TERADYNE, INC
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended July 3, 2022
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.
(Exact name of registrant as specified in its charter)
| (State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) | |
| |
||
(Address of Principal Executive Offices) |
(Zip Code) | |
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered | ||
| |
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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation Yes ☒ No ☐
S-T
(232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files) Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2
of the Exchange Act (check one): | ☒ | Accelerated filer | ☐ | ||||
Non-accelerated filer |
☐ | Emerging growth company | ||||
| Smaller reporting company | ||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule ☒
12b-2
of the Exchange Act). Yes ☐ No The number of shares outstanding of the registrant’s only class of Common Stock as of August 1, 2022 was 156,781,680
shares.
TERADYNE, INC.
INDEX
Page No. |
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6 |
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| Item 2. |
28 |
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| Item 3. |
38 |
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| Item 4. |
39 |
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| Item 1. |
39 |
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| Item 1A. |
39 |
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| Item 2. |
40 |
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| Item 4. |
40 |
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| Item 6. |
40 |
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PART I
Item 1: |
Financial Statements |
TERADYNE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
July 3, 2022 |
December 31, 2021 |
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| (in thousands, except per share amount) |
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| ASSETS |
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| Current assets: |
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| Cash and cash equivalents |
$ | $ | ||||||
| Marketable securities |
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| Accounts receivable, less allowance for credit losses of $ |
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| Inventories, net |
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| Prepayments |
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| Other current assets |
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| Total current assets |
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| Property, plant and equipment, net |
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| Operating lease right-of-use |
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| Marketable securities |
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| Deferred tax assets |
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| Retirement plans assets |
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| Other assets |
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| Acquired intangible assets, net |
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| Goodwill |
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| Total assets |
$ | $ | ||||||
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| LIABILITIES |
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| Current liabilities: |
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| Accounts payable |
$ | $ | ||||||
| Accrued employees’ compensation and withholdings |
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| Deferred revenue and customer advances |
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| Other accrued liabilities |
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| Operating lease liabilities |
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| Income taxes payable |
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| Current debt |
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| Total current liabilities |
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| Retirement plans liabilities |
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| Long-term deferred revenue and customer advances |
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| Long-term other accrued liabilities |
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| Deferred tax liabilities |
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| Long-term operating lease liabilities |
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| Long-term incomes taxes payable |
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| Debt |
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| Total liabilities |
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| Commitments and contingencies (Note Q) |
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| Mezzanine equity: |
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| Convertible common shares |
— | |||||||
| SHAREHOLDERS’ EQUITY |
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| Common stock, $ |
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| Additional paid-in capital |
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| Accumulated other comprehensive loss |
( |
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| Retained earnings |
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| Total shareholders’ equity |
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| Total liabilities, convertible common shares and shareholders’ equity |
$ | $ | ||||||
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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, 2021, are an integral part of the condensed consolidated financial statements. 1
TERADYNE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months Ended |
For the Six Months Ended |
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July 3, |
July 4, |
July 3, |
July 4, |
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2022 |
2021 |
2022 |
2021 |
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(in thousands, except per share amount) |
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| Revenues: |
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| Products |
$ | $ | $ | $ | ||||||||||||
| Services |
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| Total revenues |
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| Cost of revenues: |
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| Cost of products |
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| Cost of services |
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| Total cost of revenues (exclusive of acquired intangible assets amortization shown separately below) |
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| Gross profit |
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| Operating expenses: |
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| Selling and administrative |
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| Engineering and development |
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| Acquired intangible assets amortization |
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| Restructuring and other |
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| Total operating expenses |
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| Income from operations |
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| Non-operating (income) expense: |
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| Interest income |
( |
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| Interest expense |
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| Other (income) expense, net |
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| Income before income taxes |
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| Income tax provision |
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| Net income |
$ | $ | $ | $ | ||||||||||||
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| Net income per common share: |
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| Basic |
$ | $ | $ | $ | ||||||||||||
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| Diluted |
$ | $ | $ | $ | ||||||||||||
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| Weighted average common shares—basic |
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| Weighted average common shares—diluted |
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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, 2021, are an integral part of the condensed consolidated financial statements.
2
TERADYNE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
For the Three Months Ended |
For the Six Months Ended |
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July 3, |
July 4, |
July 3, |
July 4, |
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2022 |
2021 |
2022 |
2021 |
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(in thousands) |
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| Net income |
$ | $ | $ | $ | ||||||||||||
| Other comprehensive income, net of tax: |
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| Foreign currency translation adjustment, net of tax of $ |
( |
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| Available-for-sale |
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| Unrealized (losses) gains on marketable securities arising during period, net of tax of $( |
( |
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) | ( |
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| Less: Reclassification adjustment for losses (gains) included in net income, net of tax of $ |
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| Defined benefit post-retirement plan: |
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| Amortization of prior service credit, net of tax of $ |
( |
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| Other comprehensive (loss) income |
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| Comprehensive income |
$ | $ | $ | $ | ||||||||||||
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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, 2021, are an integral part of the condensed consolidated financial statements.
3
TERADYNE, INC.
CONDENSED STATEMENTS OF CONVERTIBLE COMMON SHARES
AND SHAREHOLDERS’ EQUITY
(Unaudited)
Shareholders’ Equity |
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Convertible Common Shares Value |
Common Stock Shares |
Common Stock Par Value |
Additional Paid-in Capital |
Accumulated Other Comprehensive (Loss) Income |
Retained Earnings |
Total Shareholders’ Equity |
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(in thousands) |
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For the Three Months Ended July 3, 2022 |
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Balance, April 3, 2022 |
$ | $ | $ | $ | ( |
) | $ | $ | ||||||||||||||||||||
Net issuance of common stock under stock-based plans |
( |
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Stock-based compensation expense |
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Repurchase of common stock |
( |
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Cash dividends ($ |
( |
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Settlements of convertible notes |
( |
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Exercise of convertible notes hedge call options |
( |
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Cumulative-effect of change in accounting principle related to convertible debt |
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Net income |
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Other comprehensive loss |
( |
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Balance, July 3, 2022 |
$ | $ | $ | $ | ( |
) | $ | $ | ||||||||||||||||||||
For the Three Months Ended July 4, 2021 |
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Balance, April 4, 2021 |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
Net issuance of common stock under stock-based plans |
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Stock-based compensation expense |
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Repurchase of common stock |
( |
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Cash dividends ($ |
( |
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Settlements of convertible notes |
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Exercise of convertible notes hedge call options |
( |
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Convertible common shares |
( |
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Net income |
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Other comprehensive income |
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Balance, July 4, 2021 |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
For the Six Months Ended July 3, 2022 |
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Balance, December 31, 2021 |
$ | $ | $ | $ | ( |
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Net issuance of common stock under stock-based plans |
( |
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Stock-based compensation expense |
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Repurchase of common stock |
( |
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Cash dividends ($ |
( |
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Settlements of convertible notes |
( |
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Exercise of convertible notes hedge call options |
( |
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Cumulative-effect of change in accounting principle related to convertible debt |
( |
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Net income |
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Other comprehensive loss |
( |
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Balance, July 3, 2022 |
$ | $ | $ | $ | ( |
) | $ | $ | ||||||||||||||||||||
For the Six Months Ended July 4, 2021 |
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Balance, December 31, 2020 |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
Net issuance of common stock under stock-based plans |
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Stock-based compensation expense |
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Repurchase of common stock |
( |
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Cash dividends ($ |
( |
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Settlements of convertible notes |
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Exercise of convertible notes hedge call options |
( |
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Convertible common shares |
( |
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Net income |
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Other comprehensive loss |
( |
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Balance, July 4, 2021 |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
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, 2021, are an integral part of the condensed consolidated financial statements.
4
TERADYNE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Six Months Ended |
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July 3, |
July 4, |
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2022 |
2021 |
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(in thousands) |
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| Cash flows from operating activities: |
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| Net income |
$ | $ | ||||||
| Adjustments to reconcile net income from operations to net cash provided by operating activities: |
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| Depreciation |
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| Stock-based compensation |
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| Amortization |
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| Losses (gains) on investments |
( |
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| Provision for excess and obsolete inventory |
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| Deferred taxes |
( |
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| Contingent consideration fair value adjustments |
( |
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| Loss on convertible debt conversions |
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| Retirement plans actuarial gains |
( |
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| Other |
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| Changes in operating assets and liabilities |
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| Accounts receivable |
( |
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| Inventories |
( |
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| Prepayments and other assets |
( |
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| Accounts payable and other liabilities |
( |
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| Deferred revenue and customer advances |
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| Retirement plans contributions |
( |
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| Income taxes |
( |
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| Net cash provided by operating activities |
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| Cash flows from investing activities: |
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| Purchases of property, plant and equipment |
( |
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| Purchases of marketable securities |
( |
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| Proceeds from maturities of marketable securities |
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| Proceeds from sales of marketable securities |
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| Purchase of investment |
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| Net cash (used for) provided by investing activities |
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| Cash flows from financing activities: |
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| Issuance of common stock under stock purchase and stock option plans |
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| Repurchase of common stock |
( |
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| Payments of convertible debt principal |
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| Dividend payments |
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| Payments related to net settlement of employee stock compensation awards |
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| Net cash used for financing activities |
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| Effects of exchange rate changes on cash and cash equivalents |
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| Cash and cash equivalents at end of period |
$ | $ | ||||||
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| Non-cash investing activities: |
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| Capital expenditures incurred but not yet paid: |
$ | $ | ||||||
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, 2021, are an integral part of the condensed consolidated financial statements.
5
TERADYNE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A. THE COMPANY
Teradyne, Inc. (“Teradyne”) is a leading global supplier of automation equipment for test and industrial applications. Teradyne designs, develops, manufactures and sells automatic test systems used to test semiconductors, wireless products, data storage and complex electronics systems in many industries including consumer electronics, wireless, automotive, industrial, computing, communications, and aerospace and defense industries. Teradyne’s industrial automation products include collaborative robotic arms, autonomous mobile robots, and advanced robotic control software used by global manufacturing, logistics and light industrial customers to improve quality, increase manufacturing and material handling efficiency and decrease manufacturing and logistics costs. Teradyne’s automatic test equipment and industrial automation products and services include:
• |
semiconductor test (“Semiconductor Test”) systems; |
• |
storage and system level test (“Storage Test”) systems, defense/aerospace (“Defense/Aerospace”) test instrumentation and systems, and circuit-board test and inspection (“Production Board Test”) systems (collectively these products represent “System Test”); |
• |
wireless test (“Wireless Test”) systems; and |
• |
industrial automation (“Industrial Automation”) products. |
B. ACCOUNTING POLICIES
Basis of Presentation
The consolidated interim financial statements include the accounts of Teradyne and its wholly owned 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 statement of such interim financial statements. Certain prior year amounts may have been reclassified to conform to the current year presentation. The December 31, 2021 condensed consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by United States of America generally accepted accounting principles (“U.S. GAAP”) for complete financial statements. 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 U.S. Securities and Exchange Commission (“SEC”) on February 23, 2022, for the year ended December 31, 2021. Preparation of Financial Statements and Use of Estimates
The preparation of consolidated financial statements requires management to make estimates and judgments that affect the amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent liabilities. On an
on-going
basis, management evaluates its estimates, including those related to inventories, investments, goodwill, intangible and other long-lived assets, accounts receivable, income taxes, deferred tax assets and liabilities, pensions, warranties, and loss contingencies. Management bases its estimates on historical experience and on appropriate and customary assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgements about the carrying values of assets and liabilities that are not readily apparent from other sources. Due to the COVID-19
pandemic, there has been uncertainty and disruption in the global economy and our markets. Management is not aware of any specific event or circumstance that would require an update to its estimates or judgments or a revision of the carrying value of its assets or liabilities as of the date of issuance of this Quarterly Report on Form 10-Q.
These estimates may change, as new events occur and additional information is obtained. Actual results may differ significantly from these estimates under different assumptions or conditions. Convertible Debt
Teradyne adopted Accounting Standards Update (“ASU”) ASU on January 1, 2022 using the modified retrospective method of adoptionUnder ASU 1.4 million to current debt for unsettled shares, an increase of $6.6 million to long-term debt for unamortized debt discount, an increase of $1.8 million to deferred tax assets and an increase to retained earnings of $94.6 million for the reclassification of the equity component. Mezzanine equity representing unsettled shares value was reduced to zero and additional 99.3 million.
2020-06
– “Debt—Debt with Conversion and Other Options and Derivatives and Hedging—Contracts in Entity’s Own Equity,”
.
2020-06,
Teradyne accounts for a convertible debt instrument as a single liability measured at its amortized cost, as long as no other features require bifurcation and recognition as derivatives. Unsettled shares are recorded in current debt, and there is no recognition of a debt discount, which was previously amortized to interest expense. Teradyne uses the if-converted
method in the diluted earnings per share (“EPS”) calculation for convertible instruments. As a result of adoption, Teradyne recorded an increase of $paid-in
capital was reduced by $6
C. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
For the six months ended July 3, 2022, there were no recently issued accounting pronouncements that had, or are expected to have, a material impact to Teradyne’s consolidated financial statements.
D. INVESTMENT IN OTHER COMPANY
On June 1, 2021, Teradyne invested $12.0 million in MachineMetrics, Inc. (“MachineMetrics”), a private company that develops and sells products to improve manufacturing performance through automated machine data collection, alerting, and analytics. Teradyne’s investment in MachineMetrics aligns with its strategy of providing and investing in leading edge products for automating industrial production processes in growing markets. The investment was recorded at cost and is evaluated for impairment or an indication of changes in fair value resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer on a quarterly basis. At July 3, 2022, the value of the investment was $12.0 million, and there were no
7
E. REVENUE
Disaggregation of Revenue
The following table provides information about disaggregated revenue by timing of revenue recognition, primary geographical market, and major product lines.
