

    (832     —          24,371        —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 89,058      $ 122,149      $ 183,930      $ 172,249   
 

 

 

   

 

 

   

 

 

   

 

 

 

Income per common share from continuing operations:

       

Basic

  $ 0.48      $ 0.68      $ 0.85      $ 0.97   
 

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

  $ 0.39      $ 0.55      $ 0.68      $ 0.79   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income per common share:

       

Basic

  $ 0.48      $ 0.68      $ 0.99      $ 0.97   
 

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

  $ 0.39      $ 0.55      $ 0.80      $ 0.79   
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common share—basic

    185,367        179,990        185,044        178,429   
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common share—diluted

    230,452        231,541        231,266        228,909   
 

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes, together with the Notes to Consolidated Financial Statements included in Teradyne’s

Annual Report on Form 10-K for the year ended December 31, 2010, are an integral part of the condensed

consolidated financial statements.

 

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TERADYNE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     For the Six Months
Ended
 
     July 3,
2011
    July 4,
2010
 
     (in thousands)  

Cash flows from operating activities:

    

Net income

   $ 183,930      $ 172,249   

Less: income from discontinued operations

     1,545        620   

Less: gain on disposal of discontinued operations

     24,371        —     
  

 

 

   

 

 

 

Income from continuing operations

     158,014        171,629   

Adjustments to reconcile income from continuing operations to net cash provided by operating activities:

    

Depreciation

     25,645        26,403   

Amortization

     25,291        23,105   

Stock-based compensation

     14,682        15,141   

Provision for excess and obsolete inventory

     6,343        1,454   

Tax benefit related to stock options and restricted stock units

     (3,717     —     

Other

     1,424        1,659   

Changes in operating assets and liabilities, net of businesses sold:

    

Accounts receivable

     (39,067     (123,184

Inventories

     (15,006     24,231   

Prepayments and other assets

     (10,348     15,544   

Deferred revenue and customer advances

     (28,339     (62,901

Accounts payable and accrued expenses

     (9,279     52,377   

Retirement plan contributions

     (5,241     (24,677

Accrued income taxes

     5,406        11,346   
  

 

 

   

 

 

 

Net cash provided by operating activities from continuing operations

     125,808        132,127   

Net cash (used for) provided by operating activities from discontinued operations

     (4,225     1,850   
  

 

 

   

 

 

 

Net cash provided by operating activities

     121,583        133,977   

Cash flows from investing activities:

    

Purchases of property, plant and equipment

     (44,467     (35,706

Purchases of available-for-sale marketable securities

     (498,541     (223,820

Proceeds from sales and maturities of available-for-sale marketable securities

     420,477        47,267   

Proceeds from sales of trading marketable securities

     —          23,700   

Proceeds from life insurance

     —          1,091   
  

 

 

   

 

 

 

Net cash used for investing activities from continuing operations

     (122,531     (187,468

Net cash provided by investing activities from discontinued operations

     39,062        —     
  

 

 

   

 

 

 

Net cash used for investing activities

     (83,469     (187,468

Cash flows from financing activities:

    

Issuance of common stock under employee stock option and stock purchase plans

     17,052        41,873   

Tax benefit related to stock options and restricted stock units

     3,717        —     

Payments of long-term debt

     (1,222     (1,123
  

 

 

   

 

 

 

Net cash provided by financing activities

     19,547        40,750   
  

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

     57,661        (12,741

Cash and cash equivalents at beginning of period

     397,737        416,737   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 455,398      $ 403,996   
  

 

 

   

 

 

 

The accompanying notes, together with the Notes to Consolidated Financial Statements included in Teradyne’s

Annual Report on Form 10-K for the year ended December 31, 2010, are an integral part of the condensed

consolidated financial statements.

 

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TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

A. The Company

Teradyne, Inc. (“Teradyne”) is a leading global supplier of automatic test equipment. Teradyne’s automatic test equipment products and services include:

 

   

semiconductor test (“Semiconductor Test”) systems; and

 

   

military/aerospace (“Mil/Aero”) test instrumentation and systems, hard disk drive test (“HDD”) systems, and circuit-board test and inspection (“Commercial Board Test”) systems (collectively these products represent “Systems Test Group”).

B. Accounting Policies

Basis of Presentation

The condensed consolidated interim financial statements include the accounts of Teradyne and its subsidiaries. All significant intercompany balances and transactions have been eliminated. These interim financial statements are unaudited and reflect all normal recurring adjustments that are, in the opinion of management, necessary for the fair presentation of such interim financial statements. Certain prior year’s amounts were reclassified to conform to the current year presentation. The December 31, 2010 condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

The accompanying financial information should be read in conjunction with the consolidated financial statements and notes thereto contained in Teradyne’s Annual Report on Form 10-K, filed with the SEC on March 1, 2011 for the year ended December 31, 2010.

On March 21, 2011, Teradyne completed the sale of Diagnostic Solutions, its automotive diagnostic and test business unit. The results of operations of Diagnostic Solutions as well as balance sheet and cash flow amounts pertaining to this business have been classified as discontinued operations in the condensed consolidated financial statements (see Note D “Discontinued Operations”).

Preparation of Financial Statements

The preparation of consolidated financial statements requires management to make estimates and judgments that affect the amounts reported in the financial statements. Actual results may differ significantly from these estimates.

C. Recently Issued Accounting Pronouncements

In March 2010, FASB issued an Accounting Standards Update (“ASU”) 2010-17, “Milestone Method of Revenue Recognition”, to Accounting Standards Codification (“ASC”) 605, “Revenue Recognition.” The guidance in this consensus allows the milestone method as an acceptable revenue recognition methodology when an arrangement includes substantive milestones. The guidance provides a definition of substantive milestone and should be applied regardless of whether the arrangement includes single or multiple deliverables or units of accounting. The scope of this consensus is limited to the transactions involving milestones relating to research and development deliverables. The guidance includes enhanced disclosure requirements about each arrangement, individual milestones and related contingent consideration, information about substantive milestones and factors considered in the determination. The consensus is effective prospectively to milestones achieved in fiscal years, and interim periods within those years, after June 15, 2010. Teradyne adopted this final consensus prospectively in January 2011. This adoption had no material impact on Teradyne’s financial position or results of operations.

 

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In May 2011, the FASB issued ASU No. 2011-04, “Fair Value Measurement.” This ASU clarifies the concepts related to highest and best use and valuation premise, blockage factors and other premiums and discounts, the fair value measurement of financial instruments held in a portfolio and of those instruments classified as a component of shareowners’ equity. The guidance includes enhanced disclosure requirements about recurring Level 3 fair value measurements, the use of nonfinancial assets, and the level in the fair value hierarchy of assets and liabilities not recorded at fair value. The provisions of this ASU are effective prospectively for interim and annual periods beginning on or after December 15, 2011. Early application is prohibited. This ASU requires changes in presentation only and Teradyne does not expect it will have a material impact on its consolidated financial statements.

In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income.” This ASU intends to enhance comparability and transparency of other comprehensive income components. The guidance provides an option to present total comprehensive income, the components of net income and the components of other comprehensive income in a single continuous statement or two separate but consecutive statements. This ASU eliminates the option to present other comprehensive income components as part of the statement of changes in shareowners’ equity. The provisions of this ASU will be applied retrospectively for interim and annual periods beginning after December 15, 2011. Early application is permitted. Teradyne is currently evaluating the impact of this new ASU.

D. Discontinued Operations

On March 21, 2011, Teradyne completed the sale of its Diagnostic Solutions business unit, which was included in the Systems Test Group segment, to SPX Corporation for $40.2 million in cash. Teradyne sold this business as its growth potential as a stand-alone business within Teradyne was significantly less than if it was part of a larger automotive supplier. The financial information for Diagnostic Solutions has been reclassified to discontinued operations for all periods presented. Net revenues and (loss) income from discontinued operations for the three and six months ended July 3, 2011 and July 4, 2010 were as follows:

 

    For the Three Months
Ended
    For the Six Months
Ended
 
      July 3,  
2011
      July 4,  
2010
    July 3,
2011
    July 4,
2010
 
    (in thousands)  

Net revenues

  $ —        $ 9,505      $ 9,086      $ 19,790   
 

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) Income from discontinued operations before income taxes

  $ —        $ (381   $ 1,278      $ 620   

(Loss) Gain from disposal of discontinued operations before income taxes

    (832 )     —          28,949        —     

Income tax provision

    —          —          4,311        —     
 

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) Income from discontinued operations

  $ (832   $ (381   $ 25,916      $ 620   
 

 

 

   

 

 

   

 

 

   

 

 

 

E. Financial Instruments and Derivatives

Financial Instruments

Teradyne uses the market and income approach to value its financial instruments and there was no change in valuation techniques used by Teradyne during the six months ended July 3, 2011 and July 4, 2010. 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 are carried at fair value and are classified 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

 

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pricing is a mathematical technique used to value securities by relying on the securities’ relationship to other benchmark quoted prices.

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.

For the right to sell the auction rate securities, held by Teradyne, back to UBS (“UBS Put”), Teradyne elected fair value treatment under ASC 825-10, “Financial Instruments.” The UBS Put was the only instrument of this nature or type that Teradyne held and for which Teradyne has elected the fair value option under ASC 825-10. The UBS Put was exercised in June 2010.

During the six months ended July 3, 2011 and July 4, 2010, there were no significant transfers in and out of Level 1 and Level 2.

