Quarterly Report (10-q)

Date : 11/09/2019 @ 1:55AM
Source : Edgar (US Regulatory)
Stock : Teradyne Inc (TER)
Quote : 61.78  0.0 (0.00%) @ 9:51PM
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Last $ 62.00 ▲ 0.22 (0.36%)

Quarterly Report (10-q)

false36020190000097210Q3December 31In the nine months ended September 29, 2019, Teradyne paid $30.8 million and $3.8 million of contingent consideration for the earn-outs in connection with the acquisition of MiR and Universal Robots, respectively. In the nine months ended September 30, 2018, Teradyne paid $24.6 million of contingent consideration for the earn-out in connection with the acquisition of Universal Robots.In the three and nine months ended September 29, 2019, the fair value of contingent consideration for the earn-out in connection with the acquisition of MiR was decreased by $7.8 million and $16.5 million, respectively, primarily due to a decrease in the forecasted revenue, partially offset by impact from the modification, in the three months ended September 29, 2019, of the earn-out structure. In the three and nine months ended September 30, 2018, the fair value of contingent consideration for the earn-out in connection with the acquisition of Universal Robots A/S (“Universal Robots”) was decreased by $0.8 million and $9.2 million, respectively, primarily due to a decrease in forecasted revenue.The carrying value represents the bifurcated debt component only, while the fair value is based on quoted market prices for the convertible note, which includes the equity conversion features.$0.7 million of amortizable intangible assets became fully amortized and have been eliminated from the gross carrying amount and accumulated amortization. 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 of $31.70, multiplied by 14.5 million shares. The result of this calculation, representing the total intrinsic value of the convertible debt, was divided by the average Teradyne stock price for the period.Convertible note hedge warrant shares were calculated using the difference between the average Teradyne stock price for the period and the warrant price of $39.78, multiplied by 14.5 million shares. The result of this calculation, representing the total intrinsic value of the warrant, was divided by the average Teradyne stock price for the period. Included in Corporate and Other are: contingent consideration adjustments, severance charges, interest income, interest expense, net foreign exchange gains (losses), intercompany eliminations, acquisition related charges, and pension and postretirement plans actuarial losses.Included in the income (loss) before income taxes for each of the segments are charges and credits related to restructuring and other and inventory charges.Total business assets are directly attributable to each business. 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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 September 29, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the transition period from                    to                    
Commission File No.
 001-06462
 
TERADYNE, INC.
(Exact name of registrant as specified in its charter)
 
     
Massachusetts
 
04-2272148
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
     
600 Riverpark Drive, North Reading,
Massachusetts
 
01864
(Address of Principal Executive Offices)
 
(Zip Code)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
978-370-2700
(Registrant’s Telephone Number, Including Area Code)
 
Securities registered pursuant to Section 12(b) of the Act:
         
Title of each class
 
Trading 
Symbol(s)
 
Name of each exchange
on which registered
Common Stock
, par value $0.125 per share
 
TER
 
Nasdaq Stock Market LLC
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
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)    
Yes
  
    No  
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):
Large accelerated filer
 
 
Accelerated filer
 
 
 
 
 
 
 
 
Non-accelerated filer
 
 
Emerging growth company
 
 
 
 
 
 
 
 
Smaller reporting company
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
I
f 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 November 4, 2019 was 167,577,669 shares.
 
 
 
     
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

TERADYNE, INC.
INDEX
             
 
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1
 
 
 
 
 
 
 
 
 
 
 
2
 
 
 
 
 
 
 
 
 
 
 
3
 
 
 
 
 
 
 
 
 
 
 
4
 
 
 
 
 
 
 
 
 
 
 
5
 
 
 
 
 
 
 
 
 
 
 
6
 
 
 
 
 
 
 
 
Item 2.
 
 
 
33
 
 
 
 
 
 
 
 
Item 3.
 
 
 
44
 
 
 
 
 
 
 
 
Item 4.
 