Semiconductor Test |
Industrial Automation |
|||||||||||||||||||||||||||||||||||
System on-a-Chip |
Memory |
System Test |
Universal Robots |
Mobile Industrial Robots |
AutoGuide |
Wireless Test |
Corporate and Eliminations |
Total |
||||||||||||||||||||||||||||
(in thousands) |
||||||||||||||||||||||||||||||||||||
| For the Three Months Ended July 3, 2022 (1) |
|
|||||||||||||||||||||||||||||||||||
| Timing of Revenue Recognition |
||||||||||||||||||||||||||||||||||||
| Point in Time |
$ | $ | $ | $ | $ | $ | $ | $ | ( |
) | $ | |||||||||||||||||||||||||
| Over Time |
||||||||||||||||||||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Total |
$ | $ | $ | $ | $ | $ | $ | $ | ( |
) | $ | |||||||||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Geographical Market |
||||||||||||||||||||||||||||||||||||
| Asia Pacific |
$ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Americas |
( |
) | ||||||||||||||||||||||||||||||||||
| Europe, Middle East and Africa |
||||||||||||||||||||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Total |
$ | $ | $ | $ | $ | $ | $ | $ | ( |
) | $ | |||||||||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| For the Three Months Ended July 4, 2021 (1) |
|
|||||||||||||||||||||||||||||||||||
| Timing of Revenue Recognition |
||||||||||||||||||||||||||||||||||||
| Point in Time |
$ | $ | $ | $ | $ | $ | $ | $ | ( |
) | $ | |||||||||||||||||||||||||
| Over Time |
||||||||||||||||||||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Total |
$ | $ | $ | $ | $ | $ | $ | $ | ( |
) | $ | |||||||||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Geographical Market |
||||||||||||||||||||||||||||||||||||
| Asia Pacific |
$ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Americas |
( |
) | ||||||||||||||||||||||||||||||||||
| Europe, Middle East and Africa |
||||||||||||||||||||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Total |
$ | $ | $ | $ | $ | $ | $ | $ | ( |
) | $ | |||||||||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| For the Six Months Ended July 3, 2022 (2) |
|
|||||||||||||||||||||||||||||||||||
| Timing of Revenue Recognition |
||||||||||||||||||||||||||||||||||||
| Point in Time |
$ | $ | $ | $ | $ | $ | $ | $ | ( |
) | $ | |||||||||||||||||||||||||
| Over Time |
||||||||||||||||||||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Total |
$ | $ | $ | $ | $ | $ | $ | $ | ( |
) | $ | |||||||||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Geographical Market |
||||||||||||||||||||||||||||||||||||
| Asia Pacific |
$ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Americas |
( |
) | ||||||||||||||||||||||||||||||||||
| Europe, Middle East and Africa |
||||||||||||||||||||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Total |
$ | $ | $ | $ | $ | $ | $ | $ | ( |
) | $ | |||||||||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| For the Six Months Ended July 4, 2021 (2) |
|
|||||||||||||||||||||||||||||||||||
| Timing of Revenue Recognition |
||||||||||||||||||||||||||||||||||||
| Point in Time |
$ | $ | $ | $ | $ | $ | ( |
) | $ | $ | ( |
) | $ | |||||||||||||||||||||||
| Over Time |
||||||||||||||||||||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Total |
$ | $ | $ | $ | $ | $ | $ | $ | ( |
) | $ | |||||||||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Geographical Market |
||||||||||||||||||||||||||||||||||||
| Asia Pacific |
$ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Americas |
( |
) | ||||||||||||||||||||||||||||||||||
| Europe, Middle East and Africa |
||||||||||||||||||||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Total |
$ | $ | $ | $ | $ | $ | $ | $ | ( |
) | $ | |||||||||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| (1) | Includes $ “Revenue from Contracts with Customers.” |
| (2) | Includes $ “Revenue from Contracts with Customers.” |
8
Contract Balances
During the three and six months ended July 3, 2022, Teradyne recognized $25.1 million and $60.2 million, respectively, that was previously included within the deferred revenue and customer advances balances at the beginning of the period. During the three and six months ended July 4, 2021, Teradyne recognized $22.0 million and $49.6 million, respectively, that was previously included within the deferred revenue and customer advances balances. This revenue primarily relates to undelivered hardware, extended warranties, training, application support, and post contract support. Each of these represents a distinct performance obligation. As of July 3, 2022, Teradyne has $1,574 million of unsatisfied performance obligations. Teradyne expects to recognize 90 % of the remaining performance obligations in the next 12 months and 10 % in 1 -3 years.
Deferred revenue and customer advances consist of the following at July 3, 2022 and December 31, 2021, and are included in short and long-term deferred revenue and customer advances on the balance sheet:
July 3, |
December 31, |
|||||||
2022 |
2021 |
|||||||
(in thousands) |
||||||||
| Maintenance, service and training |
$ | $ | ||||||
| Extended warranty |
||||||||
| Customer advances, undelivered elements and other |
||||||||
| |
|
|
|
|||||
| Total deferred revenue and customer advances |
$ | $ | ||||||
| |
|
|
|
|||||
Accounts Receivable
During the three and six months ended July 3, 2022 and July 4, 2021, Teradyne sold certain trade accounts receivables on a 37.6 million and $7.6 million, respectively. During the six months ended July 3, 2022 and July 4, 2021, total trade accounts receivable sold under the factoring agreements were $57.1 million and $14.9 million, respectively. Factoring fees for the sales of receivables were recorded in interest expense and were not material. Teradyne accounted for these transactions as sales of receivables and presented cash proceeds as cash provided by operating activities in the consolidated statements of cash flows.
non-recourse
basis to third-party financial institutions pursuant to factoring agreements. During the three months ended July 3, 2022 and July 4, 2021, total trade accounts receivable sold under the factoring agreements were $F. INVENTORIES
Inventories, net consisted of the following at July 3, 2022 and December 31, 2021:
July 3, |
December 31, |
|||||||
2022 |
2021 |
|||||||
(in thousands) |
||||||||
| Raw material |
$ | $ | ||||||
| Work-in-process |
||||||||
| Finished goods |
||||||||
| |
|
|
|
|||||
| $ | $ | |||||||
| |
|
|
|
|||||
Inventory reserves at July 3, 2022 and December 31, 2021 were $115.5 million and $114.1 million, respectively.
G. FINANCIAL INSTRUMENTS
Cash Equivalents
Teradyne considers all highly liquid investments with maturities of three months or less at the date of acquisition to be cash equivalents.
Marketable Securities
Teradyne’s equity and debt mutual funds are classified as Level 1 and debt securities are classified as Level 2. Contingent consideration is classified as Level 3. The vast majority of Level 2 securities are fixed income securities priced by third party pricing vendors. These pricing vendors utilize the most recent observable market information in pricing these securities or, if specific prices are not available, use other observable inputs like market transactions involving identical or comparable securities.
available-for-sale
During the three and six months ended July 3, 2022 and July 4, 2021, there were no transfers in or out of Level 1, Level 2, or Level 3 financial instruments.
9
R
Unrealized losses on equity securities recorded in the three and six months ended July 3, 2022 were $6.6 million and $8.8 million, respectively. No 2.0 million and $3.3 million, respectively. Unrealized losses on equity securities recorded in the three and six months ended July 4, 2021 were $0.7
unrealized gains on equity securities were recorded in the three and six months ended July 3, 2022. Unrealized gains on equity securities recorded in the three and six months ended July 4, 2021 wer
Unrealized gains and losses on debt securities are included in accumulated other comprehensive income (loss).
available-for-sale
The cost of securities sold is based on average cost.
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, 2022 and December 31, 2021.
July 3, 2022 |
||||||||||||||||
Quoted Prices in Active Markets for Identical Instruments (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
Total |
|||||||||||||
(in thousands) |
||||||||||||||||
| Assets |
||||||||||||||||
| Cash |
$ |
$ |
$ |
$ |
||||||||||||
| Cash equivalents |
||||||||||||||||
| Available-for-sale |
||||||||||||||||
| Commercial paper |
||||||||||||||||
| U.S. Treasury securities |
||||||||||||||||
| Corporate debt securities |
||||||||||||||||
| Debt mutual funds |
||||||||||||||||
| U.S. government agency securities |
||||||||||||||||
| Certificates of deposit and time deposits |
||||||||||||||||
| Non-U.S. government securities |
||||||||||||||||
| Equity securities: |
||||||||||||||||
| Mutual funds |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
$ |
$ |
$ |
$ |
|||||||||||||
| Derivative assets |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total |
$ |
$ |
$ |
$ |
||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Liabilities |
||||||||||||||||
| Derivative liabilities |
$ |
$ |
$ |
$ |
||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total |
$ |
$ |
$ |
$ |
||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
Reported as follows:
(Level 1) |
(Level 2) |
(Level 3) |
Total |
|||||||||||||
(in thousands) |
||||||||||||||||
| Assets |
||||||||||||||||
| Cash and cash equivalents |
$ |
$ |
$ |
$ |
||||||||||||
| Marketable securities |
||||||||||||||||
| Long-term marketable securities |
||||||||||||||||
| Prepayments and other current assets |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total |
$ |
$ |
$ |
$ |
||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Liabilities |
. |
|||||||||||||||
| Other current liabilities |
$ |
$ |
$ |
$ |
||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total |
$ |
$ |
$ |
$ |
||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
1
0
December 31, 2021 |
||||||||||||||||
Quoted Prices in Active Markets for Identical Instruments (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
Total |
|||||||||||||
(in thousands) |
||||||||||||||||
| Assets |
||||||||||||||||
| Cash |
$ |
$ |
$ |
$ |
||||||||||||
| Cash equivalents |
||||||||||||||||
| Available-for-sale |
— |
|||||||||||||||
| Commercial paper |
||||||||||||||||
| U.S. Treasury securities |
||||||||||||||||
| Corporate debt securities |
||||||||||||||||
| Debt mutual funds |
||||||||||||||||
| U.S. government agency securities |
||||||||||||||||
| Certificates of deposit and time deposits |
||||||||||||||||
| Non-U.S. government securities |
||||||||||||||||
| Equity securities: |
||||||||||||||||
| Mutual Funds |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
$ |
$ |
$ |
$ |
|||||||||||||
| Derivative assets |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total |
$ |
$ |
$ |
$ |
||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Liabilities |
||||||||||||||||
| Derivative liabilities |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total |
$ |
$ |
$ |
$ |
||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
Reported as follows:
(Level 1) |
(Level 2) |
(Level 3) |
Total |
|||||||||||||
(in thousands) |
||||||||||||||||
| Assets |
||||||||||||||||
| Cash and cash equivalents |
$ |
$ |
$ |
$ |
||||||||||||
| Marketable securities |
||||||||||||||||
| Long-term marketable securities |
||||||||||||||||
| Prepayments and other current assets |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total |
$ |
$ |
$ |
$ |
||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Liabilities |
||||||||||||||||
| Other current liabilities |
$ |
$ |
$ |
$ |
||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total |
$ |
$ |
$ |
$ |
||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
Changes in the fair value of Level 3 contingent consideration for the six months ended July 3, 2022, and July 4, 2021 were as follows:
For the Three Months Ended |
For the Six Months Ended |
|||||||||||||||
July 3, |
July 4, |
July 3, |
July 4, |
|||||||||||||
2022 |
2021 |
2022 |
2021 |
|||||||||||||
(in thousands) |
||||||||||||||||
| Balance at beginning of period |
$ |
$ |
$ |
$ |
||||||||||||
| Fair value adjustment (a) |
( |
) | ||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Balance at end of period |
$ |
$ |
$ |
$ |
||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| (a) | In the six months ended July 4, 2021, the fair value of contingent consideration for the earn-outs in connection with the acquisition of AutoGuide was reduced to zero, which resulted in a benefit of $ |
1
1
On March 25, 2022, the arbitration claim filed by Industrial Automation LLC, sellers of AutoGuide, against Teradyne alleging
or $non-compliance
with the earn-out
provisions of the Membership Interests Purchase Agreement, dated as of October 18, 2019, among Industrial Automation LLC, Teradyne and AutoGuide was settled fearn-out
obligations. The carrying amounts and fair values of Teradyne’s financial instruments at July 3, 2022 and December 31, 2021 were as follows:
July 3, 2022 |
December 31, 2021 |
|||||||||||||||
Carrying Value |
Fair Value |
Carrying Value |
Fair Value |
|||||||||||||
(in thousands) |
||||||||||||||||
| Assets |
||||||||||||||||
| Cash and cash equivalents |
$ | $ | $ | $ | ||||||||||||
| Marketable securities |
||||||||||||||||
| Derivative assets |
||||||||||||||||
| Liabilities |
||||||||||||||||
| Derivative liabilities |
||||||||||||||||
| Convertible debt |
||||||||||||||||
The fair values of accounts receivable, net and accounts payable approximate the carrying value due to the short-term nature of these instruments.
The following table summarizes the composition of marketable securities at July 3, 2022:
available-for-sale
July 3, 2022 |
||||||||||||||||||||
Available-for-Sale |
||||||||||||||||||||
Cost |
Unrealized Gain |
Unrealized (Loss) |
Fair Market Value |
Fair Market Value of Investments with Unrealized Losses |
||||||||||||||||
(in thousands) |
||||||||||||||||||||
| Commercial paper |
$ |
$ |
$ |
( |
) |
$ |
$ |
|||||||||||||
| U.S. Treasury securities |
( |
) |
||||||||||||||||||
| Corporate debt securities |
( |
) |
||||||||||||||||||
| Debt mutual funds |
— |
( |
) |
|||||||||||||||||
| U.S. government agency securities |
— |
( |
) |
|||||||||||||||||
| Certificates of deposit and time deposits |
— |
— |
— |
|||||||||||||||||
| Non-U.S. government securities |
— |
— |
— |
|||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
$ |
$ |
$ |
( |
) |
$ |
$ |
||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
Reported as follows:
Cost |
Unrealized Gain |
Unrealized (Loss) |
Fair Market Value |
Fair Market Value of Investments with Unrealized Losses |
||||||||||||||||
(in thousands) |
||||||||||||||||||||
| Marketable securities |
$ |
$ |
$ |
( |
) |
$ |
$ |
|||||||||||||
| Long-term marketable securities |
( |
) |
||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
$ |
$ |
$ |
( |
) |
$ |
$ |
||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
1
2
The following table summarizes the composition of marketable securities at December 31, 2021:
available-for-sale
December 31, 2021 |
||||||||||||||||||||
Available-for-Sale |
||||||||||||||||||||
Cost |
Unrealized Gain |
Unrealized (Loss) |
Fair Market Value |
Fair Market Value of Investments with Unrealized Losses |
||||||||||||||||
(in thousands) |
||||||||||||||||||||
Commercial paper |
$ | $ | $ | ( |
) | $ | $ | |||||||||||||
U.S. Treasury securities |
( |
) | ||||||||||||||||||
Corporate debt securities |
( |
) | ||||||||||||||||||
Debt mutual funds |
— | — | ||||||||||||||||||
U.S. government agency securities |
( |
) | ||||||||||||||||||
Certificates of deposit and time deposits |
— | — | — | |||||||||||||||||
Non-U.S. government securities |
— | — | — | |||||||||||||||||
| $ | $ | $ | ( |
) | $ | $ | ||||||||||||||
Reported as follows:
Cost |
Unrealized Gain |
Unrealized (Loss) |
Fair Market Value |
Fair Market Value of Investments with Unrealized Losses |
||||||||||||||||
(in thousands) |
||||||||||||||||||||
Marketable securities |
$ | $ | $ | ( |
) | $ | $ | |||||||||||||
Long-term marketable securities |
( |
) | ||||||||||||||||||
| $ | $ | $ | ( |
) | $ | $ | ||||||||||||||
As of July 3, 2022, the fair ma
Teradyne reviews its investments to identify and evaluate investments that have an indication of possible impairment. Based on this review, Teradyne determined that the unrealized losses related to these investments at July 3, 2022 and December 31, 2021 were not other than temporary.