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 July 3, 2011 and December 31, 2010.

 

    July 3, 2011  
    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

       

Available for sale securities:

       

Money market funds

  $ 288,944      $ —        $ —        $ 288,944   

U.S. government agency securities

    —          240,102        —          240,102   

Commercial paper

    —          235,540        —          235,540   

U.S. Treasury securities

    138,455        —          —          138,455   

Corporate debt securities

    —          129,084        —          129,084   

Equity and debt mutual funds

    8,754        —          —          8,754   

Certificates of deposit and time deposits

    —          8,381        —          8,381   

Non-U.S. government securities

    298        —          —          298   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

    436,451        613,107        —          1,049,558   

Derivatives

    —          135        —          135   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 436,451      $ 613,242      $ —        $ 1,049,693   
 

 

 

   

 

 

   

 

 

   

 

 

 

Reported as follows:

 

     (Level 1)      (Level 2)      (Level 3)      Total  
     (in thousands)  

Assets

           

Cash and cash equivalents

   $ 288,944       $ 24,694       $ —         $ 313,638   

Marketable securities

     64,529         389,413         —           453,942   

Long-term marketable securities

     82,978         199,000         —           281,978   

Prepayments and other current assets

     —           135        —           135   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 436,451       $ 613,242       $ —         $ 1,049,693   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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    December 31, 2010  
    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

       

Available for sale securities:

       

U.S. government agency securities

  $ —        $ 341,510      $ —        $ 341,510   

Money market funds

    238,607        —          —          238,607   

U.S. Treasury securities

    138,707        —          —          138,707   

Commercial paper

    —          103,448        —          103,448   

Corporate debt securities

    —          92,578        —          92,578   

Certificates of deposit and time deposits

    —          11,076        —          11,076   

Equity and debt mutual funds

    8,003        —          —          8,003   

Non-U.S. government securities

    278        —          —          278   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 385,595      $ 548,612      $ —        $ 934,207   
 

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

       

Derivatives

  $ —        $ 157      $ —        $ 157   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ —        $ 157      $ —        $ 157   
 

 

 

   

 

 

   

 

 

   

 

 

 

Reported as follows:

 

     (Level 1)      (Level 2)      (Level 3)      Total  
     (in thousands)  

Assets

           

Cash and cash equivalents

   $ 238,607       $ 37,843       $ —         $ 276,450   

Marketable securities

     62,294         346,767         —           409,061   

Long-term marketable securities

     84,694         164,002         —           248,696   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 385,595       $ 548,612       $ —         $ 934,207   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Other accrued liabilities

   $ —         $ 157       $ —         $ 157   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table represents changes in the fair value of Level 3 financial assets:

 

    For the Three Months Ended  
    July 3, 2011     July 4, 2010  
    Long-Term
Auction Rate
Securities
    UBS Put     Long-Term
Auction Rate
Securities
    UBS Put  
    (in thousands)  

Balance at beginning of period

  $ —        $ —        $ 23,697      $ 2,687   

Sale of auction rate securities and exercise of UBS Put

    —          —          (20,863     (2,687

Change in unrealized gain included in interest income

    —          —          2        —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

  $ —        $ —        $ 2,836      $ —     
 

 

 

   

 

 

   

 

 

   

 

 

 

 

9


Table of Contents
    For the Six Months Ended  
    July 3, 2011     July 4, 2010  
    Long-Term
Auction Rate
Securities
    UBS Put     Long-Term
Auction Rate
Securities
    UBS Put  
    (in thousands)  

Balance at beginning of period

  $ —        $ —        $ 23,649      $ 2,830   

Sale of auction rate securities and exercise of UBS Put

    —          —          (21,013     (2,687 )

Change in unrealized gain included in interest income

    —          —          200        —     

Change in unrealized loss included in interest expense and other

    —          —          —          (143
 

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

  $ —        $ —        $ 2,836      $ —     
 

 

 

   

 

 

   

 

 

   

 

 

 

During the three and six months ended July 3, 2011, Teradyne recorded a net gain of $0.1 million and a net loss $0.1 million, respectively, from sales of marketable securities. During the three and six months ended July 4, 2010, Teradyne recorded a loss of $0.1 million and $0.4 million, respectively, from sales of marketable securities and exercise of UBS Put.

Realized losses from sales of marketable securities, decreases in auction rate securities fair value and other-than-temporary impairment losses are included in interest expense and other. Realized gains from sales of marketable securities and increases in auction rate securities fair value are included in interest income.

The carrying amounts and fair values of financial instruments at July 3, 2011 and December 31, 2010 were as follows:

 

     July 3, 2011      December 31, 2010  
     Carrying Value      Fair Value      Carrying Value      Fair Value  
     (in thousands)  

Marketable securities

   $ 735,920       $ 735,920       $ 657,757       $ 657,757   

Cash equivalents

     313,638         313,638         276,450         276,450   

Convertible debt(1)

     149,873         542,213         144,059         506,350   

Japan loan

     7,423         7,423         8,573         8,573   

 

(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 feature.

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

The following table summarizes available-for-sale marketable securities which are recorded at fair value:

 

    July 3, 2011  
    Available-for-Sale     Fair Market
Value of Investments
with Unrealized  Losses
 
    Cost     Unrealized
Gain
    Unrealized
(Loss)
    Fair Market
Value
   
    (in thousands)  

Money market funds

  $ 288,944      $ —        $ —        $ 288,944      $ —     

U.S. government agency securities

    239,366        764        (28     240,102        30,074   

Commercial paper

    235,556        17        (33     235,540        48,880   

U.S. Treasury securities

    137,934        533        (12     138,455        28,665   

Corporate debt securities

    128,664        497        (77     129,084        37,248   

Equity and debt mutual funds

    7,518        1,236        —          8,754        —     

Certificates of deposit and time deposits

    8,365        16        —          8,381        —     

Non-U.S. government securities

    298        —          —          298        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 1,046,645      $ 3,063      $ (150   $ 1,049,558      $ 144,867   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

10


Table of Contents

Reported as follows:

 

    Cost     Unrealized
Gain
    Unrealized
(Loss)
    Fair Market
Value
    Fair Market
Value of Investments
with Unrealized Losses
 
    (in thousands)  

Cash and cash equivalents

  $ 313,639      $ —        $ (1   $ 313,638      $ 10,946   

Marketable securities

    453,619        367        (44     453,942        61,468   

Long-term marketable securities

    279,387        2,696        (105     281,978        72,453   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 1,046,645      $ 3,063      $ (150   $ 1,049,558      $ 144,867   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

    December 31, 2010  
    Available-for-Sale     Fair Market
Value of Investments
with Unrealized  Losses
 
    Cost     Unrealized
Gain
    Unrealized
(Loss)
    Fair Market
Value
   
    (in thousands)  

U.S. government agency securities

  $ 341,349      $ 334      $ (173   $ 341,510      $ 97,542   

Money market funds

    238,607        —          —          238,607        —     

U.S. Treasury securities

    138,354        360        (7     138,707        10,030   

Commercial paper

    103,472        1        (25     103,448        33,210   

Corporate debt securities

    92,464        170        (56     92,578        43,434   

Certificates of deposit and time deposits

    11,068        8        —          11,076        —     

Equity and debt mutual funds

    7,056        1,378        (431     8,003        1,088   

Non-U.S. government securities

    261        17        —          278        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 932,631      $ 2,268      $ (692   $ 934,207      $ 185,304   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Reported as follows:

 

     Cost      Unrealized
Gain
     Unrealized
(Loss)
    Fair Market
Value
     Fair Market
Value of Investments
with Unrealized Losses
 
     (in thousands)  

Cash and cash equivalents

   $ 276,447       $ 3       $ —        $ 276,450       $ —     

Marketable securities

     408,934         178         (51     409,061         103,761   

Long-term marketable securities

     247,250         2,087         (641     248,696         81,543   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
   $ 932,631       $ 2,268       $ (692   $ 934,207       $ 185,304   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

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.

As of July 3, 2011, the fair market value of investments with unrealized losses less than one year totaled $144.9 million. There were no unrealized losses greater than one year. As of December 31, 2010, the fair market value of investments with unrealized losses totaled $185.3 million. Of this value, $5.0 million had unrealized losses greater than one year and $180.3 million had unrealized losses less than one year.

 

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Table of Contents

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 denominated net monetary assets. 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 net 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 fair value of the net monetary assets and liabilities denominated in foreign currencies.

The notional amount of foreign exchange contracts hedging monetary assets and liabilities denominated in foreign currencies was $49.5 million and $48.3 million at July 3, 2011 and December 31, 2010, respectively.

The following table summarizes the fair value of derivative instruments at July 3, 2011 and December 31, 2010.

 

    

Balance Sheet Location

  July 3,
2011
    December 31,
2010
 
         (in thousands)  

Derivatives not designated as hedging instruments:

      

Foreign exchange contracts

  

Prepayments and other current assets

  $ 135      $ —     

Foreign exchange contracts

  

Other accrued liabilities

    —          157   
    

 

 

   

 

 

 
     $ 135     $ 157   
    

 

 

   

 

 

 

The following table summarizes the effect of derivative instruments in the statement of operations recognized during the three and six months ended July 3, 2011 and July 4, 2010. The table does not reflect the corresponding gains (losses) from the remeasurement of the monetary assets and liabilities denominated in foreign currencies.