 
 
44
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 1.
 
 
 
45
 
 
 
 
 
 
 
 
Item 1A.
 
 
 
45
 
 
 
 
 
 
 
 
Item 2.
 
 
 
45
 
 
 
 
 
 
 
 
Item 4.
 
 
 
46
 
 
 
 
 
 
 
 
Item 6.
 
 
 
46
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
PART I
Item 1:
Financial Statements
 
 
 
 
 
 
 
 
 
 
 
TERADYNE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
                 
 
September 29,
2019
 
 
December 31,
2018
 
 
(in thousands,
except per share amount)
 
ASSETS
 
 
 
 
Current assets:
   
     
 
Cash and cash equivalents
  $
593,939
    $
926,752
 
Marketable securities
   
342,538
     
190,096
 
Accounts receivable, less allowance for doubtful accounts of $1,770 and $1,673 at September 29, 2019 and December 31, 2018, respectively
   
357,886
     
291,267
 
Inventories, net
   
178,203
     
153,541
 
Prepayments and other current assets
   
182,013
     
170,826
 
                 
Total current assets
   
1,654,579
     
1,732,482
 
Property, plant and equipment, net
   
307,567
     
279,821
 
Operating lease
right-of-use
assets, net
   
57,595
     
—  
 
Marketable securities
   
103,558
     
87,731
 
Deferred tax assets
   
69,120
     
70,848
 
Other assets
   
22,724
     
11,509
 
Retirement plans assets
   
16,358
     
16,883
 
Acquired intangible assets, net
   
96,573
     
125,482
 
Goodwill
   
370,717
     
381,850
 
                 
Total assets
  $
2,698,791
    $
2,706,606
 
                 
LIABILITIES
 
 
 
 
Current liabilities:
   
     
 
Accounts payable
  $
117,936
    $
100,688
 
Accrued employees’ compensation and withholdings
   
127,912
     
148,566
 
Deferred revenue and customer advances
   
95,936
     
77,711
 
Other accrued liabilities
   
93,736
     
78,272
 
Operating
lease liabilities
   
18,386
     
—  
 
Contingent consideration
   
6,297
     
34,865
 
Income taxes payable
   
33,508
     
36,185
 
                 
Total current liabilities
   
493,711
     
476,287
 
Retirement plans liabilities
   
121,340
     
117,456
 
Long-term deferred revenue and customer advances
   
42,592
     
32,750
 
Deferred tax liabilities
   
15,390
     
20,662
 
Long-term other accrued liabilities
   
9,803
     
37,547
 
Long-term contingent consideration
   
11,783
     
35,678
 
Long-term operating lease liabilities
   
46,813
     
—  
 
Long-term income taxes payable
   
83,782
     
83,891
 
Debt
   
390,942
     
379,981
 
                 
Total liabilities
   
1,216,156
     
1,184,252
 
                 
Commitments and contingencies (See Note S)
   
     
 
SHAREHOLDERS’ EQUITY
 
 
 
 
Common stock, $0.125 par value, 1,000,000 shares authorized; 168,490 and 175,522 shares issued and outstanding at September 29, 2019 and December 31, 2018, respectively
   
21,061
     
21,940
 
Additional
paid-in
capital
   
1,712,185
     
1,671,645
 
Accumulated other comprehensive loss
   
(24,221
)    
(13,040
)
Accumulated deficit
   
(226,390
)    
(158,191
)
                 
Total shareholders’ equity
   
1,482,635
     
1,522,354
 
                 
Total liabilities and shareholders’ equity
  $
2,698,791
    $
2,706,606
 
                 
 
 
 
 
 
 
 
 
 
 
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, 2018, 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 Nine Months
Ended
 
 
September 29,
2019
 
 
September 30,
2018
 
 
September 29,
2019
 
 
September 30,
2018
 
 
(in thousands, except per share amount)
 
Revenues:
   
     
     