The contractual maturities of investments in securities held at July 3, 2022 were as follows:
available-for-sale
July 3, 2022 |
||||||||
Cost |
Fair Market Value |
|||||||
(in thousands) |
||||||||
Due within one year |
$ | $ | ||||||
Due after 1 year through 5 years |
||||||||
Due after 5 years through 10 years |
||||||||
Due after 10 years |
||||||||
Total |
$ | $ | ||||||
Contractual maturities of investments in securities held at July 3, 2022 exclude debt mutual funds with a fair market value of $6.5 million, as they do not have a contractual maturity date.
available-for-sale
Derivatives
Teradyne conducts business in a number of foreign countries, with certain transactions denominated in local currencies. The purpose of Teradyne’s foreign currency management is to minimize the effect of exchange rate fluctuations on certain foreign currency denominated monetary assets and liabilities. Teradyne does not use derivative financial instruments for trading or speculative purposes.
1
3
To minimize the effect of exchange rate fluctuations associated with the remeasurement of monetary assets and liabilities denominated in foreign currencies, Teradyne enters into foreign currency forward contracts. The change in fair value of these derivatives is recorded directly in earnings and is used to offset the change in value of monetary assets and liabilities denominated in foreign currencies.
At July 3, 2022 and December 31, 2021, Teradyne had the following contracts to buy and sell
non-U.S.
currencies for U.S. dollars and other non-U.S.
currencies with the following notional amounts: July 3, 2022 |
December 31, 2021 |
|||||||||||||||||||||||
Buy Position |
Sell Position |
Net Total |
Buy Position |
Sell Position |
Net Total |
|||||||||||||||||||
(in millions) |
||||||||||||||||||||||||
Japanese Yen |
$ | ( |
) | $ | — | $ | ( |
) | $ | ( |
) | $ | — | $ | ( |
) | ||||||||
Taiwan Dollar |
( |
) | — | ( |
) | ( |
) | — | ( |
) | ||||||||||||||
Korean Won |
( |
) | — | ( |
) | ( |
) | — | ( |
) | ||||||||||||||
British Pound Sterling |
( |
) | — | ( |
) | ( |
) | — | ( |
) | ||||||||||||||
Singapore Dollar |
— | — | ||||||||||||||||||||||
Euro |
— | — | ||||||||||||||||||||||
Philippine Peso |
— | — | ||||||||||||||||||||||
Chinese Yuan |
— | — | ||||||||||||||||||||||
Total |
$ | ( |
) | $ | $ | $ | ( |
) | $ | $ | ||||||||||||||
The fair value of the outstanding contracts was a loss of $0.1 million and $0.1 million, respectively, at July 3, 2022 and December 31, 2021.
Gains and losses on foreign currency forward contracts and foreign currency remeasurement gains and losses on monetary assets and liabilities are included in other (income) expense, net.
The following table summarizes the fair value of derivative instruments as of July 3, 2022 and December 31, 2021:
Balance Sheet Location |
July 3, 2022 |
December 31, 2021 |
||||||||
(in thousands) |
||||||||||
Derivatives not designated as hedging instruments: |
||||||||||
Foreign exchange contracts |
Prepayments | $ | $ | |||||||
Foreign exchange contracts |
Other current liabilities | ( |
) | ( |
) | |||||
Total derivatives |
$ | ( |
) | $ | ( |
) | ||||
The following table summarizes the effect of derivative instruments recognized in the statement of operations for the three and six months ended July 3, 2022 and July 4, 2021:
Location of (Gains) Losses |
For the Three Months Ended |
For the Six Months Ended |
||||||||||||||||
Recognized in |
July 3, |
July 4, |
July 3, |
July 4, |
||||||||||||||
Statement of Operations |
2022 |
2021 |
2022 |
2021 |
||||||||||||||
(in thousands) |
||||||||||||||||||
Derivatives not designated as hedging instruments: |
||||||||||||||||||
Foreign exchange contracts |
Other (income) expense, net | $ | ( |
) | $ | $ | ( |
) | $ | |||||||||
The above table does not reflect the corresponding gains and losses from the remeasurement of the monetary assets and liabilities denominated in foreign currencies. For the three and six months ended July 3, 2022, net losses from the remeasurement of monetary assets and liabilities denominated in foreign currencies were $3.7 million and $8.0 million, respectively. For the three and six months ended July 4, 2021, net gains from the remeasurement of monetary assets and liabilities denominated in foreign currencies were $0.1 million and $0.3 million, respectively.
See Note H: “Debt” regarding derivatives related to the convertible senior notes.
H. DEBT
Convertible Senior Notes
On December 12, 2016, Teradyne completed a private offering of $
million aggregate principal amount of
% convertible senior unsecured notes (the “Notes”) due December 15, 2023 and received net proceeds, after issuance costs, of approximately $
million, $
million of which was used to pay the net cost of the convertible note hedge transactions an
d
14
$
million of which was used to repurchase
million shares of Teradyne’s common stock under its existing stock repurchase program from purchasers of the Notes in privately negotiated transactions effected through one of the initial purchasers or its affiliates conducted concurrently with the pricing of the Note offering. The Notes will mature on December 15, 2023, unless earlier repurchased or converted. The Notes bear interest at a rate of
% per year
. The Notes will be convertible at the option of the noteholders at any time prior to the close of business on the business day immediately preceding September 15, 2023, only under the following circumstances: (1) during any calendar quarter beginning after
(and only during such calendar quarter), if the closing sale price of Teradyne’s common stock, for at least
trading days (whether or not consecutive) during a period of
consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than
% of the conversion price on each applicable trading day; (2) during the
business day period after any
consecutive trading day period (the “measurement period”) in which the trading price (as defined in the Indenture) per $
principal amount of Notes for each trading day of the measurement period was less than
% of the product of the closing sale price of the Teradyne’s common stock and the conversion rate on each such trading day; and (3) upon the occurrence of specified corporate events. On or after
until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their Notes at any time, regardless of the foregoing circumstances. Teradyne may satisfy its future conversion obligation by paying cash for the principal amount of the Notes and paying or delivering cash, shares of its common stock or a combination of cash and shares of its common stock, at Teradyne’s election for the amount in excess of principal. As of July 3, 2022, the conversion price was approximately $
per share of Teradyne’s common stock. The conversion rate is subject to adjustment under certain circumstances. As of August 5, 2022, one hundred and six holders had exercised the option to convert $
million worth of notes.
Concurrent with the offering of the Notes, Teradyne entered into convertible note hedge transactions (the “Note Hedge Transactions”) with the initial purchasers or their affiliates (the “Option Counterparties”). The Note Hedge Transactions cover, subject to customary anti-dilution adjustments, the number of shares of the common stock that underlie the Notes, with a strike price equal to the conversion price of the Notes of $31.49 .
Separately and concurrent with the pricing of the Notes, Teradyne entered into warrant transactions with the Option Counterparties (the “Warrant Transactions”) in which it sold 14.6 million shares of common stock. As of July 3, 2022, the strike price of the warrants was approximately $39.52 per share. The strike price is subject to adjustment under certain circumstances. The Warrant Transactions could have a dilutive effect to Teradyne’s common stock to the extent that the market price per share of Teradyne’s common stock, as measured under the terms of the Warrant Transactions, exceeds the applicable strike price of the warrants.
net-share-settled
(or, at its election subject to certain conditions, cash-settled) warrants to the Option Counterparties. The Warrant Transactions currently cover, subject to customary anti-dilution adjustments, approximately The Note Hedge Transactions are expected to reduce the potential dilution to Teradyne’s common stock upon any conversion of the Notes. However, the Warrant Transactions could separately have a dilutive effect to the extent that the market value per share of Teradyne’s common stock exceeds the applicable strike price of the warrant. The net cost of the Note Hedge Transactions, after being partially offset by the proceeds from the sale of the warrants, was approximately $33.0 million.
In connection with establishing their initial hedge of these convertible note hedge and warrant transactions, the Option Counterparties have entered into various derivative transactions with respect to Teradyne’s common stock and/or purchased shares of Teradyne’s common stock or other securities, including the Notes, concurrent with, or shortly after, the pricing of the Notes. In addition, the Option Counterparties may modify their hedge positions by entering into or unwinding various derivative transactions with respect to Teradyne’s common stock or by selling Teradyne’s common stock or other securities, including the Notes, in secondary market transactions (and may do so during any observation period related to the conversion of the Notes). These activities could adversely affect the value of Teradyne’s common stock and the Notes.
Originally, Teradyne allocated $100.8 million of the $460.0 million principal amount of the Notes to the equity component, which represented a discount to the debt and was amortized to interest expense using the effective interest method through December 2023. Effective January 1, 2022, Teradyne adopted ASC 1.4 million to current debt for unsettled shares, an increase of $1.8 million to deferred tax assets, an increase of $6.6 million to long-term debt for unamortized debt discount, and an increase to retained earnings of $94.6 million for the reclassification of the equity component. Mezzanine equity representing unsettled shares value was reduced to zero and additional 99.3 million.
2020-06
using the modified retrospective method of transition and accounts for the debt as a single liability measured at its amortized cost. As a result of the adoption, Teradyne recorded an increase of $paid-in
capital was reduced by $On November 4, 2021, Teradyne made an irrevocable election under the Indenture to require the principal portion of the remaining Notes to be settled in cash.
Debt issuance fees of approximately $0.3 million, at July 3, 2022, are being amortized to interest expense using the effective interest method over the seven-year term of the
Notes.
15
The below tables represent the key components of Teradyne’s convertible senior notes:
July 3, 2022 |
December 31, 2021 |
|||||||
(in thousands) |
||||||||
Debt principal |
$ | $ | ||||||
Unamortized debt issuance fees (1) |
||||||||
Net Carrying amount of convertible debt |
$ | $ | ||||||
Reported as follows:
July 3, 2022 |
December 31, 2021 |
|||||||
(in thousands) |
||||||||
Current debt |
$ | $ | ||||||
Long-term debt |
||||||||
Net carrying amount of convertible debt |
$ | $ | ||||||
For the Three Months Ended |
For the Six Months Ended |
|||||||||||||||
July 3, 2022 |
July 4, 2021 |
July 3, 2022 |
July 4, 2021 |
|||||||||||||
(in thousands) |
||||||||||||||||
Contractual interest expense on the coupon |
$ | $ | $ | $ | ||||||||||||
Amortization of debt issuance fees recognized as interest expense (2) |
||||||||||||||||
Total interest expense on the convertible debt |
$ | $ | $ | $ | ||||||||||||
| (1) | Unamortized debt issuance fees as of December 31, 2021 include unamortized debt discount of $ 2020-6 on January 1, 2022. |
| (2) | Three and six months ended July 4, 2021 includes the amortization of debt discount component, which was eliminated with the adoption of ASU 2020-06 on January 1, 2022. |
As of July 3, 2022, the conversion price was approximately $31.49 per share and the 203.5 million.
if-converted
value of the notes was $During the six months ended July 3, 2022, twenty-five debt holders elected to convert $42.3 million of debt principal. The conversion of the debt was settled in cash for principal amount and in shares for the excess of conversion value over principal amount. The 1.0 million shares issued to the debt holders were received from exercising the convertible notes hedge call options.
Additional conversions of approximately $9.6 million of debt principal will occur in the third quarter of 2022 and the liability is included in current debt.
Teradyne expects to make principal interest payments of $0.9 million in the next 12 months and $0.5 million thereafter.
Revolving Credit Facility
On May 1, 2020, Teradyne entered into a credit agreement (the “Credit Agreement”) with Truist Bank, as administrative agent and collateral agent, and the lenders party thereto. The Credit Agreement provided for a three-year , senior secured revolving credit facility of $400.0 million (the “Credit Facility”).
On December 10, 2021, the Credit Agreement was amended to extend maturity date of the Credit Facility to December 10, 2026. The amended Credit Agreement provides that, subject to customary conditions, Teradyne may seek to obtain from existing or new lenders the available incremental amount under the Credit Facility, not to exceed the greater of $200.0 million or 15 % of consolidated EBIDTA. The interest rate applicable to loans under the Credit Facility are, at Teradyne’s option, equal to either a base rate plus a margin ranging from 0.00% to 0.75% per annum or LIBOR plus a margin ranging from 1.00% to 1.75% per annum, based on the consolidated leverage ratio of Teradyne. In addition, Teradyne will pay a commitment fee on the unused portion of the commitments under the Credit Facility ranging from 0.15% to 0.25% per annum, based on the then applicable consolidated leverage ratio.
16
Teradyne is not required to repay any loans under the Credit Facility prior to maturity, subject to certain customary exceptions. Teradyne is permitted to prepay all or any portion of the loans under the Credit Facility prior to maturity without premium or penalty, other than customary LIBOR breakage costs.
The Credit Agreement contains customary events of default, representations, warranties and affirmative and negative covenants that, among other things, limit Teradyne’s ability to sell assets, grant liens on assets, incur other secured indebtedness and make certain investments and restricted payments, all subject to exceptions set forth in the Credit Agreement. The Credit Agreement also requires Teradyne to satisfy two financial ratios measured as of the end of each fiscal quarter a consolidated leverage ratio and an interest coverage ratio.
The Credit Facility is guaranteed by certain of Teradyne’s domestic subsidiaries and collateralized by assets of Teradyne and such subsidiaries, including a pledge of 65 % of the capital stock of certain foreign subsidiaries.
As of August 5, 2022, Teradyne has no t borrowed any funds under the credit facility and was in compliance with all covenants.
I. PREPAYMENTS
Prepayments consist of the following:
July 3, |
December 31, |
|||||||
2022 |
2021 |
|||||||
(in thousands) |
||||||||
Contract manufacturer and supplier prepayments |
$ | $ | ||||||
Prepaid maintenance and other services |
||||||||
Prepaid taxes |
||||||||
Other prepayments |
||||||||
Total prepayments |
$ | $ | ||||||
J. PRODUCT WARRANTY
Teradyne generally provides a Related costs are charged to the warranty accrual as incurred. The balance below is included in other accrued liabilities.
one-year
warranty on its products, commencing upon installation, acceptance or shipment. A provision is recorded upon revenue recognition to cost of revenues for estimated warranty expense based on historical experience. For the Three Months Ended |
For the Six Months Ended |
|||||||||||||||
July 3, |
July 4, |
July 3, |
July 4, |
|||||||||||||
2022 |
2021 |
2022 |
2021 |
|||||||||||||
(in thousands) |
||||||||||||||||
Balance at beginning of period |
$ | $ | $ | $ | ||||||||||||
Accruals for warranties issued during the period |
||||||||||||||||
Accruals related to pre-existing warranties |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
Settlements made during the period |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
Balance at end of period |
$ | $ | $ | $ | ||||||||||||
When Teradyne receives revenue for extended warranties, beyond one year, it is deferred and recognized on a straight-line basis over the contract period. Related costs are expensed as incurred. The balance below is included in short and long-term deferred revenue and customer advances.