 

   

Location of Gains (Losses)
Recognized in Statement
of Operations

  For the Three Months
Ended
    For the Six Months
Ended
 
    July 3,
2011
    July 4,
2010
    July 3,
2011
    July 4,
2010
 
        (in thousands)  

Derivatives not designated as hedging instruments:

         

Foreign exchange contracts

 

Interest expense and other

  $ (166   $ (574   $ 660      $ (1,260
   

 

 

   

 

 

   

 

 

   

 

 

 
    $ (166   $ (574   $ 660      $ (1,260
   

 

 

   

 

 

   

 

 

   

 

 

 

See Note F “Debt” regarding derivatives related to convertible senior notes.

F. Debt

Loan Agreement

On March 31, 2009, Teradyne K.K., Teradyne’s wholly-owned subsidiary in Japan, entered into a loan agreement with a local bank in Japan to borrow approximately $10.0 million. The loan has a term of 5 years and a fixed interest rate of 0.81%. Approximately $6.0 million of the loan is collateralized by a real estate mortgage on Teradyne K.K.’s building and land in Kumamoto, Japan and approximately $4.0 million is unsecured. Teradyne, Inc. has guaranteed payment of the loan obligation. The loan is amortized over the term of the loan with semiannual principal payments of approximately $1.0 million payable on September 30 and March 30 each year. At July 3, 2011, approximately $2.5 million of the outstanding loan principal is included in current debt and approximately $4.9 million is classified as long-term debt.

 

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Table of Contents

Convertible Senior Notes

In April 2009, Teradyne issued 4.50% convertible senior notes (the “Notes”) at an aggregate principal amount of $190 million. The Notes will mature on March 15, 2014, unless earlier repurchased by Teradyne or converted. The Notes are senior unsecured obligations and rank equally with all of Teradyne’s existing and future senior debt and senior to any of Teradyne’s subordinated debt.

The Notes may be converted, under certain circumstances and during certain periods, at an initial conversion rate of approximately 182.65 shares of Teradyne’s common stock per $1,000 principal amount of Notes, which is equivalent to an initial conversion price of approximately $5.48, a 25% conversion premium based on the last reported sale price of $4.38 per share of Teradyne’s common stock on March 31, 2009. The conversion rate is subject to adjustment in certain circumstances.

During the three months ended July 3, 2011, the following circumstance that allows holders to convert their Notes at their option prior to December 15, 2013 occurred: the last reported sale price of Teradyne’s common stock for 20 or more trading days in a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter exceeded 130% of the conversion price in effect on the last trading day of the immediately preceding calendar quarter. As of August 9, 2011, no holders have exercised their option to convert their Notes.

Concurrently with the offering of the Notes, Teradyne entered into a convertible note hedge transaction with a strike price equal to the initial conversion price of the Notes, or approximately $5.48. The convertible note hedge allows Teradyne to receive shares of its common stock and/or cash related to the excess conversion value that it would pay to the holders of the Notes upon conversion. The convertible note hedges will cover, subject to customary antidilution adjustments, approximately 34,703,196 shares of Teradyne’s common stock. Teradyne paid approximately $64.6 million for the convertible note hedges.

Separately, Teradyne entered into a warrant transaction with a strike price of approximately $7.67 per share, which is 75% higher than the closing price of Teradyne’s common stock on March 31, 2009.

The convertible note hedge and warrant transaction will generally have the effect of increasing the conversion price of the Notes to approximately $7.67 per share of Teradyne’s common stock, representing a 75% conversion premium based upon the closing price of Teradyne’s common stock on March 31, 2009.

The Notes are classified as long-term debt in the balance sheet at July 3, 2011 and December 31, 2010. The tables below represent the components of Teradyne’s convertible senior notes:

 

     July 3,
2011
     December 31,
2010
 
     (in thousands)  

Debt principal

   $ 190,000       $ 190,000   

Unamortized debt discount

     40,127         45,941   
  

 

 

    

 

 

 

Net carrying amount of the convertible debt

   $ 149,873       $ 144,059   
  

 

 

    

 

 

 

 

    For the Three Months
Ended
    For the Six Months
Ended
 
      July 3,  
2011
      July 4,  
2010
    July 3,
2011
    July 4,
2010
 
    (in thousands)  

Contractual interest expense

  $ 2,138      $ 2,138      $ 4,346      $ 4,371   

Amortization of the discount component and debt issue fees

    3,160        2,783        6,221        5,480   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense on the convertible debt

  $ 5,298      $ 4,921      $ 10,567      $ 9,851   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

As of July 3, 2011, the unamortized discount was $40.1 million, which will be amortized over approximately 2.75 years, and the carrying amount of the equity component was $63.4 million. As of July 3, 2011, the conversion rate was equal to the initial conversion price of approximately $5.48 per share and the if-converted value of the Notes was $526.8 million.

G. Deferred Revenue and Customer Advances

Deferred revenue and customer advances consist of the following and are included in short and long-term deferred revenue and customer advances.

 

     July 3,
2011
     December 31,
2010
 
     (in thousands)  

Customer advances

   $ 105,696       $ 132,559   

Maintenance, training and extended warranty

     34,739         36,626   

Undelivered elements

     7,401         5,858   

Acceptance

     951         2,083   
  

 

 

    

 

 

 

Total deferred revenue and customer advances

   $ 148,787       $ 177,126   
  

 

 

    

 

 

 

H. Product Warranty

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

 

     For the Three Months
Ended
    For the Six Months
Ended
 
     July 3,
2011
    July 4,
2010
    July 3,
2011
    July 4,
2010
 
     (in thousands)  

Balance at beginning of period

   $ 9,502      $ 8,339      $ 9,886      $ 6,435   

Accruals for warranties issued during the period

     3,976        5,202        7,553        8,857   

Adjustments related to pre-existing warranties

     (1,116     (234     (2,072     354   

Settlements made during the period

     (3,100     (2,671     (6,105     (5,010
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 9,262      $ 10,636      $ 9,262      $ 10,636   
  

 

 

   

 

 

   

 

 

   

 

 

 

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 deferred revenue and customer advances and long-term other accrued liabilities.

 

     For the Three Months
Ended
    For the Six Months
Ended
 
     July 3,
2011
    July 4,
2010
    July 3,
2011
    July 4,
2010
 
     (in thousands)  

Balance at beginning of period

   $ 9,870      $ 4,470      $ 8,972      $ 4,055   

Deferral of new extended warranty revenue

     1,861        1,581        3,798        3,215   

Recognition of extended warranty deferred revenue

     (1,423     (408     (2,462     (1,627
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 10,308      $ 5,643      $ 10,308      $ 5,643   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

I. Stock-Based Compensation

During the six months ended July 3, 2011, Teradyne granted service-based restricted stock units to employees, and service-based stock options and service and performance-based restricted stock units to executive officers. The total number of restricted stock units granted was 1.7 million at a weighted average grant date fair value of $16.20. Restricted stock units vest in equal installments over four years. The percentage level of performance satisfied for performance-based grants is assessed on or near the anniversary of the grant date and, in turn, that percentage level determines the number of performance-based restricted stock units available for vesting over the vesting period; portions of the performance-based grants not available for vesting are forfeited. The total number of stock options granted to executive officers was 0.1 million at a weighted average grant date fair value of $6.74. The stock options vest in equal installments over four years, and have a term of seven years from the date of grant.

During the six months ended July 4, 2010, Teradyne granted service-based restricted stock units to employees, and service and performance-based restricted stock units and stock options to executive officers. The total number of restricted stock units granted was 2.6 million at a weighted average grant date fair value of $9.42. The total number of stock options granted was 0.3 million at a weighted average grant date fair value of $4.10. Restricted stock units and stock options vest in equal installments over four years. The stock options have a term of seven years from the date of grant.

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

 

     For the Six Months
Ended
 
     July 3,
2011
    July 4,
2010
 

Expected life (years)

     4.00        4.75   

Interest rate

     1.5     2.4

Volatility-historical

     52.1     48.8

Dividend yield

     0.0     0.0

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 rate was determined using the U.S. Treasury yield curve in effect at the time of grant.