     
 
Products
  $
488,170
    $
470,994
    $
1,339,123
    $
1,308,969
 
Services
   
93,868
     
95,854
     
301,192
     
272,275
 
                                 
Total revenues
   
582,038
     
566,848
     
1,640,315
     
1,581,244
 
Cost of revenues:
   
     
     
     
 
Cost of products
   
197,196
     
195,339
     
555,863
     
557,074
 
Cost of services
   
39,804
     
37,816
     
127,861
     
113,311
 
                                 
Total cost of revenues (exclusive of acquired intangible assets amortization shown separately below)
   
237,000
     
233,155
     
683,724
     
670,385
 
                                 
Gross profit
   
345,038
     
333,693
     
956,591
     
910,859
 
Operating expenses:
   
     
     
     
 
Selling and administrative
   
109,166
     
100,199
     
319,990
     
290,115
 
Engineering and development
   
77,804
     
77,049
     
236,030
     
226,799
 
Acquired intangible assets amortization
   
9,647
     
11,142
     
30,363
     
28,633
 
Restructuring and other
   
(6,500
)    
1,710
     
(11,792
)    
3,785
 
                                 
Total operating expenses
   
190,117
     
190,100
     
574,591
     
549,332
 
                                 
Income from operations
   
154,921
     
143,593
     
382,000
     
361,527
 
Non-operating
(income) expense:
   
     
     
     
 
Interest income
   
(5,159
)    
(6,213
)    
(18,641
)    
(17,620
)
Interest expense
   
5,682
     
5,557
     
17,195
     
18,087
 
Other (income) expense, net
   
2,665
     
3,405
     
6,557
     
4,385
 
                                 
Income before income taxes
   
151,733
     
140,844
     
376,889
     
356,675
 
Income tax provision
   
15,873
     
20,863
     
34,494
     
48,684
 
                                 
Net income
  $
135,860
    $
119,981
    $
342,395
    $
307,991
 
                                 
Net income per common share:
   
     
     
     
 
Basic
  $
0.80
    $
0.65
    $
2.00
    $
1.62
 
                                 
Diluted
  $
0.75
    $
0.63
    $
1.92
    $
1.57
 
                                 
Weighted average common shares—basic
   
169,641
     
185,744
     
171,471
     
190,576
 
                                 
Weighted average common shares—diluted
   
180,494
     
190,505
     
178,685
     
196,300
 
                                 
 
 
 
 
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, 2018, 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 Nine Months
Ended
 
 
September 29,
2019
 
 
September 30,
2018
 
 
September 29,
2019
 
 
September 30,
2018
 
 
(in thousands)
 
Net income
  $
135,860
    $
119,981
    $
342,395
    $
307,991
 
Other comprehensive income, net of tax:
   
     
     
     
 
Foreign currency translation adjustment, net of tax of $0
   
(18,002
)    
7,213
     
(17,019
)    
(11,568
)
Available-for-sale
marketable securities:
   
     
     
     
 
Unrealized gains (losses) on marketable securities arising during period, net of
tax of $507, $(62), $1,762, $(806), respectively
   
1,754
     
(66
)    
6,391
     
(2,555
)
Less: Reclassification adjustment for (gains) losses included in net income, net of tax of $(99), $(17), $(125), $(6), respectively
   
(345
)    
(57
)    
(442
)    
1,411
 
                                 
   
1,409
     
(123
)    
5,949
     
(1,144
)
Defined benefit pension and post-retirement plans:
   
     
     
     
 
Amortization of prior service benefit included in net periodic pension and post-retirement benefit, net of tax of $(11), $(18), $(32), $(53), respectively
   
(37
)    
(61
)    
(111
)    
(184
)
                                 
Other comprehensive
(loss) 
income
   
(16,630
)    
7,029
     
(11,181
)    
(12,896
)
                                 
Comprehensive income
  $
119,230
    $
127,010
    $
331,214
    $
295,095
 
                                 
 
 
 
 
 
 
 
 
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, 2018, are an integral part of the condensed
consolidated financial statements.
 