For the Three Months Ended |
For the Six Months Ended |
|||||||||||||||
July 3, |
July 4, |
July 3, |
July 4, |
|||||||||||||
2022 |
2021 |
2022 |
2021 |
|||||||||||||
(in thousands) |
||||||||||||||||
Balance at beginning of period |
$ | $ | $ | $ | ||||||||||||
Deferral of new extended warranty revenue |
||||||||||||||||
Recognition of extended warranty deferred revenue |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
Balance at end of period |
$ | $ | $ | $ | ||||||||||||
17
K. STOCK-BASED COMPENSATION
Under Teradyne’s stock compensation plans, Teradyne grants service-based restricted stock units, performance-based restricted stock units and stock options, and employees are eligible to purchase Teradyne’s common stock through its Employee Stock Purchase Plan (“ESPP”).
Service-based restricted stock unit awards granted to employees vest in equal annual installments over four years . Restricted stock unit awards granted to one-year period, with 100 % of the award vesting on the earlier of (a) the first anniversary of the grant date or (b) the date of the following year’s Annual Meeting of Shareholders. Teradyne expenses the cost of the restricted stock unit awards subject to service-based vesting, which is determined to be the fair market value of the shares at the date of grant, ratably over the period during which the restrictions lapse.
non-employee
directors vest after a Performance-based restricted stock units (“PRSUs”) granted to Teradyne’s executive officers may have a performance metric based on relative total shareholder return (“TSR”). Teradyne’s three-year TSR performance is measured against the New York Stock Exchange (“NYSE”) Composite Index. The final number of TSR PRSUs that vest will vary based upon the level of performance achieved from 0 % to 200 % of the target shares. The TSR PRSUs will vest upon the three-year anniversary of the grant date. The TSR PRSUs are valued using a Monte Carlo simulation model. The number of units expected to be earned, based upon the achievement of the TSR market condition, is factored into the grant date Monte Carlo valuation. Compensation expense is recognized on a straight-line basis over the shorter of the three-year service period or the period from the grant to the date described in the retirement provisions below. Compensation expense for executive officers meeting the retirement provisions prior to the grant date is recognized during the year following the grant. Compensation expense is recognized regardless of the eventual number of units that are earned based upon the market condition, provided the executive officer remains an employee at the end of the three-year period. Compensation expense is reversed if at any time during the three-year service period the executive officer is no longer an employee, subject to the retirement and termination eligibility provisions noted below.
PRSUs granted to Teradyne’s executive officers may also have a performance metric based on three-year cumulative 0 % to 200 % of the target shares. The PBIT PRSUs will vest upon the three-year anniversary of the grant date. Compensation expense is recognized on a straight-line basis over the shorter of the three-year service period or the period from the grant date to the date described in the retirement provisions below. Compensation expense for executive officers meeting the retirement provisions prior to the grant date is recognized during the year following the grant. Compensation expense is recognized based on the number of units that are earned based upon the three-year Teradyne PBIT as a percent of Teradyne’s revenue, provided the executive officer remains an employee at the end of the three-year period subject to the retirement and termination eligibility provisions noted below.
non-GAAP
profit before interest and tax (“PBIT”) as a percent of Teradyne’s revenue. Non-GAAP
PBIT is a financial measure equal to GAAP income from operations less restructuring and other, amortization of acquired intangible assets; acquisition and divestiture related charges or credits; pension actuarial gains and losses; and other non-recurring
gains and charges. The final number of PBIT PRSUs that vest will vary based upon the level of performance achieved from If a PRSU recipient’s employment ends prior to the determination of the performance percentage due to (1) permanent disability or death or (2) retirement or termination other than for cause, after attaining both at least age and at least ten years of service, then all or a portion of the recipient’s PRSUs (based on the actual performance percentage achieved on the determination date) will vest on the date the performance percentage is determined. Except as set forth in the preceding sentence, no PRSUs will vest if the executive officer is no longer an employee at the end of the three-year period.
Stock
options to purchase Teradyne’s common stock at
% of the fair market value on the grant date vest in equal annual installments over four years from the grant date and have a maximum term of seven years.
During the six months ended July 3, 2022 and July 4, 2021, Teradyne granted 0.4 million and 0.3 million of service-based restricted stock unit awards to employees at a weighted average grant date fair value of $111.21 and $113.23 , respectively, and $0.1 million of service-based restricted stock unit awards to 106.91 and $127.77 , respectively.
non-employee
directors at a weighted average grant date fair value of $During the six months ended July 3, 2022 and July 4, 2021, Teradyne granted 0.1 million of PBIT PRSUs with a grant date fair value of $110.84 and $113.65 , respectively.
18
During the six months ended July 3, 2022 and July 4, 2021, Teradyne granted 0.1 million of TSR PRSUs, with a grant date fair value of $101.06 and $125.02 , respectively. The fair value was estimated using the Monte Carlo simulation model with the following assumptions:
For the Six Months Ended |
||||||||
July 3, 2022 |
July 4, 2021 |
|||||||
Risk-free interest rate |
% | % | ||||||
Teradyne volatility-historical |
% | % | ||||||
NYSE Composite Index volatility-historical |
% | % | ||||||
Dividend yield |
% | % | ||||||
Expected volatility was based on the historical volatility of Teradyne’s stock and the NYSE Composite Index over the most recent three-year period. The risk-free interest rate was determined using the U.S. Treasury yield curve in effect at the time of grant. Dividend yield was based upon an estimated annual dividend amount of $0.44 per share divided by Teradyne’s stock price on the grant date of $112.12 for the 2022 grant and an estimated annual dividend amount of $0.40 per share divided by Teradyne’s stock price on the grant date of $113.48 for the 2021 grant.
During the six months ended July 3, 2022 and July 4, 2021, Teradyne granted 0.1 million of service-based stock options to executive officers at a weighted average grant date fair value of $39.01 and $36.60 , respectively.
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, 2022 |
July 4, 2021 |
|||||||
Expected life (years) |
||||||||
Risk-free interest rate |
% | % | ||||||
Volatility-historical |
% | % | ||||||
Dividend yield |
% | % | ||||||
Teradyne determined the stock options’ expected life based upon historical exercise data for executive officers, the age of the executive officers and the terms of the stock option grant. Volatility was determined using historical volatility for a period equal to the expected life. The risk-free interest rate was determined using the U.S. Treasury yield curve in effect at the time of grant. Dividend yield was based upon an estimated annual dividend amount of $0.44 per share divided by Teradyne’s stock price on the grant date of $112.12 for the 2022 grant and an estimated annual dividend amount of $0.40 per share divided by Teradyne’s stock price on the grant date of $113.48 for the 2021 grant.
19
L. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Changes in accumulated other comprehensive income (loss), which are presented net of tax, consist of the following:
Foreign Currency Translation Adjustment |
Unrealized Gains (Losses) on Marketable Securities |
Retirement Plans Prior Service Credit |
Total |
|||||||||||||
(in thousands) |
||||||||||||||||
Six Months Ended July 3, 2022 |
||||||||||||||||
Balance at December 31, 2021, net of tax of $ |
$ | ( |
) | $ | $ | $ | ( |
) | ||||||||
Other comprehensive loss before reclassifications, net of tax of $ |
( |
) | ( |
) | $ | ( |
) | |||||||||
Amounts reclassified from accumulated other comprehensive income, net of tax of $ |
( |
) | ||||||||||||||
Net current period other comprehensive loss, net of tax of $ |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
Balance at July 3, 2022, net of tax of $ |
$ | ( |
) | $ | ( |
) | $ | $ | ( |
) | ||||||
Six Months Ended July 4, 2021 |
||||||||||||||||
Balance at December 31, 2020, net of tax of $ |
$ | $ | $ | $ | ||||||||||||
Other comprehensive loss before reclassifications, net of tax of $ |
( |
) | ( |
) | — | ( |
) | |||||||||
Amounts reclassified from accumulated other comprehensive income, net of tax of $ |
( |
) | ( |
) | ( |
) | ||||||||||
Net current period other comprehensive loss, net of tax of $ |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
Balance at July 4, 2021, net of tax of $ |
$ | $ | $ | $ | ||||||||||||
Reclassifications out of accumulated other comprehensive income (loss) to the statement of operations for the three and six months ended July 3, 2022 and July 4, 2021 were as follows:
Details about Accumulated Other Comprehensive Income (Loss) Components |
For the Three Months Ended |
For the Six Months Ended |
Affected Line Item in the Statements of Operations | |||||||||||||||
July 3, 2022 |
July 4, 2021 |
July 3, 2022 |
July 4, 2021 |
|||||||||||||||
(in thousands) |
||||||||||||||||||
Available-for-sale |
||||||||||||||||||
Unrealized (losses) gains, net of tax of $( |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | Other (income) | |||||||
Defined benefit postretirement plan: |
||||||||||||||||||
Amortization of prior service credit, net of tax of $ |
(a) | |||||||||||||||||
Total reclassifications, net of tax of $( |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | Net income | |||||||
| (a) | The amortization of prior service credit is included in the computation of net periodic postretirement benefit cost. See Note P: “Retirement Plans.” |
M. GOODWILL AND ACQUIRED INTANGIBLE ASSETS
Goodwill
Teradyne performs its annual goodwill impairment test as required under the provisions of ASC on December 31 of each fiscal year unless interim indicators of impairment exist. In the six months ended July 3, 2022, there were no interim indicators of impairment. Goodwill is considered impaired when the net book value of a reporting unit exceeds its estimated fair value.
350-10,
“Intangibles—Goodwill and Other”
2
0
The changes in the carrying amount of goodwill by reportable segments for the six months ended July 3, 2022, were as follows:
Industrial Automation |
Wireless Test |
Semiconductor Test |
System Test |
Total |
||||||||||||||||
(in thousands) |
||||||||||||||||||||
Balance at December 31, 2021 |
||||||||||||||||||||
Goodwill |
$ | $ | $ | $ | $ | |||||||||||||||
Accumulated impairment losses |
— | ( |
) | ( |
) | ( |
) | ( |
) | |||||||||||
Total Goodwill |
||||||||||||||||||||
Foreign currency translation adjustment |
( |
) | ( |
) | ( |
) | ||||||||||||||
Balance at July 3, 2022 |
||||||||||||||||||||
Goodwill |
||||||||||||||||||||
Accumulated impairment losses |
— | ( |
) | ( |
) | ( |
) | ( |
) | |||||||||||
Total Goodwill |
$ | $ | $ | $ | $ | |||||||||||||||
Intangible Assets
Teradyne reviews long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of these assets are no longer appropriate.
Amortizable intangible assets consist of the following and are included in intangible assets, net on the balance sheet:
Gross Carrying Amount |
Accumulated Amortization |
Foreign Currency Translation Adjustment |
Net Carrying Amount |
|||||||||||||
Balance at July 3, 2022 |
(in thousands) |
|||||||||||||||
Developed technology |
$ | $ | ( |
) | $ | ( |
) | $ | ||||||||
Customer relationships |
( |
) | ||||||||||||||
Tradenames and trademarks |
( |
) | ( |
) | ||||||||||||
Total intangible assets |
$ | $ | ( |
) | $ | ( |
) | $ | ||||||||
Balance, December 31, 2021 |
||||||||||||||||
Developed technology |
$ | $ | ( |
) | $ | ( |
) | $ | ||||||||
Customer relationships |
( |
) | ||||||||||||||
Tradenames and trademarks |
( |
) | ( |
) | ||||||||||||
Total intangible assets |
$ | $ | ( |
) | $ | ( |
) | $ | ||||||||
Aggregate intangible asset amortization expense was $4.9 million and $9.9 million, respectively, for the three and six months ended July 3, 2022 and $5.4 million and $10.9 million, respectively, for the three and six months ended July 4, 2021.
Estimated intangible asset amortization expense for each of the five succeeding fiscal years and thereafter is as follows:
Year |
Amortization Expense |
|||
(in thousands) |
||||
2022 |
$ | |||
2023 |
||||
2024 |
||||
2025 |
||||
2026 |
||||
Thereafter |
||||
2
1
N. 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, 2022 |
July 4, 2021 |
July 3, 2022 |
July 4, 2021 |
|||||||||||||
(in thousands, except per share amounts) |
||||||||||||||||
Net income for basic and diluted net income per share |
$ | $ | $ | $ | ||||||||||||
Weighted average common shares-basic |
||||||||||||||||
Effect of dilutive potential common shares: |
||||||||||||||||
Convertible note hedge warrant shares (1) |
||||||||||||||||
Incremental shares from assumed conversion of convertible notes (2) |
||||||||||||||||
Restricted stock units |
||||||||||||||||
Stock options |
||||||||||||||||
Employee stock purchase plan |
||||||||||||||||
Dilutive potential common shares |
||||||||||||||||
Weighted average common shares-diluted |
||||||||||||||||
Net income per common share-basic |
$ | $ | $ | $ | ||||||||||||
Net income per common share-diluted |
$ | $ | $ | $ | ||||||||||||
| (1) | Convertible notes hedge warrant shares were calculated using the difference between the average Teradyne stock price for the period and the warrant price, multiplied by the number of warrant shares. The result of this calculation, representing the total intrinsic value of the warrant, was divided by the average Teradyne stock price for the period. |
| (2) | Incremental shares from assumed conversion of the convertible notes were calculated using the difference between the average Teradyne stock price for the period and the conversion price, multiplied by the number of convertible notes shares. The result of this calculation, representing the total intrinsic value of the convertible debt, was divided by the average Teradyne stock price for the period. |
The computation of diluted net income per common share for the three and six months ended July 3, 2022 excludes the effect of the potential vesting of 0.1 million and 0.2 million, respectively, of restricted stock units because the effect would have been anti-dilutive.
The computation of diluted net income per common share for the three and six months ended July 4, 2021 excludes the effect of the potential vesting of 0.1 million and 0.1 million, respectively, of restricted stock units because the effect would have been anti-dilutive.
O. RESTRUCTURING AND OTHER
During the three months ended July 3, 2022 and July 4, 2021, Teradyne recorded a charge of $1.5 million and $1.7 million, respectively, for an increase in environmental and legal liabilities.
During the six months ended July 3, 2022, Teradyne recorded a charge of $14.7 million related to the arbitration claim filed against Teradyne and AutoGuide related to an 26.7 million, and a charge of $2.0 million for an increase in environmental and legal liabilities. Previously, in the three months ended December 31, 2021, Teradyne recorded a charge of $12 million related to this
earn-out
dispute, which was settled on March 25, 2022 for $earn-out
dispute. During the six months ended July 4, 2021, Teradyne recorded a gain of $7.2 million for the decrease in the fair value of the AutoGuide contingent consideration liability, partially offset by a charge of $1.7 million for an increase in environmental and legal liabilities.