The weighted-average fair value of employee stock purchase rights granted in the first six months of 2011 and 2010 was $3.66 and $3.05, respectively. The fair value of the employees’ purchase rights was estimated using the Black-Scholes option-pricing model with the following assumptions:

 

     For the Six Months
Ended
 
     July 3,
2011
    July 4,
2010
 

Expected life (years)

     0.5        0.5   

Interest rate

     0.19     0.18

Volatility-historical

     41.5     45.5

Dividend yield

     0.0     0.0

 

15


Table of Contents

J. Comprehensive Income

Comprehensive income is calculated as follows:

 

    For the Three
Months Ended
    For the Six
Months Ended
 
    July 3,
2011
    July 4,
2010
    July 3,
2011
    July 4,
2010
 
    (in thousands)  

Net income

  $ 89,058      $ 122,149      $ 183,930      $ 172,249   

Foreign currency translation adjustment

    —          210        2,266        (363

Unrealized gains (losses) on investments, net of tax of $0, $0, $0 and $0

    1,298        (401     1,313        296   

Actuarial (losses) gains arising during period, net of tax of $10, $1,121, ($5) and $1,247

    (4,150     17,202        (4,201     17,587   

Amortization included in net periodic pension and post-retirement costs:

       

Actuarial losses, net of tax of $8, $44, $20 and $90

    2,377        953        4,455        2,707   

Prior service costs, net of tax of $0, $0, $0 and $0

    6        122        12        246   

Settlement loss net of tax of $38, $0, $73 and $0

    217        —          277        —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

  $ 88,806      $ 140,235      $ 188,052      $ 192,722   
 

 

 

   

 

 

   

 

 

   

 

 

 

K. Intangible Assets

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

 

    July 3, 2011  
    Gross
Carrying
Amount
    Accumulated
Amortization
    Net
Carrying
Amount
    Weighted
Average
Useful Life
 
    (in thousands)  

Developed technology

  $ 121,055      $ 74,500      $ 46,555        6.1 years   

Customer relationships and service and software maintenance contracts

    91,271        38,030        53,241        8.6 years   

Trade names and trademarks

    14,840        6,279        8,561        11.5 years   

Customer backlog

    300        300        —          0.5 years   
 

 

 

   

 

 

   

 

 

   

Total intangible assets

  $ 227,466      $ 119,109      $ 108,357        7.6 years   
 

 

 

   

 

 

   

 

 

   
    December 31, 2010  
    Gross
Carrying
Amount
    Accumulated
Amortization
    Net
Carrying
Amount
    Weighted
Average
Useful Life
 
    (in thousands)  

Developed technology

  $ 121,055      $ 65,610      $ 55,445        6.1 years   

Customer relationships and service and software maintenance contracts

    91,271        32,749        58,522        8.6 years   

Trade names and trademarks

    14,840        5,866        8,974        11.5 years   

Customer backlog

    300        300        —          0.5 years   
 

 

 

   

 

 

   

 

 

   

Total intangible assets

  $ 227,466      $ 104,525      $ 122,941        7.6 years   
 

 

 

   

 

 

   

 

 

   

 

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Table of Contents

Aggregate intangible asset amortization expense was $7.3 million and $14.6 million, respectively, for the three and six months ended July 3, 2011 and $7.3 million and $14.7 million, respectively, for the three and six months ended July 4, 2010. Estimated intangible asset amortization expense for each of the five succeeding fiscal years is as follows:

 

Year

   Amount
(in thousands)
 

2011 (remainder)

   $ 13,238   

2012

     25,732   

2013

     24,683   

2014

     21,598   

2015

     4,575   

L. Net Income per Common Share

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

 

    For the Three Months
Ended
    For the Six Months
Ended
 
    July 3,
2011
    July 4,
2010
    July 3,
2011
    July 4,
2010
 
    (in thousands, except per share amounts)  

Income from continuing operations

  $ 89,890      $ 122,530      $ 158,014      $ 171,629   

(Loss) Income from discontinued operations

    —          (381     1,545        620   

(Loss) Gain on disposal of discontinued operations

    (832     —          24,371        —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income for basic net income per share

  $ 89,058      $ 122,149      $ 183,930      $ 172,249   

Income impact of assumed conversion of convertible notes

    —          4,379        —          8,766   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income for diluted net income per share

  $ 89,058      $ 126,528      $ 183,930      $ 181,015   
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares-basic

    185,367        179,990        185,044        178,429   

Effect of dilutive potential common shares:

       

Incremental shares from assumed conversion of convertible notes

    22,711        34,703        23,036        34,703   

Convertible note hedge warrant shares

    17,914        11,225        18,368        10,174   

Restricted stock units

    3,877        2,924        4,222        2,896   

Stock options

    469        2,571        508        2,635   

Employee stock purchase rights

    114        128        88        72   
 

 

 

   

 

 

   

 

 

   

 

 

 

Dilutive potential common shares

    45,085        51,551        46,222        50,480   
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares-diluted

    230,452        231,541        231,266        228,909   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income per common share-basic

       

Continuing operations

  $ 0.48      $ 0.68      $ 0.85      $ 0.97   

Discontinued operations

    —          —          0.14        —     
 

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0.48      $ 0.68      $ 0.99      $ 0.97   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income per common share-diluted

       

Continuing operations

  $ 0.39      $ 0.55      $ 0.68      $ 0.79   

Discontinued operations

    —          —          0.12        —     
 

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0.39      $ 0.55      $ 0.80      $ 0.79   
 

 

 

   

 

 

   

 

 

   

 

 

 

The computation of diluted net income per common share for the three and six months ended July 3, 2011 excludes the effect of the potential exercise of stock options to purchase approximately 0.5 million and 1.0 million shares, respectively, because the effect would have been anti-dilutive.

 

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Table of Contents

The computation of diluted net income per common share for the three and six months ended July 4, 2010 excludes the effect of the potential exercise of stock options to purchase approximately 4.5 million and 6.0 million shares and restricted stock units of 0.1 million and 0.4 million shares, respectively, because the effect would have been anti-dilutive.

With respect to the Teradyne’s convertible debt, Teradyne intends to settle its conversion spread (i.e., the intrinsic value of the embedded option feature contained in the convertible debt) in shares. Teradyne accounts for its conversion spread using the treasury stock method. In the fourth quarter of 2010, Teradyne determined that it had the ability and intent to settle the principal amount of the convertible debt in cash, accordingly as of the fourth quarter of 2010, the principal amount has been excluded from the determination of diluted earnings per share.

Teradyne’s call option on its common stock (convertible note hedge transaction) is excluded from the calculation of diluted shares because the effect would be anti-dilutive. See Note F “Debt” regarding convertible note hedge transaction.

M. Restructuring and Other, Net

Restructuring

In response to a downturn in the industry in 2008 and 2009, Teradyne initiated restructuring activities across all segments to reduce costs, principally through headcount reductions and facility consolidations. The tables below represent activity related to these actions. The remaining accrual for severance and benefits is reflected in the accrued employees’ compensation and withholdings account on the balance sheet and is expected to be paid by July 2012. The remaining accrual for lease payments on vacated facilities is reflected in the other accrued liabilities account and the long-term other accrued liabilities account and is expected to be paid over the lease terms, the latest of which expires in 2013. Teradyne expects to pay approximately $0.9 million against the lease accruals over the next twelve months. Teradyne’s future lease commitments are net of expected sublease income of $0.8 million as of July 3, 2011.

 

     Severance
and
Benefits
    Facility
Exit
Costs
    Total  
     (in thousands)  
Pre-2010 Activities       

Balance at December 31, 2009

   $ 2,905      $ 10,166      $ 13,071   

Change in estimate

     240        (2,672     (2,432

Cash payments

     (3,124     (4,193     (7,317
  

 

 

   

 

 

   

 

 

 

Balance at December 31, 2010

     21       3,301        3,322   

Change in estimate

     —          (432     (432

Cash payments

     (21 )     (242     (263
  

 

 

   

 

 

   

 

 

 

Balance at April 3, 2011

     —          2,627        2,627   

Cash payments

     —          (301     (301
  

 

 

   

 

 

   

 

 

 

Balance at July 3, 2011

   $ —        $ 2,326      $ 2,326   
  

 

 

   

 

 

   

 

 

 

 

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Table of Contents
     Severance
and
Benefits
    Facility
Exit
Costs
     Total  
     (in thousands)  
2010 Activities        

Q1 2010 Activity:

       

Provision

   $ 405      $ —         $ 405   

Cash payments

     (405     —           (405
  

 

 

   

 

 

    

 

 

 

Balance at December 31, 2010

   $ —        $ —         $ —     
  

 

 

   

 

 

    

 

 

 

Q2 2010 Activity:

       

Provision

   $ 890      $ —         $ 890   

Cash payments

     (402     —           (402
  

 

 

   

 

 

    

 

 

 

Balance at December 31, 2010

     488        —           488   

Provision

     202        —           202   

Cash payments

     (690     —           (690
  

 

 

   

 

 

    

 

 

 

Balance at April 3, 2011

   $ —        $ —         $ —     
  

 

 

   

 

 

    

 

 

 

Q3 2010 Activity:

       

Provision

   $ 382     $ —         $ 382   

Cash payments

     (72     —           (72

Other

     (184     —           (184
  

 

 

   

 

 

    

 

 

 

Balance at December 31, 2010

     126       —           126   

Change in estimate

     (47     —           (47

Cash payments

     (79     —           (79
  

 

 

   

 

 

    

 

 

 

Balance at April 3, 2011

   $ —        $ —         $ —     
  

 

 

   

 

 

    

 

 

 

Q4 2010 Activity:

       

Provision

   $ 98      $ —         $ 98   
  

 

 

   

 

 

    

 

 

 

Balance at December 31, 2010

     98        —           98   

Provision

     117        —           117   

Cash payments

     (215     —           (215
  

 

 

   

 

 

    

 

 

 

Balance at April 3, 2011

   $ —        $ —         $ —     
  

 

 

   

 

 

    

 

 

 
2011 Activity        

Q1 2011 Activity:

       

Provision

   $ 572      $ —         $ 572   

Cash payments

     (241     —           (241
  

 

 

   

 

 

    

 

 

 

Balance at April 3, 2011

     331        —           331   

Cash payments

     (154     —           (154
  

 

 

   

 

 

    

 

 

 

Balance at July 3, 2011

   $ 177      $ —         $ 177   
  

 

 

   

 

 

    

 

 

 

Q2 2011 Activity:

       

Provision

   $ 344      $ —         $ 344   
  

 

 

   

 

 

    

 

 

 

Balance at July 3, 2011

   $ 344      $ —         $ 344   
  

 

 

   

 

 

    

 

 

 

Balance at July 3, 2011

   $ 521      $ 2,326       $ 2,847   
  

 

 

   

 

 

    

 

 

 

During the six months ended July 3, 2011, Teradyne recorded the following restructuring charges:

Q2 2011 Action:

 

   

$0.3 million of severance charges related to headcount reductions of 2 people in Semiconductor Test segment.