3
 

 
TERADYNE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited)
                                                 
 
 
 
 
 
 
 
 
 
 
Common
Stock
Shares
Issued
   
Common
Stock
 
Par
Value
   
Additional
Paid-in

Capital
   
Accumulated
Other
Comprehensive
(
Loss
) Income
   
Accumulated
Deficit
   
Total
Shareholders’
Equity
 
 
(in thousands)
 
For the Three Months Ended September 29, 2019
 
 
Balance, June 30, 2019
   
170,436
    $
21,305
    $
1,688,211
 
 
  $
(7,591
)   $
(222,513
)   $
1,479,412
 
Net issuance of common stock under stock-based plans
   
377
     
46
     
14,041
     
     
     
14,087
 
Stock-based compensation expense
   
     
     
9,933
     
     
     
9,933
 
Repurchase of common stock
   
(2,323
)    
(290
)    
     
     
(124,473
)    
(124,763
)
Cash dividends ($0.09 per share)
   
     
     
     
     
(15,264
)    
(15,264
)
Net income
   
     
     
     
     
135,860
     
135,860
 
Other comprehensive
loss
   
     
     
     
(16,630
)    
     
(16,630
)
                                                 
Balance, September 
29
, 2019
   
168,490
    $
21,061
    $
1,712,185
    $
(24,221
)   $
(226,390
)   $
1,482,635
 
                                                 
For the Three Months Ended September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, July 1, 2018
   
187,962
    $
23,495
    $
1,645,679
    $
(3,504
)   $
74,270
    $
1,739,940
 
Net issuance of common stock under stock-based plans
   
332
     
42
     
10,056
     
     
     
10,098
 
Stock-based compensation expense
   
     
     
8,833
     
     
     
8,833
 
Repurchase of common stock
   
(5,005
)    
(626
)    
     
     
(200,846
)    
(201,472
)
Cash dividends ($0.09 per share)
   
     
     
     
     
(16,648
)    
(16,648
)
Net income
   
     
     
     
     
119,981
     
119,981
 
Other comprehensive income
   
     
     
     
7,028
     
     
7,028
 
                                                 
Balance, September 30, 2018
   
183,289
    $
22,911
    $
1,664,568
    $
3,524
    $
(23,243
)   $
1,667,760
 
                                                 
For the Nine Months Ended September 29, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2018
   
175,522
    $
21,940
    $
1,671,645
    $
(13,040
)   $
(158,191
)   $
1,522,354
 
Net issuance of common stock under stock-based plans
   
1,762
     
220
     
14,511
     
     
     
14,731
 
Stock-based compensation expense
   
     
     
26,029
     
     
     
26,029
 
Repurchase of common stock
   
(8,794
)    
(1,099
)    
     
     
(364,287
)    
(365,386
)
Cash dividends ($0.09 per share)
   
     
     
     
     
(46,307
)    
(46,307
)
Net income
   
     
     
     
     
342,395
     
342,395
 
Other comprehensive
loss
   
     
     
     
(11,181
)    
     
(11,181
)
                                                 
Balance, September 
29
, 2019
   
168,490
    $
21,061
    $
1,712,185
    $
(24,221
)   $
(226,390
)   $
1,482,635
 
                                                 
For the Nine Months Ended September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2017
   
195,548
    $
24,444
    $
1,638,413
    $
18,776
    $
272,013
    $
1,953,646
 
Net issuance of common stock under stock-based plans
   
1,584
     
197
     
1,813
     
     
     
2,010
 
Stock-based compensation expense
   
     
     
24,342
     
     
     
24,342
 
Repurchase of common stock
   
(13,843
)    
(1,730
)    
     
     
(566,930
)    
(568,660
)
Cash dividends ($0.09 per share)
   
     
     