P. RETIREMENT PLANS
ASC 715, “Compensation—Retirement Benefits,” requires an employer with defined benefit plans or other postretirement benefit plans to recognize an asset or a liability on its balance sheet for the overfunded or underfunded status of the plans as defined by ASC 715. The pension asset or liability represents a difference between the fair value of the pension plan’s assets and the projected benefit obligation at December 31. Teradyne uses a December 31 measurement date for all its plans.
2
2
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 the U.S. qualified pension plan consist primarily of fixed income and equity securities. In addition, Teradyne has an unfunded supplemental executive defined benefit plan in the United States to provide retirement benefits in excess of levels allowed by the Employment Retirement Income Security Act (“ERISA”) and the Internal Revenue Code (the “IRC”), as well as unfunded qualified foreign plans. In the six months ended July 3, 2022 and July 4, 2021, Teradyne contributed $1.6 million and $1.7 million, respectively, to the U.S. supplemental executive defined benefit pension plan, and $0.5 million and $0.5 million, respectively, to certain qualified pension plans for
non-U.S.
subsidiaries. For the three and six months ended July 3, 2022 and July 4, 2021, Teradyne’s net periodic pension cost was comprised of the following:
For the Three Months Ended |
||||||||||||||||
July 3, 2022 |
July 4, 2021 |
|||||||||||||||
United States |
Foreign |
United States |
Foreign |
|||||||||||||
(in thousands) |
||||||||||||||||
| Service cost |
$ | $ | $ | $ | ||||||||||||
| Interest cost |
||||||||||||||||
| Expected return on plan assets |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Net actuarial gain |
( |
) | — | ( |
) | — | ||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total net periodic pension cost |
$ | $ | $ | $ | ||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
For the Six Months Ended |
||||||||||||||||
July 3, 2022 |
July 4, 2021 |
|||||||||||||||
United States |
Foreign |
United States |
Foreign |
|||||||||||||
(in thousands) |
||||||||||||||||
| Service cost |
$ | $ | $ | $ | ||||||||||||
| Interest cost |
||||||||||||||||
| Expected return on plan assets |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Net actuarial gain |
( |
) | — | ( |
) | — | ||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total net periodic pension cost |
$ | $ | $ | $ | ||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
Postretirement Benefit Plan
In addition to receiving pension benefits, Teradyne employees in the United States who meet early retirement eligibility requirements as of their termination dates may participate in Teradyne’s Welfare Plan, which includes medical and dental benefits up to age 65. Death benefits provide a fixed sum to retirees’ survivors and are available to all retirees. Substantially all of Teradyne’s current U.S. employees could become eligible for these benefits, and the existing benefit obligation relates primarily to those employees.
For the three and six months ended July 3, 2022 and July 4, 2021, Teradyne’s net periodic postretirement benefit cost (credit) was comprised of the following:
For the Three Months Ended |
For the Six Months Ended |
|||||||||||||||
July 3, 2022 |
July 4, 2021 |
July 3, 2022 |
July 4, 2021 |
|||||||||||||
(in thousands) |
||||||||||||||||
| Service cost |
$ | $ | $ | $ | ||||||||||||
| Interest cost |
||||||||||||||||
| Amortization of prior service credit |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Net actuarial loss (gain) |
( |
) | ( |
) | ||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total net periodic postretirement benefit cost (credit) |
$ | $ | ( |
) | $ | $ | ( |
) | ||||||||
| |
|
|
|
|
|
|
|
|||||||||
23
Q. COMMITMENTS AND CONTINGENCIES
Purchase Commitments
As of July 3, 2022, Teradyne had entered into purchase commitments for certain components and materials. The purchase commitments covered by the agreements aggregate to approximately $1,006.8 million, of which $870.5 million is for less than one year.
Legal Claims
Teradyne is subject to various legal proceedings and claims which have arisen in the ordinary course of business such as, but not limited to, patent, employment, commercial and environmental matters. Teradyne believes that it has meritorious defenses against all pending claims and intends to vigorously contest them. While it is not possible to predict or determine the outcomes of any pending claims or to provide possible ranges of losses that may arise, Teradyne believes the potential losses associated with all of these actions are unlikely to have a material adverse effect on its business, financial position or results of operations.
On March 8, 2021, Industrial Automation LLC, sellers of AutoGuide, submitted a demand for arbitration against Teradyne and AutoGuide in Wilmington, Delaware alleging that Teradyne and AutoGuide breached certain provisions of the Membership Interests Purchase Agreement (the “Purchase Agreement”), dated as of October 18, 2019, among Industrial Automation LLC, Teradyne and AutoGuide. The arbitration demand sought full acceleration of the maximum 106.9 million, for the alleged breach of the 26.7 million. As a result, Teradyne has no remaining
earn-out
amount payable under the Purchase Agreement, or $earn-out
provisions of the Purchase Agreement. On March 25
, 2022, the arbitration claim was settled for $earn-out
obligations. Guarantees and Indemnification Obligations
Teradyne provides indemnification, to the extent permitted by law, to its officers, directors, employees and agents for liabilities arising from certain events or occurrences, while the officer, director, employee, or agent, is or was serving, at Teradyne’s request in such capacity. Teradyne may enter into indemnification agreements with certain of its officers and directors. With respect to acquisitions, Teradyne provides indemnifications to or assumes indemnification obligations for the current and former directors, officers and employees of the acquired companies in accordance with the acquired companies’
by-laws
and charters. As a matter of practice, Teradyne has maintained directors’ and officers’ liability insurance coverage, including coverage for directors and officers of acquired companies. Teradyne enters into agreements in the ordinary course of business with customers, resellers, distributors, integrators and suppliers. Most of these agreements require Teradyne to defend and/or indemnify the other party against intellectual property infringement claims brought by a third party with respect to Teradyne’s products. From time to time, Teradyne also indemnifies customers and business partners for damages, losses and liabilities they may suffer or incur relating to personal injury, personal property damage, product liability, breach of confidentiality obligations and environmental claims relating to the use of Teradyne’s products and services or resulting from the acts or omissions of Teradyne, its employees, authorized agents or subcontractors. On occasion, Teradyne has also provided guarantees to customers regarding the delivery and performance of its products, in addition to the warranty described below.
As a matter of ordinary course of business, Teradyne warrants that its products will substantially perform in accordance with its standard published specifications in effect at the time of delivery. Most warranties have a
Teradyne had a product warranty accrual of $one-year
duration commencing from installation. A provision is recorded upon revenue recognition to cost of revenues for estimated warranty expense based upon historical experience. When Teradyne receives revenue for extended warranties beyond the standard duration, the revenue is deferred and recognized on a straight-line basis over the contract period. Related costs are expensed as incurred. As of July 3, 2022 and December 31, 2021, In addition, in the ordinary course of business, Teradyne provides minimum purchase guarantees to certain vendors to ensure continuity of supply against the market demand. Although some of these guarantees provide penalties for cancellations and/or modifications to the purchase commitments as the market demand decreases, most of the guarantees do not. Therefore, as the market demand decreases, Teradyne
re-evaluates
these guarantees and determines what charges, if any, should be recorded. With respect to its agreements covering product, business or entity divestitures and acquisitions, Teradyne provides certain representations, warranties and covenants to purchasers and agrees to indemnify and hold such purchasers harmless against breaches of such representations, warranties and covenants. Many of the indemnification claims have a definite expiration date while some remain in force indefinitely. With respect to its acquisitions, Teradyne may, from time to time, assume the liability for certain events or occurrences that took place prior to the date of acquisition.
As a matter of ordinary course of business, Teradyne occasionally guarantees certain indebtedness obligations of its subsidiary companies, limited to the borrowings from financial institutions, purchase commitments to certain vendors, and lease commitments to landlords.
24
Based on historical experience and information known as of July 3, 2022 and December 31, 2021, except for product warranty, Teradyne has not recorded any liabilities for these guarantees and obligations because the amount would be immaterial.
R. INCOME TAXES
A reconciliation of the United States federal statutory corporate tax rate to Teradyne’s effective tax rate was as follows:
For the Three Months Ended |
For the Six Months Ended |
|||||||||||||||
July 3, 2022 |
July 4, 2021 |
July 3, 2022 |
July 4, 2021 |
|||||||||||||
| U.S. statutory federal tax rate |
% | % | % | % | ||||||||||||
| Non-deductible officers’ compensation |
||||||||||||||||
| Foreign taxes |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Tax credits |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| International provisions of the U.S. Tax Cuts and Jobs Act of 2017 |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Discrete benefit related to equity compensation |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Other, net |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Effective tax rate |
% | % | % | % | ||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
On a quarterly basis, Teradyne evaluates the realizability of the deferred tax assets by jurisdiction and assesses the need for a valuation allowance. As of July 3, 2022, Teradyne believes that it will ultimately realize the deferred tax assets recorded on the condensed consolidated balance sheet. However, should Teradyne believe that it is
more-likely-than-not
that the deferred tax assets would not be realized, the tax provision would increase in the period in which Teradyne determined that the realizability was not likely. Teradyne considers the probability of future taxable income and historical profitability, among other factors, in assessing the realizability of the deferred tax assets. As of July 3, 2022 and December 31, 2021, Teradyne had $14.6 million and $14.5 million, respectively, of reserves for uncertain tax positions. The $0.1 million net increase in reserves for uncertain tax positions consists of an increase related to U.S. federal research and development credits generated in the current year partially offset by the release of reserves related to prior year loss carryforwards.
As of July 3, 2022, Teradyne does not anticipate a material change in the balance of unrecognized tax benefits during the next twelve months.
Teradyne recognizes interest and penalties related to income tax matters in income tax expense. As of July 3, 2022 and December 31, 2021, $0.3 million and $0.3 million, respectively, of interest and penalties were accrued for uncertain tax positions. For the six months ended July 3, 2022 and July 4, 2021, an expense of $0.1 million and $0.2 million, respectively, was recorded for interest and penalties related to income tax items.
Teradyne qualifies for a tax holiday in Singapore by fulfilling the requirements of an agreement with the Singapore Economic Development Board under which certain headcount and spending requirements must be met. The tax savings due to the tax holiday for the six months ended July 3, 2022 was $8.3 million, or $0.05 per diluted share. The tax savings due to the tax holiday for the six months ended July 4, 2021 was $15.9 million, or $0.08 per diluted share. In November 2020, Teradyne entered into an agreement with the Singapore Economic Development Board which extended
its
Singapore tax holiday under substantially similar terms to the agreement which expired on December 31, 2020. The new tax holiday is scheduled to expire on December 31, 2025. S. SEGMENT INFORMATION
Teradyne has four reportable segments (Semiconductor Test, System Test, Industrial Automation and Wireless Test). Each of the reportable segments is also an individual operating segment.
The Semiconductor Test segment includes operations related to the design, manufacturing and marketing of semiconductor test products and services. The System Test segment includes operations related to the design, manufacturing and marketing of products and services for defense/aerospace instrumentation test, storage and system level test, and circuit-board test. The Industrial Automation segment includes operations related to the design, manufacturing and marketing of collaborative robotic arms, autonomous mobile robots and advanced robotic control software. The Wireless Test segment includes operations related to the design, manufacturing and marketing of wireless test products and services. Each operating segment has a segment manager who is accountable to and maintains regular contact with Teradyne’s chief operating decision maker (Teradyne’s chief executive officer) to discuss operating activities, financial results, forecasts, and plans for the segment.
25
Teradyne evaluates performance based on several factors, of which the primary financial measure is business segment income (loss) before income taxes. The accounting policies of the business segments in effect are described in Note B: “Accounting Policies” in Teradyne’s Annual Report on Form
10-K
for the year ended December 31, 2021. Segment information for the three and six months ended July 3, 2022 and July 4, 2021 is as follows:
Semiconductor Test |
System Test |
Industrial Automation |
Wireless Test |
Corporate and Eliminations |
Consolidated |
|||||||||||||||||||
(in thousands) |
||||||||||||||||||||||||
| Three Months Ended July 3, 2022 |
||||||||||||||||||||||||
| Revenues |
$ | $ | $ | $ | $ | ( |
) | $ | ||||||||||||||||
| Income (loss) before income taxes (1)(2) |
( |
) | ( |
) | ||||||||||||||||||||
| Total assets (3) |
||||||||||||||||||||||||
| Three Months Ended July 4, 2021 |
||||||||||||||||||||||||
| Revenues |
$ | $ | $ | $ | $ | ( |
) | $ | ||||||||||||||||
| Income (loss) before income taxes (1)(2) |
( |
) | ||||||||||||||||||||||
| Total assets (3) |
||||||||||||||||||||||||
| Six Months Ended July 3, 2022 |
||||||||||||||||||||||||
| Revenues |
$ | $ | $ | $ | $ | ( |
) | $ | ||||||||||||||||
| Income (loss) before income taxes (1)(2) |
( |
) | ( |
) | ||||||||||||||||||||
| Total assets (3) |
||||||||||||||||||||||||
| Six Months Ended July 4, 2021 |
||||||||||||||||||||||||
| Revenues |
$ | $ | $ | $ | $ | ( |
) | $ | ||||||||||||||||
| Income (loss) before income taxes (1)(2) |
( |
) | ||||||||||||||||||||||
| Total assets (3) |
||||||||||||||||||||||||
| (1) | Included in Corporate and Eliminations are: legal and environmental fees, contingent consideration fair value adjustments, interest income, interest expense, severance charges, net foreign exchange gains (losses), acquisition related charges and compensation, pension, intercompany eliminations and for the three and six months ended July 4, 2021, loss on convertible debt conversions. |
| (2) | Included in income (loss) before taxes are charges and credits related to restructuring and other, inventory charges and, for the three and six months ended July 4, 2021, loss on convertible debt conversions. |
| (3) | Total assets are attributable to each segment. Corporate assets consist of cash and cash equivalents, marketable securities, and certain other assets. |
Included in each segment are charges and credits in the following line items in the statements of operations:
For the Three Months Ended |
For the Six Months Ended |
|||||||||||||||
July 3, 2022 |
July 4, 2021 |
July 3, 2022 |
July 4, 2021 |
|||||||||||||
(in thousands) |
||||||||||||||||
| Semiconductor Test: |
||||||||||||||||
| Cost of revenues—inventory charge |
$ | $ | — | $ | $ | |||||||||||
| Industrial Automation: |
||||||||||||||||
| Cost of revenues—inventory charge |
$ | $ | — | $ | $ | |||||||||||
| Restructuring and other—acquisition related expenses and compensation |
— | — | — | |||||||||||||
| Wireless: |
||||||||||||||||
| Cost of revenues—inventory charge |
$ | $ | — | $ | $ | |||||||||||
| Corporate and Eliminations: |
||||||||||||||||
| Restructuring and other—other |
$ | $ | $ | $ | ||||||||||||
| Restructuring and other—legal settlement charge |
||||||||||||||||
| Other (income) expense, net—loss on convertible debt conversions |
||||||||||||||||
| Restructuring and other—AutoGuide contingent consideration adjustment |
( |
) | ||||||||||||||
| Restructuring and other—acquisition related expenses and compensation |
( |
) | ||||||||||||||
26
T. SHAREHOLDERS’ EQUITY
Stock Repurchase Program
In January 2021, Teradyne’s Board of Directors cancelled the January 2020 repurchase program and approved a new repurchase program for up to $2.0 billion of common stock. Teradyne intends to repurchase a minimum of $750.0 million of its common stock in 2022.