Q1 2011 Action:

 

   

$0.6 million of severance charges related to headcount reductions of 5 people in Semiconductor Test segment.

 

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Table of Contents

Pre-2010 Actions:

 

   

($0.4) million related to changes in the estimated exit costs related to the Westford, MA and Poway, CA facilities in System Test Group segment, and the North Reading, MA facility across both segments.

Q2 2010 Actions:

 

   

$0.2 million related to a change in the estimated severance benefits related to headcount reduction activities across both segments.

Q3 2010 Actions:

 

   

$0.1 million related to a change in the estimated severance benefits related to headcount reduction activities across both segments.

During the six months ended July 4, 2010, Teradyne recorded the following restructuring charges:

Q1 2010 Actions:

 

   

$0.4 million of severance charges related to headcount reductions of 4 people in Semiconductor Test segment.

Q2 2010 Actions:

 

   

$0.4 million of severance charges related to headcount reductions of 6 people in Systems Test Group segment.

Q2 2009 Actions:

 

   

$0.5 million related to a change in the estimated severance benefits related to headcount reduction activities across both segments.

Other

During the six months ended July 3, 2011, Teradyne recorded a $0.9 million charge related to a non-U.S. pension settlement.

N. Retirement Plans

Defined Benefit Pension Plans

Teradyne has defined benefit pension plans covering a portion of domestic employees and employees of certain non-U.S. subsidiaries. Benefits under these plans are based on employees’ years of service and compensation. Teradyne’s funding policy is to make contributions to these plans in accordance with local laws and to the extent that such contributions are tax deductible. The assets of these plans consist primarily of equity and fixed income securities. In addition, Teradyne has foreign unfunded defined benefit pension plans and 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 and the Internal Revenue Code.

 

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Table of Contents

Components of net periodic pension cost for all plans were as follows:

 

     For the Three Months
Ended
    For the Six Months
Ended
 
     July 3, 
2011
    July 4, 
2010
    July 3, 
2011
    July 4, 
2010
 
     (in thousands)  

Service cost

   $ 668      $ 921      $ 1,493      $ 1,952   

Interest cost

     4,459        4,268        8,849        8,816   

Expected return on plan assets

     (4,187     (5,273     (8,375     (10,140

Amortization of unrecognized:

        

Prior service cost

     155        181        310        363   

Net loss

     2,341        1,022        4,386        2,768   

Settlement

     935        —          935        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net periodic pension cost

   $ 4,371      $ 1,119      $ 7,598      $ 3,759   
  

 

 

   

 

 

   

 

 

   

 

 

 

In the six months ended July 3, 2011, Teradyne contributed $4.4 million primarily to its foreign pension plans.

Post-Retirement 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 death, and 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.

Components of net periodic post-retirement cost were as follows:

 

     For the Three Months
Ended
    For the Six Months
Ended
 
     July 3,
2011
    July 4,
2010
    July 3,
2011
    July 4,
2010
 
     (in thousands)  

Service cost

   $ 14      $ 7      $ 30      $ 27   

Interest cost

     134        174        269        392   

Amortization of unrecognized:

        

Prior service benefit

     (150     (59     (299     (117

Net loss

     45        (25     90        29   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net periodic post-retirement cost

   $ 43      $ 97      $ 90      $ 331   
  

 

 

   

 

 

   

 

 

   

 

 

 

O. Commitments and Contingencies

Purchase Commitments

As of July 3, 2011, Teradyne had entered into purchase commitments for certain components and materials. The purchase commitments are for less than one year and aggregate to approximately $190.7 million.

Legal Claims

Teradyne is subject to various legal proceedings and claims which have arisen in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on Teradyne’s results of operations, financial condition or cash flows.

 

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Table of Contents

P. Segment Information

Teradyne’s two reportable segments are Semiconductor Test and Systems Test Group. The Semiconductor Test segment includes operations related to the design, manufacturing and marketing of semiconductor test products and services. The Systems Test Group segment includes operations related to the design, manufacturing and marketing of products and services for military/aerospace instrumentation test, hard disk drive test and circuit-board test and inspection.

Teradyne evaluates performance based on several factors, of which the primary financial measure is business segment income before income taxes. The accounting policies of the business segments are the same as those described in Note B “Accounting Policies” in Teradyne’s Annual Report on Form 10-K for the year ended December 31, 2010. Segment information is as follows:

 

    Semiconductor
Test
    Systems
Test Group
    Corporate
and
Eliminations
    Consolidated  
    (in thousands)  

Three months ended July 3, 2011:

       

Net revenues

  $ 343,096      $ 67,423      $ —        $ 410,519   

Income (loss) from continuing operations before income taxes(1)(2)

    92,477        9,125        (3,873     97,729   

Three months ended July 4, 2010:

       

Net revenues

  $ 413,059      $ 32,212      $ —        $ 445,271   

Income (loss) from continuing operations before income taxes(1)(2)

    141,911        (5,845     (3,993     132,073   

Six months ended July 3, 2011:

       

Net revenues

  $ 662,346      $ 125,334      $ —        $ 787,680   

Income (loss) from continuing operations before income taxes(1)(2)

    167,893        14,313        (10,867     171,339   

Six months ended July 4, 2010:

       

Net revenues

  $ 702,736      $ 61,873      $ —        $ 764,609   

Income (loss) from continuing operations before income taxes(1)(2)

    206,997        (11,472     (9,523     186,002   

 

(1) Interest income and interest expense and other are included in Corporate and Eliminations.
(2) Included in the income (loss) from continuing operations before income taxes for each of the segments are charges for the three months and six months ended July 3, 2011 and July 4, 2010 that include restructuring and other, net, and provision for excess and obsolete inventory, as follows:

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

 

    For the Three Months
Ended
    For the Six Months
Ended
 
      July 3,  
2011
      July 4,  
2010
    July 3,
2011
    July 4,
2010
 
    (in thousands)  

Cost of revenues—provision for excess and obsolete inventory

  $ 1,500     $ —        $ 5,942     $ 496   

Restructuring and other, net

    1,279       —          2,170        1,082   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 2,779      $ —        $ 8,112      $ 1,578   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Included in the Systems Test Group segment are charges for the following:

 

    For the Three Months
Ended
    For the Six Months
Ended
 
    July 3,
2011
    July 4,
2010
    July 3,
2011
    July 4,
2010
 
    (in thousands)  

Cost of revenues—provision for excess and obsolete inventory

  $ 216      $ 276      $ 401      $ 958   

Restructuring and other, net

    —          408        (246     229   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 216      $ 684      $ 155      $ 1,187   
 

 

 

   

 

 

   

 

 

   

 

 

 

Included in the Corporate and Eliminations segment are charges for the following:

 

    For the Three Months
Ended
    For the Six Months
Ended
 
    July 3,
2011
    July 4,
2010
    July 3,
2011
    July 4,
2010
 
    (in thousands)  

Restructuring and other, net

  $ —        $ (37   $ (232   $ (37
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ —        $ (37 )   $ (232   $ (37 )
 

 

 

   

 

 

   

 

 

   

 

 

 

Q. Subsequent Event

During the period from July 4, 2011 to August 9, 2011, Teradyne repurchased 1.5 million shares of common stock for $17.8 million at an average price of $12.30.

 

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Table of Contents
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

Statements in this Quarterly Report on Form 10-Q which are not historical facts, so called “forward looking statements,” are made pursuant to the safe harbor provisions of Section 21E of the Securities Exchange Act of 1934, as amended. Investors are cautioned that all forward looking statements involve risks and uncertainties, including those detailed in Teradyne’s filings with the Securities and Exchange Commission. See also Part II, Item 1A of this Quarterly Report on Form 10-Q and Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2010. Readers are cautioned not to place undue reliance on these forward-looking statements which reflect management’s analysis only as of the date hereof. We assume no obligation to update these forward-looking statements to reflect actual results or changes in factors or assumptions affecting forward-looking statements, except as may be required by law.

Overview

We are a leading global supplier of automatic test equipment. We design, develop, manufacture, and sell automatic test systems and solutions used to test complex electronics in the consumer electronics, automotive, computing, telecommunications, and aerospace and defense industries. Our automatic test equipment products and services include:

 

   

semiconductor test (“Semiconductor Test”) systems; and

 

   

military/aerospace (“Mil/Aero”) test instrumentation and systems, hard disk drive test (“HDD”) systems and circuit-board test and inspection (“Commercial Board Test”) systems (collectively these products represent “Systems Test Group”).

We have a broad customer base which includes integrated device manufacturers (“IDMs”), outsourced semiconductor assembly and test providers (“OSATs”), wafer foundries, fabless companies that design, but contract with others for the manufacture of integrated circuits (“ICs”), manufacturers of circuit boards, HDD manufacturers, aerospace and military contractors as well as the United States Department of Defense.

The sales of our products and services are dependent, to a large degree, on customers who are subject to cyclical trends in the demand for their products. These cyclical periods have had, and will continue to have, a significant effect on our business since our customers often delay or accelerate purchases in reaction to changes in their businesses and to demand fluctuations in the semiconductor industry. Historically, these demand fluctuations have resulted in significant variations in our results of operations. This was particularly relevant beginning in the fourth quarter of fiscal year 2008 where we saw a significant decrease in revenue in our Semiconductor Test business which was impacted by the deteriorating global economy, which negatively impacted the entire semiconductor industry. The sharp swings in the semiconductor industry in recent years have generally affected the semiconductor test equipment and services industry more significantly than the overall capital equipment sector.