     
     
(51,352
)    
(51,352
)
Net income
   
     
     
     
     
307,991
     
307,991
 
Other comprehensive
loss
   
     
     
     
(12,896
)    
     
(12,896
)
Reclassification of unrealized gains on equity securities
   
     
     
     
(3,125
)    
3,125
     
 
Reclassification of tax effects resulting from the Tax Reform Act
   
     
     
     
769
     
(769
)    
 
Cumulative effect of changes in accounting principle related to
 
revenue
recognition
   
     
     
     
     
12,679
     
12,679
 
                                                 
Balance, September 30, 2018
   
183,289
    $
22,911
    $
1,664,568
    $
3,524
    $
(23,243
)   $
1,667,760
 
                                                 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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, 2018, are an integral part of the
 
condensed
consolidated financial statements.
 
4
 

 
TERADYNE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
                 
 
For the Nine Months Ended
 
 
September 29,
2019
 
 
September 30,
2018
 
 
(in thousands)
 
Cash flows from operating activities:
   
     
 
Net income
  $
342,395
    $
307,991
 
Adjustments to reconcile net income to net cash provided by operating activities:
   
     
 
Depreciation
   
51,508
     
49,930
 
Amortization
   
36,849
     
32,909
 
Stock-based compensation
   
28,822
     
25,327
 
Deferred taxes
   
(2,977
)    
24,442
 
Provision for excess and obsolete inventory
   
8,848
     
9,522
 
Contingent consideration fair value adjustment
   
(16,460
)    
(9,236
)
Gains on marketable securities
   
(4,158
)    
(420
)
Retirement plan
s
actuarial losses
   
448
     
196
 
Other
   
610
     
936
 
Changes in operating assets and liabilities, net of businesses acquired:
   
     
 
Accounts receivable
   
(66,789
)    
(77,807
)
Inventories
   
(14,143
)    
(34,117
)
Prepayments and other assets
   
(16,118
)    
(28,719
)
Accounts payable and other liabilities
   
20,807
     
16,124
 
Deferred revenue and customer advances
   
27,779
     
9,823
 
Retirement plans contributions
   
(3,775
)    
(3,244
)
Income taxes
   
(31,224
)    
(33,152
)
                 
Net cash provided by operating activities
   
362,422
     
290,505
 
                 
Cash flows from investing activities:
   
     
 
Purchases of property, plant and equipment
   
(96,048
)    
(88,269
)
Proceeds from government subsidy for property, plant and equipment
   
—  
     
7,920
 
Purchases of marketable securities
   
(605,539
)    
(809,521
)
Proceeds from sales of marketable securities
   
60,274
     
843,164
 
Proceeds from maturities of marketable securities
   
393,472
     
934,100
 
Proceeds from life insurance
   
2,912
     
1,126
 
Purchase of investment and acquisition of businesses, net of cash acquired
   
(21,970
)    
(169,474
)
                 
Net cash (used for) provided by investing activities
   
(266,899
)    
719,046
 
                 
Cash flows from financing activities:
   
     
 
Issuance of common stock under stock purchase and stock option plans
   
29,280
     
20,959
 
Repurchase of common stock
   
(368,782
)    
(562,263
)
Dividend payments
   
(46,269
)    
(51,320
)
Payments related to net settlement of employee stock compensation awards
   
(14,550
)    
(19,841
)
Payments of contingent consideration
   
(27,615
)    
(13,571
)
                 
Net cash used for financing activities
   
(427,936
)    
(626,036
)
                 
Effects of exchange rate changes on cash and cash equivalents
   
(400
)    
661
 
                 
(Decrease) increase in cash and cash equivalents
   
(332,813
)    
384,176
 
Cash and cash equivalents at beginning of period
   
926,752
     
429,843
 
                 
Cash and cash equivalents at end of period
  $
593,939
    $
814,019
 
                 
 
 
 