During the six months ended July 3, 2022, Teradyne repurchased 5.0 million shares of common stock for $532.8 million at an average price of $107.50 per share. During the six months ended July 4, 2021, Teradyne repurchased 1.6 million shares of common stock for $196.6 million at an average price of $125.69 per share. The cumulative repurchases under the $2.0 billion common stock repurchase program as of July 3, 2022 were 9.7 million shares of common stock for $1,132.8 million at an average price per share of $116.45 .
The total price includes commissions and is recorded as a reduction to retained earnings.
Dividend
Holders of Teradyne’s common stock are entitled to receive dividends when they are declared by Teradyne’s Board of Directors.
In January 2022 and May 2022, Teradyne’s Board of Directors declared a quarterly cash dividend 0.11 per share. Dividend payments for the three and six months ended July 3, 2022 were $17.5 million and $35.4 million, respectively.
of
$In January 2021 and May 2021, Teradyne’s Board of Directors declared a quarterly cash dividend of $0.10 per share. Dividend payments for the three and six months ended July 4, 2021 were $16.6 million and $33.3 million, respectively.
While Teradyne declared a quarterly cash dividend and authorized a share repurchase program, it may reduce or eliminate the cash dividend or share repurchase program in the future. Future cash dividends and stock repurchases are subject to the discretion of Teradyne’s Board of Directors which will consider, among other things, Teradyne’s earnings, capital requirements and financial condition.
2
7
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 our 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, 2021. 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 automation equipment for test and industrial applications. We design, develop, manufacture and sell automatic test systems used to test semiconductors, wireless products, data storage and complex electronics systems in many industries including the consumer electronics, wireless, automotive, industrial, computing, communications, and aerospace and defense industries. Our industrial automation products include collaborative robotic arms, autonomous mobile robots (“AMRs”) and advanced robotic control software used by global manufacturing, logistics and light industrial customers to improve quality, increase manufacturing and material handling efficiency and decrease manufacturing and logistics costs. Our automatic test equipment and industrial automation products and services include:
| • | semiconductor test (“Semiconductor Test”) systems; |
| • | storage and system level test (“Storage Test”) systems, defense/aerospace (“Defense/Aerospace”) test instrumentation and systems and circuit-board test and inspection (“Production Board Test”) systems (collectively these products represent “System Test”); |
| • | wireless test (“Wireless Test”) systems; and |
| • | industrial automation (“Industrial Automation”) products. |
The market for our test products is concentrated with a limited number of significant customers accounting for a substantial portion of the purchases of test equipment. A few customers drive significant demand for our test products both through direct sales and sales to the customers’ supply partners. We expect that sales of our test products will continue to be concentrated with a limited number of significant customers for the foreseeable future. In 2022, we expect lower demand in the mobility and compute segments of our Semiconductor Test business due to end market slowdown in these segments as well as slower technology transition in one of our largest
end-markets.
While there is uncertainty if end markets will recover in 2023, the ramp of 3 nanometer starting in 2023 followed by gate-all-around and increasing multichip packaging remain unaltered drivers of growth. We expect Semiconductor Test demand in the automation and industrial segments to remain strong in 2022. Our Industrial Automation segment consists of Universal Robots A/S (“UR”), a leading supplier of collaborative robotic arms, Mobile Industrial Robots A/S (“MiR”), a leading maker of AMRs for industrial automation and AutoGuide, LLC (“AutoGuide”), a maker of high payload AMRs. The market for our Industrial Automation segment products is dependent on the adoption of new automation technologies by large manufacturers as well as small and medium enterprises (SMEs) throughout the world. We expect our UR and MiR businesses to continue to grow in 2022, while our AutoGuide business will focus on continuing to invest to scale and integrate high payload AMR solutions.
Both our test and industrial automation businesses may continue to be impacted by supply constraints, which will in turn impact our revenue and is expected to, along with inflation, increase costs in 2022. Through the second quarter of 2022, inflation has not had a material impact on our results. In the second quarter 2022, we were unable to supply approximately $40 million of revenue in our test businesses for which we had customer demand. Our third quarter 2022 forecast excludes approximately $50 million of revenue, primarily in our test businesses, due to these continued supply chain constraints.
Our corporate strategy continues to focus on profitably gaining market share in our test businesses through the introduction of differentiated products that target expanding segments and accelerating growth through continued investment in our Industrial Automation businesses. We plan to execute on our strategy while balancing capital allocations between returning capital to our shareholders through stock repurchases and dividends and using capital for opportunistic acquisitions.
Impact of the
COVID-19
Pandemic on our Business The novel coronavirus orders, vaccination and testing mandates, and business limitations and shutdowns. These measures have impacted our operations and disrupted our business, workforce and operations, as well as the operations of our customers, contract manufacturers and suppliers. We are continuing to monitor the rapidly evolving situation regarding the
(COVID-19)
pandemic resulted in government authorities implementing numerous measures in an effort to contain the spread of the virus, such as travel bans and restrictions, limitations on gatherings or social distancing requirements, quarantines, shelter-in-place
day-to-day
COVID-19
pandemic, particularly in China, and the availability and impact of vaccinations globally. However, we are unable to accurately predict the full 28
impact of
COVID-19,
which will depend on future developments that are highly uncertain and cannot be predicted with accuracy, including, but not limited to, any new surges or new strains or variants of the virus in areas where we do business, the availability and use of vaccinations, any further government actions to contain the virus or treat its impact, continuing shutdowns in China, and how quickly and to what extent normal economic and operating conditions can resume. Due to the
COVID-19
pandemic, there has been uncertainty and disruption in the global economy and our markets. We are not aware of any specific event or circumstance that would require an update to our estimates or judgments or a revision of the carrying value of our assets or liabilities as of August 5, 2022, the date of issuance of this Quarterly Report on Form 10-Q.
Health and Safety
In response to the
COVID-19
pandemic, we have taken proactive, aggressive action to protect the health and safety of our employees, customers, contract manufacturers and suppliers, and we have complied with all government orders around the globe. The spread of COVID-19
has caused us to modify our business practices, which includes implementing social distancing protocols, limiting employee travel and requiring employees to work remotely. We may take further actions as may be required or recommended by government authorities or that we determine are in the best interests of our employees, customers, contract manufacturers and suppliers. Operations
We believe the
COVID-19
pandemic, and the numerous measures implemented by authorities in response, has adversely impacted our results of operations, including by increasing costs, but we cannot accurately estimate the amount of the impact to our second quarter of 2022 financial results or to our future financial results. In addition, the pandemic has disrupted our contract manufacturers and suppliers, and has resulted in supply constraints and short-term cost increases to meet customer demand. While the duration and severity of the pandemic may further impact our workforce and operations, as well as those of our customers, contract manufacturers and suppliers, we expect that our manufacturing facilities will remain operational, at sufficient capacity to support production based on demand and the availability of supply. We are monitoring our operations closely in an effort to avoid any potential productivity losses caused by responses to the COVID-19
pandemic. Demand
The
COVID-19
pandemic has significantly increased economic uncertainty in our markets. Demand for our Test products in China and other countries was strong throughout 2021 and in the first half of 2022, but the COVID-19
pandemic could cause further economic disruption that could cause demand for our products to decline, which would adversely affect our business. Liquidity
Although there is continued uncertainty related to the impact of the
COVID-19
pandemic on our future results, we believe our business model and our current cash reserves leave us well-positioned to manage our business through this crisis. We have a strong balance sheet, as well as an operating model that we believe is capable of flexing up and down with extreme demand swings while still remaining profitable. Based on our analysis, we believe our existing balances of cash and cash equivalents and our currently anticipated operating cash flows will be sufficient to meet our working capital needs and other capital and liquidity requirements for the next twelve months. However, due to the uncertainty related to the future impact of the COVID-19
pandemic, in order to bolster our liquidity position, on May 1, 2020 we entered into a credit agreement providing for a three-year, senior secured revolving credit facility of $400 million. On December 10, 2021, we amended the credit agreement to extend its maturity to December 10, 2026 as further described in Note H: “Debt.” As of August 5, 2022, we have not borrowed any funds under the credit facility. We are continuing to monitor the evolving situation regarding the
COVID-19
pandemic, the availability of vaccinations where we do business and guidance from government authorities around the world. In these circumstances, there may be developments outside our control requiring us to adjust our operating plan. As a result, given the uncertain nature of this situation, we are not able to accurately predict the full extent of the impact of COVID-19
on our business, financial condition, results of operations, liquidity, or cash flows in the future. Supply Chain Constraints and Inflationary Pressures
The global supply shortage of electrical components, including semiconductor chips, continued to impact our supply chain in the second quarter of 2022. As a result, we experienced, and expect to continue to experience, increases in our lead times and costs for certain components for certain of our products. In addition, while not material, inflationary pressures contributed to increased costs for product components and wage inflation, impacting our cost of products, gross margin and profit for the quarter. Our supply chain team, and our suppliers, continue to manage numerous supply, production, and logistics obstacles. While not material through the second quarter of 2022, in an effort to mitigate these risks, in some cases, we have incurred higher costs due to investment in supply chain resiliency and to secure available inventory or have extended or placed
non-cancellable
purchase commitments with semiconductor suppliers, which introduces inventory risk if our forecasts and assumptions prove inaccurate. We have also sourced components from additional suppliers and multi-sourced and pre-ordered
components and finished goods inventory in some cases in an effort to reduce the impact of the adverse supply chain conditions we have experienced. There is no assurance that these efforts will be successful. In the second quarter 2022, we were unable to supply approximately $40 million of revenue in our test businesses for which we had customer demand. Our third quarter 2022 forecast excludes approximately $50 million of revenue, primarily in our test businesses, due to these continued supply chain constraints. 29
Impact of Russia’s invasion of Ukraine on our Business
Russia’s invasion of Ukraine, in February 2022, did not have a significant impact on our business as we have minimal business in Russia and Ukraine, both directly and indirectly. However, following the invasion, the U.S. and other countries imposed significant sanctions against the Russian government and many Russian companies and individuals. Although Teradyne does not have significant operations in Russia, the sanctions and Russia’s response to the sanctions, have impacted Teradyne’s business in other countries and could have a negative impact on the Company’s future revenue and supply chain, either of which could adversely affect Teradyne’s business and financial results. In addition, the global economic uncertainty following the invasion, sanctions and Russia’s response to the sanctions could impact demand for our products.
See Part II—Item 1A, “Risk Factors,” included in our Annual Report on Form
10-K
for the fiscal year ended December 31, 2021 for our risk factors regarding risks associated with both the COVID-19
pandemic and international conflicts. 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 six months ended July 3, 2022 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, 2021, except as noted below. Critical accounting estimates are complex and may require significant judgment by management. Changes to the underlying assumptions may have a material impact on our financial condition and results of operations. These estimates may change, as new events occur, and additional information is obtained. Actual results could differ significantly from these estimates under different assumptions or conditions.
Convertible Debt
We adopted Accounting Standards Update (“ASU”) ASU on January 1, 2022 using the modified retrospective method of adoptionUnder ASU
2020-06
– “Debt—Debt with Conversion and Other Options and Derivatives and Hedging—Contracts in Entity’s Own Equity,”
.
2020-06,
we account for a convertible debt instrument as a single liability measured at its amortized cost, as long as no other features require bifurcation and recognition as derivatives. Unsettled shares are recorded in current debt, and there is no recognition of a debt discount, which was previously amortized to interest expense. We use the if-converted
method in the diluted EPS calculation for convertible instruments. As a result of adoption, we recorded an increase of $1.4 million to current debt for unsettled shares, an increase of $1.8 million to deferred tax assets, an increase of $6.6 million to long-term debt for unamortized debt discount, and an increase to retained earnings of $94.6 million for the reclassification of the equity component. Mezzanine equity representing unsettled shares value was reduced to zero and additional paid-in
capital was reduced by $99.3 million. Preparation of Financial Statements and Use of Estimates
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 under different assumptions or conditions.
30
SELECTED RELATIONSHIPS WITHIN THE CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
For the Three Months Ended |
For the Six Months Ended |
|||||||||||||||
July 3, 2022 |
July 4, 2021 |
July 3, 2022 |
July 4, 2021 |
|||||||||||||
Percentage of revenues: |
||||||||||||||||
Revenues: |
||||||||||||||||
Products |
83 | % | 88 | % | 83 | % | 86 | % | ||||||||
Services |
17 | 12 | 17 | 14 | ||||||||||||
Total revenues |
100 | 100 | 100 | 100 | ||||||||||||
Cost of revenues: |
||||||||||||||||
Cost of products |
33 | 36 | 32 | 35 | ||||||||||||
Cost of services |
7 | 5 | 7 | 5 | ||||||||||||
Total cost of revenues (exclusive of acquired intangible assets amortization shown separately below) |
40 | 40 | 40 | 41 | ||||||||||||
Gross profit |
60 | 60 | 60 | 59 | ||||||||||||
Operating expenses: |
||||||||||||||||
Selling and administrative |
17 | 13 | 18 | 14 | ||||||||||||
Engineering and development |
13 | 10 | 14 | 11 | ||||||||||||
Acquired intangible assets amortization |
— | — | 1 | 1 | ||||||||||||
Restructuring and other |
— | — | 1 | — | ||||||||||||
Total operating expenses |
31 | 24 | 33 | 26 | ||||||||||||
Income from operations |
29 | 36 | 27 | 33 | ||||||||||||
Non-operating (income) expense: |
||||||||||||||||
Interest income |
— | — | — | — | ||||||||||||
Interest expense |
— | 1 | — | 1 | ||||||||||||
Other (income) expense, net |
1 | — | 1 | — | ||||||||||||
Income before income taxes |
28 | 35 | 26 | 33 | ||||||||||||
Income tax provision |
5 | 5 | 4 | 4 | ||||||||||||
Net income |
24 | % | 30 | % | 23 | % | 29 | % | ||||||||
Results of Operations
Second Quarter 2022 Compared to Second Quarter 2021
Revenues
Revenues by our reportable segments were as follows:
For the Three Months Ended |
||||||||||||
July 3, 2022 |
July 4, 2021 |
Dollar Change |
||||||||||
(in millions) |
||||||||||||
Semiconductor Test |
$ | 541.3 | $ | 834.0 | $ | (292.7 | ) | |||||
System Test |
134.7 | 104.8 | 29.9 | |||||||||
Industrial Automation |
101.1 | 92.2 | 8.9 | |||||||||
Wireless Test |
63.9 | 54.9 | 9.0 | |||||||||
Corporate and Eliminations |
(0.2 | ) | (0.1 | ) | (0.1 | ) | ||||||
| $ | 840.8 | $ | 1,085.7 | $ | (244.9 | ) | ||||||
The decrease in Semiconductor Test revenues of $292.7 million, or 35.1%, was driven primarily by lower tester sales in high performance compute processor and mobile applications, and lower memory test sales of flash memory testers. The increase in System Test revenues of $29.9 million, or 28.5%, was primarily due to higher sales in Storage Test of system level and hard disk drive testers. The increase in Industrial Automation revenues of $8.9 million, or 9.7%, was driven primarily by higher demand for UR’s collaborative robotic arms and MiR’s autonomous mobile robots. The rise in Wireless Test revenues of $9.0 million, or 16.4%, was primarily due to increase in connectivity test products.