Commencing in the fourth quarter of 2009, we experienced improvement in our Semiconductor Test business. We believe our acquisitions of Nextest and Eagle Test and our entry into the high speed memory and HDD markets have enhanced our opportunities for growth. We will continue to invest in our business to expand further our addressable markets while tightly managing our costs. As the last six quarters have demonstrated, with our current cost structure, we can achieve significantly higher profitability than we achieved at comparable revenue levels in the past.

We regularly face price competition in each of our businesses. More recently, we have been subject to greater price competition in the Semiconductor Test segment. We intend to respond to competitive pricing moves as necessary, which may adversely impact our gross margins. Longer term, we will continue to invest in engineering to lower the cost of test which should help mitigate the impacts from aggressive pricing actions.

On March 21, 2011, we completed the sale of our Diagnostic Solutions business unit, which was included in the Systems Test Group segment, to SPX Corporation for $40.2 million in cash. We sold this business as its growth potential as a stand-alone business was significantly less than if it was part of a larger automotive supplier. The financial information for Diagnostic Solutions has been reclassified to discontinued operations.

Critical Accounting Policies and Estimates

We have identified the policies which are critical to understanding our business and our results of operations. There have been no significant changes during the three months ended July 3, 2011 to the items disclosed as our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010.

 

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Table of Contents

SELECTED RELATIONSHIPS WITHIN THE CONDENSED CONSOLIDATED

STATEMENTS OF OPERATIONS

 

     For the Three Months
Ended
    For the Six Months
Ended
 
     July 3,
2011
    July 4,
2010
    July 3,
2011
    July 4,
2010
 

Percentage of total net revenues:

        

Net revenue:

        

Products

     83     87     83     85

Services

     17        13        17        15   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net revenues

     100        100        100        100   

Cost of revenues:

        

Cost of products

     39        37        40        37   

Cost of services

     9        7        8        8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenues

     48        44        48        45   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     52        56        52        55   

Operating expenses:

        

Engineering and development

     12        11        12        13   

Selling and administrative

     14        13        15        15   

Acquired intangible asset amortization

     2        2        2        2   

Restructuring and other, net

                            
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     28        26        29        30   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     25        31        23        25   

Interest & other

     (1     (1     (1     (1
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     24        30        22        24   

Income tax provision

     2        2        2        2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     22        28        20        22   

(Loss) Income from discontinued operations before income taxes

                            

Income tax benefit

                            
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) Income from discontinued operations

                            

(Loss) Gain on disposal of discontinued operations

                   3          
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     22     28     23     22
  

 

 

   

 

 

   

 

 

   

 

 

 

Results of Operations

Second Quarter 2011 Compared to Second Quarter 2010

Book to Bill Ratio

Book to bill ratio is calculated as net bookings divided by net sales. Book to bill ratio by reportable segment was as follows:

 

     For the Three Months
Ended
 
     July 3,
2011
     July 4,
2010
 

Semiconductor Test

     0.8         1.1   

Systems Test Group

     1.1         1.2   

Total Company

     0.8         1.1   

 

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Table of Contents

Revenue

Net revenues for our two reportable segments were as follows:

 

     For the Three Months
Ended
     Dollar
Change
 
       July 3,  
2011
       July 4,  
2010
    
     (in millions)  

Semiconductor Test

   $ 343.1       $ 413.1       $ (70.0

Systems Test Group

     67.4         32.2         35.2   
  

 

 

    

 

 

    

 

 

 
   $ 410.5       $ 445.3       $ (34.8
  

 

 

    

 

 

    

 

 

 

The decrease of $70.0 million or 17% in Semiconductor Test revenue was due to a decrease in System on a Chip product sales partially offset by an increase in memory product sales. The increase in Systems Test Group revenue of $35.2 million or 109% was primarily due to the increase in sales of Hard Disk Drive test systems.

Our revenues by region as a percentage of total net revenue were as follows:

 

     For the Three Months
Ended
 
     July 3,
2011
    July 4 ,
2010
 

United States

     15     14

Korea

     15        8   

Taiwan

     12        24   

Philippines

     11        10   

China

     11        9   

Europe

     8        5   

Thailand

     8        5   

Japan

     7        4   

Malaysia

     6        10   

Singapore

     6        10   

Rest of World

     1        1   
  

 

 

   

 

 

 
     100     100
  

 

 

   

 

 

 

Gross Profit

Our gross profit was as follows:

 

     For the Three Months
Ended
    Dollar/Point
Change
 
       July 3,   
2011
      July 4,   
2010
   
     (in millions)  

Gross Profit

   $ 215.1      $ 250.9      $ (35.8

Percent of Total Revenue

     52.4     56.3     (3.9

The decrease in gross profit of 3.9 points was the result of a decrease of 2.0 points related to product mix primarily from higher Hard Disk Drive test system sales, a decrease of 1.3 points due to lower sales of previously written down inventory and higher inventory provisions, and a decrease of 0.3 points due to lower volume.

We assess the carrying value of our inventory on a quarterly basis by estimating future demand and comparing that demand against on-hand and on-order inventory positions. Forecasted revenue information is obtained from the sales and marketing groups and incorporates factors such as backlog and future revenue demand. This quarterly process

 

26


Table of Contents

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 four quarters, is written-down to estimated net realizable value.

During the three months ended July 3, 2011, we recorded an inventory provision of $1.7 million included in cost of revenues, due to the downward revisions to previously forecasted demand levels. Of the $1.7 million of total excess and obsolete provisions recorded in the three months ended July 3, 2011, $1.5 million was related to Semiconductor Test and $0.2 million was related to Systems Test Group.

During the three months ended July 4, 2010, we recorded an inventory provision of $0.3 million included in cost of revenues related to Systems Test Group.

During the three months ended July 3, 2011 and July 4, 2010, we scrapped $2.2 million and $1.0 million of inventory, respectively. During the three months ended July 3, 2011 and July 4, 2010, we sold $0.8 million and $5.2 million, respectively, of previously written-down or written-off inventory. As of July 3, 2011, we had inventory related reserves for amounts which had been written-down or written-off totaling $124.7 million. We have no pre-determined timeline to scrap the remaining inventory.

Engineering and Development

Engineering and development expenses were as follows:

 

     For the Three Months
Ended
    Dollar
Change
 
     July 3,
2011
    July 4,
2010
   
     (in millions)  

Engineering and Development

   $ 47.4      $ 49.3      $ (1.9

Percent of Total Revenue

     11.5     11.1  

The decrease of $1.9 million in engineering and development expenses is due to a decrease in spending for engineering projects and lower variable compensation.

Selling and Administrative

Selling and administrative expenses were as follows:

 

     For the Three Months
Ended
    Dollar
Change
 
     July 3,
2011
    July 4,
2010
   
     (in millions)  

Selling and Administrative

   $ 57.5      $ 57.7      $ (0.2

Percent of Total Revenue

     14.0     13.0  

The decrease of $0.2 million in selling and administrative expenses is due primarily to lower variable compensation, partially offset by an increase in marketing and selling expenses for new products and customers.

Restructuring and Other, Net

Restructuring

In response to a downturn in the industry in 2008 and 2009, we initiated restructuring activities across all segments to reduce costs, principally through headcount reductions and facility consolidations. The tables below represent activity related to these actions. The remaining accrual for severance and benefits is reflected in the accrued employees’ compensation and withholdings account on the balance sheet and is expected to be paid by July 2012. The remaining accrual for lease payments on vacated facilities is reflected in the other accrued liabilities account and the long-term other accrued liabilities account and is expected to be paid over the lease

 

27


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terms, the latest of which expires in 2013. We expect to pay approximately $0.9 million against the lease accruals over the next twelve months. Our future lease commitments are net of expected sublease income of $0.8 million as of July 3, 2011.