 
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, 2018, 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 the consumer electronics, wireless, automotive, industrial, computing, communications, and aerospace and defense industries. Teradyne’s industrial automation products include collaborative robotic arms, autonomous mobile robots, and advanced robotic control software used by global manufacturing and light industrial customers to improve quality, increase manufacturing and material handling efficiency and decrease manufacturing costs. Teradyne’s automatic test equipment and industrial automation products and services include:
  semiconductor test (“Semiconductor Test”) systems;
 
 
 
 
 
  industrial automation (“Industrial Automation”) products;
 
 
 
 
 
  defense/aerospace (“Defense/Aerospace”) test instrumentation and systems, storage test (“Storage Test”) systems, and circuit-board test and inspection (“Production Board Test”) systems (collectively these products represent “System Test”); and
 
 
 
 
 
  wireless test (“Wireless Test”) systems.
 
 
 
 
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 were reclassified to conform to the current year presentation. The December 31, 2018 condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.
The accompanying financial information should be read in conjunction with the consolidated financial statements and notes thereto contained in Teradyne’s Annual Report on Form
10-K,
filed with the U.S. Securities and Exchange Commission (“SEC”) on March 1, 2019, for the year ended December 31, 2018.
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.
Investment in Other Company
Teradyne holds an investment in a private company that develops and sells advanced wearable technology. Teradyne does not have the ability to exert significant influence over the company. The investment was recorded at cost and is evaluated for impairment or an indication of changes in fair value resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer on a quarterly basis. See Note D: “Acquisitions and Investment in Other Company.”
Leases
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2016-02,
“Leases (Topic 842)”
(“Topic 842”), which requires a lessee to record a
right-of-use
(“ROU”) asset and a lease liability on the balance sheet for operating leases with terms longer than twelve months. Teradyne adopted this standard and the related amendments (collectively “ASC 842”) on January 1, 2019 and utilized the modified retrospective approach provided by ASU
2018-11,
“Leases (Topic 842): Targeted
Improvements,”
that allowed for a cumulative effect adjustment in the period of adoption. Under this method of adoption, the comparative information in the consolidated financial statements has not been revised and continues to be reported under the previously applicable lease accounting guidance (ASC 840). Teradyne also utilized the package of practical expedients permitted under the transition guidance which included the carry-forward of historical lease classification. Adoption of ASC 842 resulted in recording ROU assets and lease liabilities of approximately $50.1 million and $54.3 million, respectively. Operating lease liabilities were calculated using the discount rate on January 1, 2019. The adoption of ASC 842 did not have a material impact on beginning retained earnings, the consolidated statement of operations, cash flows, or earnings per share.
 