31
Revenues by country as a percentage of total revenues were as follows (1):
For the Three Months Ended |
||||||||
July 3, 2022 |
July 4, 2021 |
|||||||
Taiwan |
25 | % | 44 | % | ||||
Korea |
17 | 9 | ||||||
United States |
14 | 9 | ||||||
China |
13 | 15 | ||||||
Europe |
8 | 5 | ||||||
Thailand |
6 | 3 | ||||||
Malaysia |
5 | 2 | ||||||
Japan |
5 | 5 | ||||||
Philippines |
3 | 6 | ||||||
Singapore |
2 | 1 | ||||||
Rest of World |
2 | 1 | ||||||
| 100 | % | 100 | % | |||||
| (1) | Revenues attributable to a country are based on location of customer site. |
Gross Profit
Our gross profit was as follows:
For the Three Months Ended |
||||||||||||
July 3, 2022 |
July 4, 2021 |
Dollar/Point Change |
||||||||||
(in millions) |
||||||||||||
Gross profit |
$ | 506.4 | $ | 647.0 | $ | (140.6 | ) | |||||
Percent of total revenues |
60.2 | % | 59.6 | % | 0.6 | |||||||
Gross profit as a percent of revenue increased by 0.6 points, primarily due to favorable product mix in Semiconductor Test, partially offset by higher material costs due to inflation.
Selling and Administrative
Selling and administrative expenses were as follows:
For the Three Months Ended |
||||||||||||
July 3, 2022 |
July 4, 2021 |
Dollar Change |
||||||||||
(in millions) |
||||||||||||
Selling and administrative |
$ | 139.5 | $ | 140.2 | $ | (0.7 | ) | |||||
Percent of total revenues |
16.6 | % | 12.9 | % | ||||||||
The decrease of $0.7 million in selling and administrative expenses was primarily due to lower variable compensation.
32
Engineering and Development
Engineering and development expenses were as follows:
For the Three Months Ended |
||||||||||||
July 3, 2022 |
July 4, 2021 |
Dollar Change |
||||||||||
(in millions) |
||||||||||||
Engineering and development |
$ | 112.0 | $ | 110.0 | $ | 2.0 | ||||||
Percent of total revenues |
13.3 | % | 10.1 | % | ||||||||
The increase of $2.0 million in engineering and development expenses was primarily due to higher spending in Semiconductor Test and Industrial Automation, partially offset by lower variable compensation.
Restructuring and Other
During the three months ended July 3, 2022 and July 4, 2021, we recorded a charge of $1.5 million and $1.7 million, respectively, for an increase in environmental and legal liabilities.
Interest and Other
For the Three Months Ended |
||||||||||||
July 3, 2022 |
July 4, 2021 |
Dollar Change |
||||||||||
(in millions) |
||||||||||||
Interest income |
$ | (1.0 | ) | $ | (0.6 | ) | $ | (0.4 | ) | |||
Interest expense |
0.9 | 5.6 | $ | (4.7 | ) | |||||||
Other (income) expense, net |
9.4 | (0.1 | ) | $ | 9.5 | |||||||
Interest expense decreased by $4.7 million primarily due to the January 1, 2022 adoption of ASU
2020-06
which eliminated the amortization of the debt discount which was $3.3 million in the three months ended July 4, 2021. Other (income) expense, net increased by $9.5 million primarily due to changes in unrealized gains/losses on equity securities, from a $1.3 million gain in 2021 to a $6.6 million loss in 2022. Income (Loss) Before Income Taxes
For the Three Months Ended |
||||||||||||
July 3, 2022 |
July 4, 2021 |
Dollar Change |
||||||||||
(in millions) |
||||||||||||
Semiconductor Test |
$ | 177.8 | $ | 337.3 | $ | (159.5 | ) | |||||
System Test |
54.0 | 34.0 | 20.0 | |||||||||
Wireless Test |
25.4 | 21.5 | 3.9 | |||||||||
Industrial Automation |
(6.4 | ) | (9.8 | ) | 3.4 | |||||||
Corporate and Eliminations (1) |
(12.2 | ) | 1.1 | (13.3 | ) | |||||||
| $ | 238.6 | $ | 384.0 | $ | (145.4 | ) | ||||||
| (1) | Included in Corporate and Eliminations are legal and environmental fees, interest income, interest expense, net foreign exchange gains (losses), pension, intercompany eliminations, acquisition related charges and compensation and for the three months ended July 4, 2021, loss on convertible debt conversions. |
The decrease in income before income taxes in Semiconductor Test was driven primarily by lower revenues in compute processor and mobile applications, and lower memory test sales of flash memory testers. The increase in income before income taxes in System Test was primarily due to higher sales in Storage Test of system level and hard disk drive testers. The rise in income before taxes in Wireless Test was driven primarily by an increase in connectivity test products. The lower losses before taxes in Industrial Automation was driven primarily by higher demand for UR’s collaborative robotic arms and MiR’s autonomous mobile robots.
33
Income Taxes
The effective tax rate for the three months ended July 3, 2022 and July 4, 2021 was 17.1% and 14.5%, respectively. The increase in the effective tax rate from the three months ended July 4, 2021 to the three months ended July 3, 2022 was primarily attributable to a shift in the geographic distribution of income, which increases the income subject to taxation in higher tax rate jurisdictions relative to lower tax rate jurisdictions, a reduction in the benefit related to the international provisions of the U.S. Tax Cuts and Jobs Act of 2017 and an increase in
non-deductible
officers’ compensation. These increases in expense were partially offset by an increase in benefit from tax credits. Six Months 2022 Compared to Six Months 2021
Revenues
Revenues by our reportable segments were as follows:
For the Six Months Ended |
||||||||||||
July 3, 2022 |
July 4, 2021 |
Dollar Change |
||||||||||
(in millions) |
||||||||||||
Semiconductor Test |
$ | 1,023.7 | $ | 1,362.0 | $ | (338.3 | ) | |||||
System Test |
253.4 | 237.7 | 15.7 | |||||||||
Industrial Automation |
204.2 | 172.1 | 32.1 | |||||||||
Wireless Test |
115.4 | 95.8 | 19.6 | |||||||||
Corporate and Eliminations |
(0.5 | ) | (0.3 | ) | (0.2 | ) | ||||||
| $ | 1,596.1 | $ | 1,867.3 | $ | (271.1 | ) | ||||||
The decrease in Semiconductor Test revenues of $338.3 million, or 24.8%, was driven primarily by lower tester sales in high performance compute processor and mobile applications, and lower memory test sales of flash memory testers. The increase in System Test revenues of $15.7 million, or 6.6%, was primarily due to higher sales in Defense/Aerospace and in Production Board Test. The increase in Industrial Automation revenues of $32.1 million, or 18.7%, was driven primarily by higher demand for UR’s collaborative robotic arms and MiR’s autonomous mobile robots. The rise in Wireless Test revenues of $19.6 million, or 20.5%, was primarily due to increase in connectivity test.
Revenues by country as a percentage of total revenues were as follows (1):
For the Six Months Ended |
||||||||
July 3, 2022 |
July 4, 2021 |
|||||||
Taiwan |
22 | % | 40 | % | ||||
China |
16 | 17 | ||||||
Korea |
15 | 9 | ||||||
United States |
15 | 9 | ||||||
Europe |
9 | 6 | ||||||
Thailand |
5 | 5 | ||||||
Japan |
5 | 4 | ||||||
Malaysia |
5 | 3 | ||||||
Philippines |
3 | 5 | ||||||
Singapore |
3 | 2 | ||||||
Rest of World |
2 | — | ||||||
| 100 | % | 100 | % | |||||
| (1) | Revenues attributable to a country are based on location of customer site. |
34
Gross Profit
Our gross profit was as follows:
For the Six Months Ended |
||||||||||||
July 3, |
July 4, |
Dollar/Point |
||||||||||
2022 |
2021 |
Change |
||||||||||
(in millions) |
||||||||||||
Gross profit |
$ | 961.3 | $ | 1,108.6 | $ | (147.3 | ) | |||||
Percent of total revenues |
60.2 | % | 59.4 | % | 0.8 | |||||||
Gross profit as a percent of revenue increased by 0.8 points, primarily due to favorable product mix in Semiconductor Test, partially offset by higher material costs due to inflation.
Selling and Administrative
Selling and administrative expenses were as follows:
For the Six Months Ended |
||||||||||||
July 3, |
July 4, |
Dollar |
||||||||||
2022 |
2021 |
Change |
||||||||||
(in millions) |
||||||||||||
Selling and administrative |
$ | 279.7 | $ | 270.0 | $ | 9.7 | ||||||
Percent of total revenues |
17.5 | % | 14.5 | % | ||||||||
The increase of $9.7 million in selling and administrative expenses was primarily due to higher spending in Industrial Automation, and Semiconductor Test, partially offset by lower variable compensation.
Engineering and Development
Engineering and development expenses were as follows:
For the Six Months Ended |
||||||||||||
July 3, |
July 4, |
Dollar |
||||||||||
2022 |
2021 |
Change |
||||||||||
(in millions) |
||||||||||||
Engineering and development |
$ | 220.1 | $ | 210.4 | $ | 9.7 | ||||||
Percent of total revenues |
13.8 | % | 11.3 | % | ||||||||
The increase of $9.7 million in engineering and development expenses was due to higher spending primarily in Semiconductor Test and Industrial Automation, partially offset by lower variable compensation.
Restructuring and Other
During the six months ended July 3, 2022, we recorded a charge of $14.7 million related to the arbitration claim filed against Teradyne and AutoGuide related to an
earn-out
dispute, which was settled on March 25, 2022 for $26.7 million, and a charge of $2.0 million for an increase in environmental and legal liabilities. Previously, in the three months ended December 31, 2021, we recorded a charge of $12.0 million related to this earn-out
dispute During the six months ended July 4, 2021, we recorded a gain of $7.2 million for the decrease in the fair value of the AutoGuide contingent consideration liability, partially offset by a charge of $1.7 million for an increase in environmental and legal liabilities.
35
Interest and Other
For the Six Months Ended |
||||||||||||
July 3, |
July 4, |
Dollar |
||||||||||
2022 |
2021 |
Change |
||||||||||
(in millions) |
||||||||||||
| Interest income |
$ | (1.7 | ) | $ | (1.4 | ) | $ | (0.3 | ) | |||
| Interest expense |
1.9 | 11.6 | (9.7 | ) | ||||||||
| Other (income) expense, net |
14.6 | 3.7 | 10.9 | |||||||||
Interest expense decreased by $9.7 million primarily due to the January 1, 2022 adoption of ASU
2020-06
which eliminated the amortization of the debt discount which was $6.9 million in the six months ended July 4, 2021. Other (income) expense, net increased by $10.9 million primarily due to changes in unrealized gains/losses on equity securities, from a $2.6 million gain in 2021 to an $8.8 million loss in 2022, partially offset by lower losses on convertible debt early conversions. Income (Loss) Before Income Taxes
For the Six Months Ended |
||||||||||||
July 3, |
July 4, |
Dollar |
||||||||||
2022 |
2021 |
Change |
||||||||||
(in millions) |
||||||||||||
| Semiconductor Test |
$ | 327.5 | $ | 513.7 | $ | (186.2 | ) | |||||
| System Test |
95.4 | 85.0 | 10.4 | |||||||||
| Wireless Test |
44.0 | 31.1 | 12.9 | |||||||||
| Industrial Automation |
(11.5 | ) | (22.8 | ) | 11.3 | |||||||
| Corporate and Eliminations (1) |
(36.4 | ) | 1.1 | (37.5 | ) | |||||||
| |
|
|
|
|
|
|||||||
| $ | 419.0 | $ | 608.0 | $ | (189.0 | ) | ||||||
| |
|
|
|
|
|
|||||||
| (1) | Included in Corporate and Eliminations are legal and environmental fees, contingent consideration adjustments, interest income, interest expense, net foreign exchange gains (losses), pension, intercompany eliminations, acquisition related charges and compensation and for the six months ended July 4, 2021, loss on convertible debt conversions. |
The decrease in income before income taxes in Semiconductor Test was driven primarily by lower revenues in compute processor and mobile applications, and lower memory test sales of flash memory testers. The increase in income before income taxes in System Test was primarily due to higher sales in Defense/Aerospace and in Production Board Test. The rise in income before taxes in Wireless Test was driven primarily by an increase in connectivity test products. The reduction in losses before taxes in Industrial Automation was driven primarily by higher demand for UR’s collaborative robotic arms and MiR’s autonomous mobile robots. The loss before income taxes in Corporate and Eliminations was primarily due to legal settlement charges related to litigation for the
earn-out
dispute in connection with the AutoGuide acquisition. Income Taxes
The effective tax rate for the six months ended July 3, 2022 and July 4, 2021 was 14.1% and 12.2%, respectively. The increase in the effective tax rate from the six months ended July 4, 2021 to the six months ended July 3, 2022 was primarily attributable to a shift in the geographic distribution of income, which increases the income subject to taxation in higher tax rate jurisdictions relative to lower tax rate jurisdictions, a reduction in the benefit related to the international provisions of the U.S. Tax Cuts and Jobs Act of 2017 and an increase in
non-deductible
officers’ compensation. These increases in expense were partially offset by increases in benefit from tax credits and discrete benefit related to equity compensation. Contractual Obligations
There have been no changes outside of the ordinary course of business to our contractual obligations as disclosed in our Annual Report on Form
10-K
for the year ended December 31, 2021. 36
Liquidity and Capital Resources
Our cash, cash equivalents, and marketable securities balances decreased by $606.4 million in the six months ended July 3, 2022 to $893.9 million.