 

     Severance
and
Benefits
    Facility
Exit
Costs
    Total  
     (in thousands)  
Pre-2010 Activities       

Balance at December 31, 2009

   $ 2,905      $ 10,166      $ 13,071   

Change in estimate

     240        (2,672     (2,432

Cash payments

     (3,124     (4,193     (7,317
  

 

 

   

 

 

   

 

 

 

Balance at December 31, 2010

     21       3,301        3,322   

Change in estimate

     —          (432     (432

Cash payments

     (21 )     (242     (263
  

 

 

   

 

 

   

 

 

 

Balance at April 3, 2011

     —          2,627        2,627   

Cash payments

     —          (301     (301
  

 

 

   

 

 

   

 

 

 

Balance at July 3, 2011

   $ —        $ 2,326      $ 2,326   
  

 

 

   

 

 

   

 

 

 
2010 Activities       

Q1 2010 Activity:

      

Provision

   $ 405      $ —        $ 405   

Cash payments

     (405     —          (405
  

 

 

   

 

 

   

 

 

 

Balance at December 31, 2010

   $ —        $ —        $ —     
  

 

 

   

 

 

   

 

 

 

Q2 2010 Activity:

      

Provision

   $ 890      $ —        $ 890   

Cash payments

     (402     —          (402
  

 

 

   

 

 

   

 

 

 

Balance at December 31, 2010

     488        —          488   

Provision

     202        —          202   

Cash payments

     (690     —          (690
  

 

 

   

 

 

   

 

 

 

Balance at April 3, 2011

   $ —        $ —        $ —     
  

 

 

   

 

 

   

 

 

 

Q3 2010 Activity:

      

Provision

   $ 382     $ —        $ 382   

Cash payments

     (72     —          (72

Other

     (184     —          (184
  

 

 

   

 

 

   

 

 

 

Balance at December 31, 2010

     126       —          126   

Change in estimate

     (47     —          (47

Cash payments

     (79     —          (79
  

 

 

   

 

 

   

 

 

 

Balance at April 3, 2011

   $ —        $ —        $ —     
  

 

 

   

 

 

   

 

 

 

Q4 2010 Activity:

      

Provision

   $ 98      $ —        $ 98   
  

 

 

   

 

 

   

 

 

 

Balance at December 31, 2010

     98        —          98   

Provision

     117        —          117   

Cash payments

     (215     —          (215
  

 

 

   

 

 

   

 

 

 

Balance at April 3, 2011

   $ —        $ —        $ —     
  

 

 

   

 

 

   

 

 

 
2011 Activity       

Q1 2011 Activity:

      

Provision

   $ 572      $ —        $ 572   

Cash payments

     (241     —          (241
  

 

 

   

 

 

   

 

 

 

Balance at April 3, 2011

     331        —          331   

Cash payments

     (154     —          (154
  

 

 

   

 

 

   

 

 

 

Balance at July 3, 2011

   $ 177      $ —        $ 177   
  

 

 

   

 

 

   

 

 

 

Q2 2011 Activity:

      

Provision

   $ 344      $ —        $ 344   
  

 

 

   

 

 

   

 

 

 

Balance at July 3, 2011

   $ 344      $ —        $ 344   
  

 

 

   

 

 

   

 

 

 

Balance at July 3, 2011

   $ 521      $ 2,326      $ 2,847   
  

 

 

   

 

 

   

 

 

 

 

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Table of Contents

During the three months ended July 3, 2011, we recorded the following restructuring charges:

Q2 2011 Action:

 

   

$0.3 million of severance charges related to headcount reductions of 2 people in Semiconductor Test segment.

During the three months ended July 4, 2010, we recorded the following restructuring charges:

Q2 2010 Actions:

 

   

$0.4 million of severance charges related to headcount reductions of 6 people in Systems Test Group segment.

Other

During the three months ended July 3, 2011, Teradyne recorded a $0.9 million charge related to a non-U.S. pension settlement.

Interest and Other

Interest income decreased by $2.3 million, from the second quarter of 2010 to 2011, due primarily to a gain from the sale of auction rate securities recorded in the second quarter of 2010. Interest expense and other decreased by $2.4 million, from the second quarter of 2010 to 2011, primarily due to a loss on the exercise of the auction rate securities related UBS Put recorded in the second quarter of 2010.

Income Taxes

For the three months ended July 3, 2011, we recorded a tax provision of $7.8 million from continuing operations, which consisted of U.S. federal, state and foreign taxes. For the three months ended July 4, 2010, we recorded a tax provision of $9.5 million from continuing operations, which consisted primarily of foreign taxes. Due to the continued uncertainty of realization, we have maintained our valuation allowance at July 3, 2011 for deferred tax assets in the U.S. and Singapore. We will assess the level of the valuation allowance required in the future period. Should more positive than negative evidence regarding the realizability of tax attributes exist in a future period, the valuation allowance may be reduced or eliminated altogether. Reduction of the valuation allowance, in whole or in part, would result in a non-cash income tax benefit during the period of reduction.

Six Months of 2011 Compared to Six Months of 2010

Revenue

Net revenues for our two reportable segments were as follows:

 

     For the Six Months
Ended
     Dollar
Change
 
     July 3,
2011
     July 4,
2010
    
     (in millions)  

Semiconductor Test

   $ 662.3       $ 702.7       $ (40.4

Systems Test Group

     125.4         61.9         63.5   
  

 

 

    

 

 

    

 

 

 
   $ 787.7       $ 764.6       $ 23.1   

The decrease of $40.4 million or 6% in Semiconductor Test revenue was due to a decrease in System on a Chip product sales, partially offset by an increase in memory product sales. The increase of $63.5 million or 103% in Systems Test Group revenue was primarily due to the increase in sales of Hard Disk Drive test systems.

 

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Table of Contents

Our revenues by region as a percentage of total net revenue were as follows:

 

     For the Six Months
Ended
 
     July 3,
2011
    July 4,
2010
 

United States

     14     15

Taiwan

     13        24   

Korea

     13        6   

Philippines

     12        10   

Malaysia

     11        9   

China

     9        8   

Europe

     7        5   

Japan

     7        4   

Singapore

     6        11   

Thailand

     6        6   

Rest of World

     2        2   
  

 

 

   

 

 

 
     100     100
  

 

 

   

 

 

 

Gross Profit

Our gross profit was as follows:

 

     For the Six Months
Ended
    Dollar/Point
Change
 
     July 3, 
2011
    July 4, 
2010
   
     (in millions)  

Gross Profit

   $ 407.5      $ 420.8      $ (13.3

Percent of Total Revenue

     51.7     55.0     (3.3

The decrease of 3.3 points was the result of a decrease of 2.4 points related to product mix primarily from higher Hard Disk Drive test system sales and a decrease of 0.8 points due to higher inventory provisions and lower sales of previously written down inventory.

We assess the carrying value of our inventory on a quarterly basis by estimating future demand and comparing that demand against on-hand and on-order inventory positions. Forecasted revenue information is obtained from the sales and marketing groups and incorporates factors such as backlog and future revenue demand. This quarterly process identifies obsolete and excess inventory. Obsolete inventory, which represents items for which there is no demand, is fully reserved. Excess inventory, which represents inventory items that are not expected to be consumed during the next four quarters, is written-down to estimated net realizable value.

During the six months ended July 3, 2011, we recorded an inventory provision of $6.3 million included in cost of revenues due to the downward revisions to previously forecasted demand levels. Of the $6.3 million of total excess and obsolete provisions recorded in the six months ended July 3, 2011, $5.9 million was related to Semiconductor Test and $0.4 million was related to Systems Test Group.

During the six months ended July 4, 2010, we recorded an inventory provision of $1.5 million included in cost of revenues. Of the $1.5 million of total excess and obsolete provisions recorded in the six months ended July 4, 2010, $1.0 million was related to Systems Test Group and $0.5 million was related to Semiconductor Test.

 

30


Table of Contents

During the six months ended July 3, 2011 and July 4, 2010, we scrapped $2.6 million and $2.0 million of inventory, respectively. During the six months ended July 3, 2011 and July 4, 2010, we sold $3.8 million and $5.2 million, respectively, of previously written-down or written-off inventory. As of July 3, 2011, we had inventory related reserves for amounts which had been written-down or written-off totaling $124.7 million. We have no pre-determined timeline to scrap the remaining inventory.

Engineering and Development

Engineering and development expenses were as follows:

 

     For the Six Months
Ended
    Dollar
Change
 
     July 3,
2011
    July 4 ,
2010
   
     (in millions)  

Engineering and Development

   $ 95.4      $ 97.3      $ (1.9

Percent of Total Revenue

     12.1     12.7  

The decrease of $1.9 million in engineering and development expenses is due to lower spending for engineering projects and lower variable compensation.

Selling and Administrative

Selling and administrative expenses were as follows:

 

     For the Six Months
Ended
    Dollar
Change
 
     July 3,
2011
    July 4,
2010
   
     (in millions)  

Selling and Administrative

   $ 115.7      $ 112.4      $ 3.3   

Percent of Total Revenue

     14.7     14.7  

The increase of $3.3 million in selling and administrative expenses is due primarily to an increase in marketing and selling expenses for new products and customers, partially offset by lower variable compensation.

Restructuring and Other, Net

Restructuring

In response to a downturn in the industry in 2008 and 2009, we initiated restructuring activities across all segments to reduce costs, principally through headcount reductions and facility consolidations. The tables below represent activity related to these actions. The remaining accrual for severance and benefits is reflected in the accrued employees’ compensation and withholdings account on the balance sheet and is expected to be paid by July 2012. The remaining accrual for lease payments on vacated facilities is reflected in the other accrued liabilities account and the long-term other accrued liabilities account and is expected to be paid over the lease terms, the latest of which expires in 2013. We expect to pay approximately $0.9 million against the lease accruals over the next twelve months. Our future lease commitments are net of expected sublease income of $0.8 million as of July 3, 2011.