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Under ASC 842, a contract is or contains a lease when Teradyne has the right to control the use of an identified asset. Teradyne determines if an arrangement is a lease at inception of the contract, which is the date on which the terms of the contract are agreed to and the agreement creates enforceable rights and obligations. The commencement date of the lease is the date that the lessor makes an underlying asset available for use by Teradyne. As of September 29, 2019, Teradyne does not have material leases that have not yet commenced.
Teradyne determines if the lease is operating or finance at the lease commencement date based upon the terms of the lease and the nature of the asset. The lease term used to calculate the lease liability includes options to extend or terminate the lease when it is reasonably certain that the option will be exercised.
For leases commencing after January 1, 2019, the lease liability is measured at the present value of future lease payments, discounted using the discount rate for the lease at the commencement date. As Teradyne is typically unable to determine the implicit rate, Teradyne uses an incremental borrowing rate based on the lease term and economic environment at commencement date. Teradyne initially measures payments based on an index by using the applicable rate at lease commencement. Variable payments that do not depend on an index are not included in the lease liability and are recognized as they are incurred. The ROU asset is initially measured as the amount of lease liability, adjusted for any initial lease costs, prepaid lease payments, and reduced by any lease incentives.
Teradyne’s contracts often include
non-lease
components such as common area maintenance. Teradyne elected the practical expedient to account for the lease and
non-lease
components as a single lease component. For leases with a term of one year or less Teradyne has elected not to record the lease asset or liability. The lease payments are recognized in the consolidated statement of earnings on a straight-line basis over the lease term. Teradyne includes lease costs within cost of revenues and operating expenses. See Note H: “Leases.”
C. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
On January 26, 2017, the FASB issued ASU
2017-04,
“Intangibles—Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment.”
The new guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Goodwill impairment will be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance will remain largely unchanged. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. The same
one-step
impairment test will be applied to goodwill at all reporting units, even those with zero or negative carrying amounts. Entities will be required to disclose the amount of goodwill at reporting units with zero or negative carrying amounts. The revised guidance will be applied prospectively, and is effective in 2020. Early adoption is permitted for any impairment tests performed after January 1, 2017. Teradyne is currently evaluating the impact of this ASU on its financial position, results of operations and statements of cash flows.
D. ACQUISITIONS AND INVESTMENT IN OTHER COMPANY
Acquisitions
Lemsys SA
On January 30, 2019, Teradyne acquired all of the issued and outstanding shares of Lemsys SA (“Lemsys”) for a total purchase price of approximately $9.1 million. Lemsys strengthens Teradyne’s position in the electrification trends of vehicles, solar, wind, and industrial applications. The Lemsys acquisition was accounted for as a business combination and, accordingly, the results have been included in Teradyne’s Semiconductor Test segment from the date of acquisition. Teradyne’s final allocation of the purchase price was goodwill of $1.4 million, which is not deductible for tax purposes, acquired intangible assets of $4.6 million with an average estimated useful life of 5.2 years, and $3.1 million of net tangible assets. The acquisition was not material to Teradyne’s condensed consolidated financial statements.
Mobile Industrial Robots
On April 25, 2018, Teradyne acquired all of the issued and outstanding shares of Mobile Industrial Robots Aps (“MiR”), a Danish limited liability company located in Odense, Denmark. MiR is the leading maker of collaborative autonomous mobile robots for industrial applications. MiR is part of Teradyne’s Industrial Automation segment.
 
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The total purchase price of $197.8 million included $145.2 million of cash paid and $52.6 million of contingent consideration measured at fair value. The contingent consideration is payable in Euros upon the achievement of certain thresholds and targets for revenue and earnings before interest and taxes for periods from January 1, 2018 to December 31, 2018; January 1, 2018 to December 31, 2019; and January 1, 2018 to December 31, 2020. The contingent consideration related to revenue for the period from January 1, 2018 to December 31, 2018 in the amount of $30.8 million was paid in March 2019. The remaining maximum contingent consideration that could be paid is $81.0 million.
The valuation of the contingent consideration is dependent on the following assumptions: forecasted revenues, revenue volatility, earnings before interest and taxes, and discount rate. These assumptions were estimated based on a review of the historical and projected results.
The MiR acquisition was accounted for as a business combination and, accordingly, the results have been included in Teradyne’s consolidated results of operations from the date of acquisition. MiR’s products will help expand the Industrial Automation segment, which is a key component of Teradyne’s growth strategy. The allocation of the total purchase price to MiR’s net tangible liabilities and identifiable intangible assets was based on their estimated fair values as of the acquisition date. The excess of the purchase price over the identifiable intangible assets and net tangible liabilities in the amount of $136.0 million was allocated to goodwill, which is not deductible for tax purposes. MiR’s results have been included in Teradyne’s Industrial Automation segment from the date of acquisition.
The following table represents the final allocation of the purchase price:
         
 
Purchase Price
Allocation
 
 
(in thousands)
 
Goodwill
  $
135,976
 
Intangible assets
   
80,670
 
Tangible assets acquired and liabilities assumed:
   