Operating activities during the six months ended July 3, 2022 provided cash of $122.9 million. Changes in operating assets and liabilities used cash of $309.1 million. This was due to a $287.8 million increase in operating assets and a $21.3 million decrease in operating liabilities.
The increase in operating assets was due to a $146.4 million increase in accounts receivable, a $94.8 million prepayments and other assets due to prepayments to our contract manufacturers, and a $46.7 million increase in inventories.
The decrease in operating liabilities was due to a $61.7 million decrease in accrued employee compensation, a $6.9 million decrease in other accrued liabilities, and $2.6 million of retirement plan contributions, partially offset by a $25.0 million increase in accounts payable, a $14.2 million increase in deferred revenue and customer advance payments, and a $10.8 million increase in income taxes.
Investing activities during the six months ended July 3, 2022 used cash of $54.3 million due to $247.9 million used for purchases of marketable securities, and $89.7 million used for purchases of property, plant and equipment, partially offset by $139.7 million and $143.6 million in proceeds from maturities and sales of marketable securities, respectively.
Financing activities during the six months ended July 3, 2022 used cash of $626.8 million due to $532.8 million used for the repurchase of 5.0 million shares of common stock at an average price of $107.5 per share, $42.3 million used for payments of convertible debt principal, $35.4 million used for dividend payments, and $32.8 million used for payment related to net settlements of employee stock compensation awards, partially offset by $16.5 million from the issuance of common stock under employee stock purchase and stock option plans.
Operating activities during the six months ended July 4, 2021 provided cash of $244.4 million. Changes in operating assets and liabilities used cash of $373.6 million. This was due to a $470.2 million increase in operating assets and a $96.6 million increase in operating liabilities.
The increase in operating assets was due to a $372.7 million increase in accounts receivable due to greater sales, a $117.4 million increase in prepayments and other assets due to prepayments to our contract manufacturers as a result of higher forecasted revenues, partially offset by a $19.9 million decrease in inventories.
The change in operating liabilities was due to increases of $78.5 million in other accrued liabilities, $22.3 million in accounts payable, and $15.2 million in deferred revenue and customer advance payments, partially offset by a $14.0 million decrease in accrued employee compensation, $2.7 million of retirement plan contributions, and a $2.6 million decrease in income taxes.
Investing activities during the six months ended July 4, 2021 provided cash of $92.3 million due to $460.2 million and $116.1 million in proceeds from maturities and sales of marketable securities, respectively, partially offset by $398.1 million used for purchases of marketable securities, $74.0 million used for purchases of property, plant and equipment and $12.0 million used for an investment in MachineMetrics, Inc.
Financing activities during the six months ended July 4, 2021 used cash of $295.9 million due to $66.8 million used for payments of convertible debt principal, $196.6 million used for the repurchase of 1.6 million shares of common stock at an average price of $125.69 per share, $31.8 million used for payments related to net settlements of employee stock compensation awards, and $33.3 million used for dividend payments, partially offset by $32.6 million from the issuance of common stock under employee stock purchase and stock option plans.
In January 2022 and May 2022, Teradyne’s Board of Directors declared a quarterly cash dividend of $0.11 per share. Dividend payments for the three and six months ended July 3, 2022 were $17.5 million and $35.4 million, respectively.
In January 2021 and May 2021, Teradyne’s Board of Directors declared a quarterly cash dividend of $0.10 per share. Dividend payments for the three and six months ended July 4, 2021 were $16.6 million and $33.3 million, respectively.
37
In January 2021, our Board of Directors approved a new repurchase program for up to $2.0 billion of common stock. Unless terminated by resolution of our Board of Directors, the repurchase program will expire when we have repurchased all shares authorized for repurchase under the share repurchase program. We intend to repurchase a minimum of $750.0 million in 2022.
During the six months ended July 3, 2022, Teradyne repurchased 5.0 million shares of common stock for $532.8 million at an average price of $107.5 per share. During the six months ended July 4, 2021, Teradyne repurchased 1.6 million shares of common stock for $196.6 million at an average price of $125.69 per share. The cumulative repurchases under the $2.0 billion common stock repurchase program as of July 3, 2022 were 9.7 million shares of common stock for $1,132.8 million at an average price per share of $116.45.
While we declared a quarterly cash dividend and authorized a share repurchase program, we may reduce or eliminate the cash dividend or share repurchase program in the future. Future cash dividends and stock repurchases are subject to the discretion of our Board of Directors, which will consider, among other things, our earnings, capital requirements and financial condition.
On May 1, 2020, we entered into a credit agreement providing a three-year, senior secured revolving credit facility of $400 million. On December 10, 2021, the credit agreement was amended to extend the senior secured revolving credit facility to December 10, 2026. As of August 5, 2022, we have not borrowed any funds under the credit facility.
We believe our cash, cash equivalents and marketable securities balance will be sufficient to pay our quarterly dividend and meet our working capital and expenditure needs for at least the next twelve months. At this time, the
COVID-19
pandemic has not had an impact on our liquidity, but there is no assurance that continued impacts resulting from the pandemic will not have an adverse effect in the future. Equity Compensation Plans
As discussed in Note Q: “Stock-Based Compensation” in our 2021 Annual Report on Form
10-K,
we have a 1996 Employee Stock Purchase Plan and a 2006 Equity and Cash Compensation Incentive Plan (the “2006 Equity Plan”). The purpose of the 1996 Employee Stock Purchase Plan is to encourage stock ownership by all eligible employees of Teradyne. The purpose of the 2006 Equity Plan is to provide equity ownership and compensation opportunities in Teradyne to our employees, officers, directors, consultants and/or advisors. Both plans were approved by our shareholders.
Recently Issued Accounting Pronouncements
For the six months ended July 3, 2022, there were no recently issued accounting pronouncements that had, or are expected to have, a material impact to our consolidated financial statements.
Item 3: |
Quantitative and Qualitative Disclosures about Market Risks |
For “Quantitative and Qualitative Disclosures about Market Risk” affecting Teradyne, see Part 2 Item 7A, “Quantitative and Qualitative Disclosures about Market Risks,” in our Annual Report on Form
10-K
filed with the SEC on February 23, 2022. There were no material changes in our exposure to market risk from those set forth in our Annual Report on Form 10-K
for the fiscal year ended December 31, 2021. In addition to market risks described in our Annual Report on Form
10-K,
we have an equity price risk related to the fair value of our convertible senior unsecured notes issued in December 2016. In December 2016, Teradyne issued $460 million aggregate principal amount of 1.25% convertible senior unsecured notes (the “Notes”) due December 15, 2023. As of July 3, 2022, $74.7million of principal remained outstanding and the Notes had a fair value of $233.3 million. The table below provides a sensitivity analysis of hypothetical 10% changes of Teradyne’s stock price as of the end of the second quarter of 2022 and the estimated impact on the fair value of the Notes. The selected scenarios are not predictions of future events, but rather are intended to illustrate the effect such event may have on the fair value of the Notes. The fair value of the Notes is subject to equity price risk due to the convertible feature. The fair value of the Notes will generally increase as Teradyne’s common stock price increases and will generally decrease as the common stock price declines in value. The change in stock price affects the fair value of the Notes, but does not impact Teradyne’s financial position, cash flows or results of operations due to the fixed nature of the debt obligation. Additionally, we carry the Notes at face value less unamortized discount on our balance sheet, and we present the fair value for required disclosure purposes only. In connection with the offering of the Notes we also sold warrants to the option counterparties. These transactions have been accounted for as an adjustment to our shareholders’ equity. The convertible note hedge transactions are expected to reduce the potential equity dilution upon conversion of the Notes. The warrants along with any shares issuable upon conversion of the Notes will have a dilutive effect on our earnings per share to the extent that the average market price of our common stock for a given reporting period exceeds the applicable strike price or conversion price of the warrants or Notes, respectively. 38
Hypothetical Change in Teradyne Stock Price |
Fair Value |
Estimated change in fair value |
Hypothetical percentage increase (decrease) in fair value |
|||||||||
| 10% Increase |
$ | 253,683 | $ | 20,344 | 8.7 | % | ||||||
| No Change |
233,339 | — | — | |||||||||
| 10% Decrease |
212,995 | (20,344 | ) | (8.7 | ) | |||||||
Item 4: |
Controls and Procedures |
As of the end of the period covered by this report, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule
13a-15(b)
or Rule 15d-15(f)
promulgated under the Exchange Act. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective in ensuring that material information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, including ensuring that such material information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. There have been no changes in our internal control over financial reporting (as defined in Rules
13a-15(f)
and 15d-15(f)
under the Exchange Act) during the three months ended July 3, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. PART II. OTHER INFORMATION
Item 1: |
Legal Proceedings |
We are subject to various legal proceedings and claims which have arisen in the ordinary course of business such as, but not limited to, patent, employment, commercial and environmental matters. Teradyne believes that it has meritorious defenses against all pending claims and intends to vigorously contest them. While it is not possible to predict or determine the outcomes of any pending claims or to provide possible ranges of losses that may arise, Teradyne believes the potential losses associated with all of these actions are unlikely to have a material adverse effect on its business, financial position or results of operations.
On March 8, 2021, Industrial Automation LLC submitted a demand for arbitration against Teradyne and AutoGuide in Wilmington, Delaware alleging that Teradyne and AutoGuide breached certain provisions of the Membership Interests Purchase Agreement (the “Purchase Agreement”), dated as of October 18, 2019, among Industrial Automation LLC, Teradyne and AutoGuide. The arbitration demand sought full acceleration of the maximum
earn-out
amount payable under the Purchase Agreement, or $106.9 million, for the alleged breach of the earn-out
provisions of the Purchase Agreement. On March 25, 2022, the arbitration claim was settled for $26.7 million. As a result, Teradyne has no remaining earn-out
obligations. Item 1A: |
Risk Factors |
In addition to other information set forth in this Form
10-Q,
including the risk discussed below, you should carefully consider the factors discussed in Part I, “Item 1A: Risk Factors” in our Annual Report on Form 10-K
for the year ended December 31, 2021, which could materially affect our business, financial condition or future results. The risk factors described in our Annual Report on Form 10-K
remain applicable to our business and many of these risks could be further increased due to the COVID-19
pandemic. The risks described in our Annual Report on Form
10-K
are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results. 39
The global supply shortage of electrical components and inflationary cost increases has impacted our ability to meet customer demand and could adversely affect our business and financial results
There is currently a global supply shortage of electrical components, including semiconductor chips. As a result, we have experienced, and expect to continue to experience, increases in our lead times and costs for certain components for certain products and delays in the delivery of some orders placed by our customers. While not material, year to date 2022, in an effort to mitigate these risks, in some cases, we have incurred higher costs due to investment in supply chain resiliency and to secure available inventory or have extended or placed
non-cancellable
purchase commitments with semiconductor suppliers, which introduces inventory risk if our forecasts and assumptions prove inaccurate. We have also sourced components from additional suppliers and multi-sourced and pre-ordered
components and finished goods inventory in some cases in an effort to reduce the impact of the adverse supply chain conditions we have experienced. However, if we are unable to secure manufacturing capacities from our current or new suppliers and contract manufacturers, on acceptable terms or at all, or successfully manage our purchase commitments and inventory for components, our ability to deliver our products to our customers in the desired quantities, at competitive prices or in a timely manner may be negatively impacted for the remainder of 2022 and into 2023. In the second quarter 2022, we were unable to supply approximately $40 million of revenue in our test businesses for which we had customer demand. Our third quarter 2022 forecast excludes approximately $50 million of revenue, primarily in our test businesses, due to these continued supply chain constraints. Also, our suppliers and contract manufacturers have increased their prices, which increased our cost of products. We have been and may continue to be, affected by wage inflation. We have, and may continue to attempt to, offset the effect of these inflationary pressures by increasing the prices of our products. However, we may not be fully able to pass additional costs on to our customers, which could have a negative impact on our results of operations and financial condition. Item 2: |
Unregistered Sales of Equity Securities and Use of Proceeds |
In January 2021, Teradyne’s Board of Directors approved a new repurchase program for up to $2.0 billion of common stock. During the six months ended July 3, 2022, Teradyne repurchased 5.0 million shares of common stock for $532.8 million at an average price of $107.5 per share. During the six months ended July 4, 2021, Teradyne repurchased 1.6 million shares of common stock for $196.6 million at an average price of $125.69 per share. The cumulative repurchases under the $2.0 billion common stock repurchase program as of July 3, 2022 were 9.7 million shares of common stock for $1,132.8 million at an average price per share of $116.45.
The following table includes information with respect to repurchases we made of our common stock during the three months ended July 3, 2022 (in thousands except per share price):
| Period |
(a) Total Number of Shares (or Units) Purchased |
(b) Average Price Paid per Share (or Unit) |
(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs |
(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that may Yet Be Purchased Under the Plans or Programs |
||||||||||||
| April 4, 2022 - May 1, 2022 |
853 | $ | 111.53 | 852 | $ | 1,103,537 | ||||||||||
| May 2, 2022 - May 29, 2022 |
989 | $ | 104.60 | 974 | $ | 1,001,700 | ||||||||||
| May 30, 2022 - July 3, 2022 |
1,381 | $ | 97.45 | 1,380 | $ | 867,202 | ||||||||||
| |
|
|
|
|
|
|||||||||||
| 3,223 | (1) | $ | 103.37 | (1) | 3,206 | |||||||||||
| |
|
|
|
|
|
|||||||||||
| (1) | Includes approximately seventeen thousand shares at an average price of $109.12 withheld from employees for the payment of taxes. |
We satisfy U.S. federal and state minimum withholding tax obligations due upon the vesting and the conversion of restricted stock units into shares of our common stock, by automatically withholding from the shares being issued, a number of shares with an aggregate fair market value on the date of such vesting and conversion that would satisfy the minimum withholding amount due.
Item 4: |
Mine Safety Disclosures |
Not Applicable
Item 6: |
Exhibits |
40
Exhibit Number |
Description | |
| 32.1 | Certification of Principal Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith) | |
| 32.2 | Certification of Principal Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith) | |
| 101.INS | Inline XBRL Instance Document | |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL, and contained in Exhibit 101) | |
41
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
TERADYNE, INC. |
| Registrant |
| /s/ S ANJAY MEHTA |
| Sanjay Mehta Vice President, Chief Financial Officer and Treasurer (Duly Authorized Officer and Principal Financial Officer) August 5, 2022 |
42
TABLE OF CONTENTS
Part IItem 1: Financial StatementsItem 2: Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3: Quantitative and Qualitative Disclosures About Market RisksItem 4: Controls and ProceduresPart II. Other InformationItem 1: Legal ProceedingsItem 1A: Risk FactorsItem 2: Unregistered Sales Of Equity Securities and Use Of ProceedsItem 4: Mine Safety DisclosuresItem 6: Exhibits