 

31


Table of Contents
     Severance
and
Benefits
    Facility
Exit
Costs
    Total  
     (in thousands)  
Pre-2010 Activities       

Balance at December 31, 2009

   $ 2,905      $ 10,166      $ 13,071   

Change in estimate

     240        (2,672     (2,432

Cash payments

     (3,124     (4,193     (7,317
  

 

 

   

 

 

   

 

 

 

Balance at December 31, 2010

     21       3,301        3,322   

Change in estimate

     —          (432     (432

Cash payments

     (21 )     (242     (263
  

 

 

   

 

 

   

 

 

 

Balance at April 3, 2011

     —          2,627        2,627   

Cash payments

     —          (301     (301
  

 

 

   

 

 

   

 

 

 

Balance at July 3, 2011

   $ —        $ 2,326      $ 2,326   
  

 

 

   

 

 

   

 

 

 
2010 Activities       

Q1 2010 Activity:

      

Provision

   $ 405      $ —        $ 405   

Cash payments

     (405     —          (405
  

 

 

   

 

 

   

 

 

 

Balance at December 31, 2010

   $ —        $ —        $ —     
  

 

 

   

 

 

   

 

 

 

Q2 2010 Activity:

      

Provision

   $ 890      $ —        $ 890   

Cash payments

     (402     —          (402
  

 

 

   

 

 

   

 

 

 

Balance at December 31, 2010

     488        —          488   

Provision

     202        —          202   

Cash payments

     (690     —          (690
  

 

 

   

 

 

   

 

 

 

Balance at April 3, 2011

   $ —        $ —        $ —     
  

 

 

   

 

 

   

 

 

 

Q3 2010 Activity:

      

Provision

   $ 382     $ —        $ 382   

Cash payments

     (72     —          (72

Other

     (184     —          (184
  

 

 

   

 

 

   

 

 

 

Balance at December 31, 2010

     126       —          126   

Change in estimate

     (47     —          (47

Cash payments

     (79     —          (79
  

 

 

   

 

 

   

 

 

 

Balance at April 3, 2011

   $ —        $ —        $ —     
  

 

 

   

 

 

   

 

 

 

Q4 2010 Activity:

      

Provision

   $ 98      $ —        $ 98   
  

 

 

   

 

 

   

 

 

 

Balance at December 31, 2010

     98        —          98   

Provision

     117        —          117   

Cash payments

     (215     —          (215
  

 

 

   

 

 

   

 

 

 

Balance at April 3, 2011

   $ —        $ —        $ —     
  

 

 

   

 

 

   

 

 

 
2011 Activity       

Q1 2011 Activity:

      

Provision

   $ 572      $ —        $ 572   

Cash payments

     (241     —          (241
  

 

 

   

 

 

   

 

 

 

Balance at April 3, 2011

     331        —          331   

Cash payments

     (154     —          (154
  

 

 

   

 

 

   

 

 

 

Balance at July 3, 2011

   $ 177      $ —        $ 177   
  

 

 

   

 

 

   

 

 

 

Q2 2011 Activity:

      

Provision

   $ 344      $ —        $ 344   
  

 

 

   

 

 

   

 

 

 

Balance at July 3, 2011

   $ 344      $ —        $ 344   
  

 

 

   

 

 

   

 

 

 

Balance at July 3, 2011

   $ 521      $ 2,326      $ 2,847   
  

 

 

   

 

 

   

 

 

 

 

32


Table of Contents

During the six months ended July 3, 2011, we recorded the following restructuring charges:

Q2 2011 Action:

 

   

$0.3 million of severance charges related to headcount reductions of 2 people in Semiconductor Test segment.

Q1 2011 Action:

 

   

$0.6 million of severance charges related to headcount reductions of 5 people in Semiconductor Test segment.

Pre-2010 Actions:

 

   

($0.4) million related to changes in the estimated exit costs related to the Westford, MA and Poway, CA facilities in System Test Group segment, and the North Reading, MA facility across both segments.

Q2 2010 Actions:

 

   

$0.2 million related to a change in the estimated severance benefits related to headcount reduction activities across both segments.

Q3 2010 Actions:

 

   

$0.1 million related to a change in the estimated severance benefits related to headcount reduction activities across both segments.

During the six months ended July 4, 2010, we recorded the following restructuring charges:

Q1 2010 Actions:

 

   

$0.4 million of severance charges related to headcount reductions of 4 people in Semiconductor Test segment.

Q2 2010 Actions:

 

   

$0.4 million of severance charges related to headcount reductions of 6 people in Systems Test Group segment.

Q2 2009 Actions:

 

   

$0.5 million related to a change in the estimated severance benefits related to headcount reduction activities across both segments.

Other

During the six months ended July 3, 2011, we recorded a $0.9 million charge related to a non-U.S. pension settlement

Interest and Other

Interest income decreased by $1.8 million, from the first six months of 2010 to 2011, due primarily to a gain from the sale of auction rate securities recorded in the second quarter of 2010, partially offset by higher interest income due to an increase in our marketable securities balance in 2011. Interest expense and other decreased by $2.2 million, from the first six months of 2010 to 2011, primarily due to a loss on the exercise of the auction rate securities related UBS Put recorded in the second quarter of 2010.

 

33


Table of Contents

Income Taxes

For the six months ended July 3, 2011, we recorded a tax provision of $13.3 million from continuing operations, which consisted of U.S. federal, state and foreign taxes. For the six months ended July 4, 2010, we recorded a tax provision of $14.4 million, which consisted primarily of foreign taxes. Due to the continued uncertainty of realization, we have maintained our valuation allowance at July 3, 2011 for deferred tax assets in the U.S. and Singapore. We will assess the level of the valuation allowance required in the future period. Should more positive than negative evidence regarding the realizability of tax attributes exist in a future period, the valuation allowance may be reduced or eliminated altogether. Reduction of the valuation allowance, in whole or in part, would result in a non-cash income tax benefit during the period of reduction.

Liquidity and Capital Resources

Our cash, cash equivalents and marketable securities balance increased by $135.8 million in the first six months of 2011 to $1.2 billion. Cash activity for the first six months of 2011 and 2010 was as follows:

 

     For the Six Months
Ended
 
     July 3,
2011
    July 4,
2010
 
     (in millions)  

Cash provided by operating activities:

    

Income from continuing operations, adjusted for non-cash items

   $ 227.7      $ 239.4   

Change in operating assets and liabilities, net of businesses sold

     (101.9     (107.3

Cash (used for) provided by discontinued operations

     (4.2     1.9   
  

 

 

   

 

 

 

Total cash provided by operating activities

     121.6        134.0   
  

 

 

   

 

 

 

Cash used for investing activities from continuing operations

     (122.5     (187.5

Cash provided by investing activities from discontinued operations

     39.1        —     
  

 

 

   

 

 

 

Total cash used for investing activities

     (83.4     (187.5
  

 

 

   

 

 

 

Total cash provided by financing activities

     19.5        40.8   
  

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

   $ 57.7      $ (12.7
  

 

 

   

 

 

 

 

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In the six months ended July 3, 2011, changes in operating assets and liabilities, net of businesses sold, used cash of $101.9 million. This was due to a $64.4 million increase in operating assets and a $37.5 million decrease in operating liabilities.

The increase in operating assets was due to a $39.1 million increase in accounts receivable and a $15.0 million increase in inventories due to higher sales volume, and a $10.3 million increase in prepayments and other assets. The decrease in operating liabilities was due to a $44.0 million decrease in accrued employee compensation due primarily to variable compensation payments, a $26.9 million decrease in customer advance payments due to shipments of systems prepaid by customers, $5.2 million of retirement plan contributions, and a $1.4 million decrease in deferred revenue, partially offset by a $25.9 million increase in accounts payable due to increased sales volume and an $8.7 million increase in other accrued liabilities, and a $5.4 million increase in accrued income taxes.

Investing activities during the six months ended July 3, 2011 used cash of $122.5 million, due to $498.5 million used for purchases of marketable securities and $44.5 million used for purchases of property, plant and equipment, partially offset by proceeds from sales and maturities of marketable securities that provided cash of $420.5 million.

Financing activities during the six months ended July 3, 2011 provided cash of $19.5 million, $17.0 million from the issuance of common stock under stock option and stock purchase plans, and $3.7 million from the tax benefit related to stock options and restricted stock units, partially offset by $1.2 million of cash used for a payment on long-term debt.

In the six months ended July 4, 2010, changes in operating assets and liabilities, net of businesses sold, used cash of $107.3 million. This was due to an $83.4 million increase in operating assets and a $23.9 million decrease in operating liabilities. The increase in operating assets was due to an increase in accounts receivable of $123.2 million partially offset by a $24.2 million decrease in inventories due to higher sales volume, and a decrease in prepayments and other assets of $15.6 million. The decrease in operating liabilities consisted mainly of a $62.9 million decrease in deferred revenue due to shipments of systems prepaid by customers in 2009, $24.7 million of retirement plan contributions, a $4.3 million decrease in other accrued expenses due to convertible

 

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note interest payment, partially offset by a $29.3 million increase in accounts payable, a $19.3 million increase in accrued employee compensation, an $11.3 million increase in accrued income taxes, and an $8.1 million increase in other accrued liabilities.

Investing activities during the six months ended July 4, 2010 used cash of $187.5 million, due to $223.8 million used for purchases of marketable securities and $35.7 million used for purchases of property, plant and equipment, partially offset by proceeds from sales of marketable securities that provided cash of $71.0 million, and proceeds from life insurance that provided cash of $1.1 million.

Financing activities during the six months ended July 4, 2010 provided cash of $40.8 million, $41.9 million was from the issuance of common stock under stock option and stock purchase plans which was partially offset by $1.1 million of cash used for a payment on long-term debt.

We believe our cash, cash equivalents and marketable securities balance of $1.2 billion will be sufficient to meet working capital and expenditure needs for at least the next twelve months. Inflation has not had a significant long-term impact on earnings.

Equity Compensation Plans

As discussed in Note M “Stock Based Compensation” in our 2010 Form 10-K, we have a 1996 Employee Stock Purchase Plan and a 2006 Equity and Cash Compensation Incentive Plan (the “2006 Equity Plan”). </