 
Current assets
   
6,039
 
Non-current
assets
   
1,336
 
Accounts payable and current liabilities
   
(7,336
)
Long-term deferred tax liabilities
   
(18,007
)
Other long-term liabilities
   
(900
)
         
Total purchase price
  $
197,778
 
         
 
 
 
 
 
Teradyne estimated the fair value of intangible assets using the income and cost approaches. Acquired intangible assets are amortized on a straight-line basis over their estimated useful lives. Components of these intangible assets and their estimated useful lives at the acquisition date are as follows:
                 
 
Fair Value
 
 
Estimated Useful
Life
 
 
(in
 
thousands)
 
 
(in years)
 
Developed technology
  $
58,900
     
7.0
 
Trademarks and tradenames
   
13,240
     
11.0
 
Customer relationships
   
8,500
     
2.5
 
Backlog
   
30
     
0.2
 
                 
Total intangible assets
  $
80,670
     
7.2
 
                 
 
 
 
 
 
 
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The following unaudited pro forma information gives effect to the acquisition of MiR as if the acquisition occurred on January 1, 2018. The unaudited pro forma results are not necessarily indicative of what actually would have occurred had the acquisition been in effect for the periods presented:
         
 
For the Nine Months
Ended
 
 
September 30,
2018
 
 
(in thousands)
 
Revenue
  $
1,588,042
 
Net income
   
306,768
 
Net income per common share:
   
 
Basic
  $
1.61
 
         
Diluted
  $
1.56
 
         
 
 
 
 
 
Pro forma results for the nine months ended September 30, 2018 were adjusted to exclude $2.9 million of acquisition related costs, and $0.4 million of
non-recurring
expense related to fair value adjustment to acquisition-date inventory.
Energid Technologies Corporation
On February 26, 2018, Teradyne acquired all of the issued and outstanding shares of Energid Technologies Corporation (“Energid”) for a total purchase price of approximately $27.6 million. Energid’s technology enables and simplifies the programming of complex robotic motions used in a wide variety of end markets, ranging from heavy industry to healthcare, utilizing both traditional robots and collaborative robots. The Energid acquisition was accounted for as a business combination and, accordingly, Energid’s results have been included in Teradyne’s Industrial Automation segment from the date of acquisition. As of the acquisition date, Teradyne’s purchase price allocation was goodwill of $14.4 million which is deductible for tax purposes, acquired intangible assets of $12.3 million with an average estimated useful life of 7.7 years, and $1.0 million of net tangible assets. The acquisition was not material to Teradyne’s condensed consolidated financial statements.
Investment in Other Company
On June 3, 2019, Teradyne invested $15.0 million in RealWear, Inc. (“RealWear”). RealWear, a private company, develops and sells advanced wearable technology including industrial, hands-free, head-mounted augmented reality devices that make the workplace safer and more productive. Teradyne’s investment in RealWear aligns with its strategy of bringing the power of advanced automation to companies of all sizes to improve the productivity of their employees and the quality of their products and services. The investment was recorded at cost and is evaluated for impairment or an indication of changes in fair value resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer on a quarterly basis. At September 29, 2019
,
the value of the investment was $15.0 million
, which was unchanged in the three months ended September 30, 2019
.
E. REVENUE
For the three and nine months ended September 29, 2019, revenues recognized in accordance with ASC 606: “
Revenue from Contracts with Customers”
were $580.6 million and $1,635.5 million, respectively. For the three and nine months ended September 29, 2019, Teradyne also recognized $1.5 million and $4.9 million, respectively, of revenues from leases of Teradyne systems, which are accounted for outside of ASC 606.
For the three and nine months ended September 30, 2018, revenues recognized in accordance with ASC 606: “
Revenue from Contracts with Customers”
were $564.5 million and $1,571.0 million, respectively. For the three and nine months ended September 30, 2018, Teradyne also recognized $2.3 million and $10.2 million, respectively, of revenues from leases of Teradyne systems, which are accounted for outside of ASC 606.
 
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