SEC Info - Teradyne, Inc. - ‘10-Q’ for 10/2/22

Semiconductor Test

Industrial
Automation

System

on-a-Chip

Memory

System
Test

Universal
Robots

Mobile
Industrial
Robots

Wireless

Test

Corporate

and

Eliminations

Total

(in thousands)

For the Nine Months Ended October 3, 2021 (2)

Timing of Revenue Recognition

Point in Time

i 1,548,895

i 291,578

i 295,666

i 214,427

i 41,612

i 154,908

( i 352

)

i 2,546,734

Over Time

i 188,022

i 21,776

i 44,595

i 5,001

i 2,111

i 9,596

i —

i 271,101

Total

i 1,736,917

i 313,354

i 340,261

i 219,428

i 43,723

i 164,504

( i 352

)

i 2,817,835

Geographical Market

Asia Pacific

i 1,618,117

i 301,562

i 223,507

i 55,531

i 8,674

i 133,678

i —

i 2,341,069

Americas

i 71,562

i 9,373

i 98,475

i 66,390

i 17,799

i 24,228

( i 352

)

i 287,475

Europe, Middle East and Africa

i 47,238

i 2,419

i 18,279

i 97,507

i 17,250

i 6,598

i —

i 189,291

Total

i 1,736,917

i 313,354

i 340,261

i 219,428

i 43,723

i 164,504

( i 352

)

i 2,817,835

(1)	Includes $ i 1.8 million and $ i 3.8 million in 2022 and 2021, respectively, for leases of Teradyne’s systems recognized outside Accounting Standards Codification (“ASC”) 606 “Revenue from Contracts with Customers.”

(2)	Includes $ i 5.9 million and $ i 11.1 million in 2022 and 2021, respectively, for leases of Teradyne’s systems recognized outside ASC 606 “Revenue from Contracts with Customers.”

Contract Balances

During the three and nine months ended October 2, 2022, Teradyne recognized $ i 27.1 million and $ i 87.3 million, respectively, that was previously included within the deferred revenue and customer advances balances at the beginning of the period. During the three and nine months ended October 3, 2021, Teradyne recognized $ i 32.9 million and $ i 82.5 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 October 2, 2022, Teradyne has $ i 1,506 million of unsatisfied performance obligations. Teradyne expects to recognize i 88% of the remaining performance obligations in the next i 12 months and i 12% in

i 1- i 3

years.

Deferred revenue and customer advances consist of the following at October 2, 2022 and December 31, 2021, and are included in short and long-term deferred revenue and customer advances on the balance sheet:


	October 2, 2022		December 31, 2021
	(in thousands)
Maintenance, service and training	$	i 76,310	$	i 81,826
Extended warranty		i 61,920		i 64,168
Customer advances, undelivered elements and other		i 53,849		i 55,112

Total deferred revenue and customer advances	$	i 192,079	$	i 201,106

Accounts Receivable

During the three and nine months ended October 2, 2022 and October 3, 2021, Teradyne sold certain trade accounts receivables on a

non-recourse

basis to third-party financial institutions pursuant to factoring agreements. During the three months ended October 2, 2022 and October 3, 2021, total trade accounts receivable sold under the factoring agreements were $ i 15.9 million and $ i 66.9 million, respectively. During the nine months ended October 2, 2022 and October 3, 2021, total trade accounts receivable sold under the factoring agreements were $ i 73.0 million and $ i 81.7 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.

F. INVENTORIES

Inventories, net consisted of the following at October 2, 2022 and December 31, 2021:


	October 2, 2022		December 31, 2021
	(in thousands)

Raw material	$	i 228,762	$	i 155,641
Work-in-process		i 42,093		i 37,740
Finished goods		i 39,899		i 49,949

	$	i 310,754	$	i 243,330

Inventory reserves at October 2, 2022 and December 31, 2021 were $ i 124.8 million and $ i 114.1 million, respectively.

/ i

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

available-for-sale

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.

During the three and nine months ended October 2, 2022 and October 3, 2021, there were no transfers in or out of Level 1, Level 2, or Level 3 financial instruments.

Realized gains recorded in the three and nine months ended October 2, 2022 were $ i 0.1 million and $ i 0.6 million, respectively. Realized gains recorded in the three and

nine months ended October 3, 2021 were $ i 0.5 million and $ i 2.6 million, respectively. Realized losses recorded in the three and nine months ended October 2, 2022 were $ i 0.3 million and $ i 0.9 million, respectively. i i No / realized losses were recorded in the three and nine months ended October 3, 2021. Realized gains and losses are included in other (income) expense, net.

Unrealized losses on equity securities recorded in the three and nine months ended October 2, 2022 were $ i 2.3 million and $ i 11.1 million, respectively. i i No / unrealized gains on equity securities were recorded in the three and nine months ended October 2, 2022. Unrealized gains on equity securities recorded in

the

nine months ended October 3, 2021 were $ i 3.3 million. Unrealized losses on equity securities recorded in the three and nine months ended October 3, 2021 were $ i 0.4 million and $ i 1.1 million, respectively. Unrealized gains and losses on equity securities are included in other (income) expense, net.

Unrealized gains and losses on

available-for-sale

debt securities are included in accumulated other comprehensive income (loss).

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 October 2, 2022 and 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

i 464,744

i —

i 464,744

Cash equivalents

i 51,243

i 194,759

i —

i 246,002

Available-for-sale

securities:

U.S. Treasury securities

i —

i 65,354

i —

i 65,354

Corporate debt securities

i —

i 45,864

i —

i 45,864

Commercial paper

i —

i 17,719

i —

i 17,719

Debt mutual funds

i 6,441

i —

i 6,441

U.S. government agency securities

i —

i 4,681

i —

i 4,681

Certificates of deposit and time deposits

i —

i 1,205

i —

i 1,205

Non-U.S.

government securities

i —

i 512

i —

i 512

Equity securities:

Mutual funds

i 34,573

i —

i 34,573

i 557,001

i 330,094

i —

i 887,095

Derivative assets

i —

i 546

i —

i 546

Total

i 557,001

i 330,640

i —

i 887,641

Liabilities

Derivative liabilities

i —

i 1,106

i —

i 1,106

Total

i —

i 1,106

i —

i 1,106

Reported as follows:

(Level 1)

(Level 2)

(Level 3)

Total

(in thousands)

Assets

Cash and cash equivalents

i 515,987

i 194,759

i —

i 710,746

Marketable securities

i —

i 65,310

i —

i 65,310

Long-term marketable securities

i 41,014

i 70,025

i —

i 111,039

Prepayments and other current assets

i —

i 546

i —

i 546

Total

i 557,001

i 330,640

i —

i 887,641

Liabilities

Other cur

ent liabilities

i —

i 1,106

i —

i 1,106

Total

i —

i 1,106

i —

i 1,106

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

i 628,740

i —

i 628,740

Cash equivalents

i 412,212

i 81,247

i —

i 493,459

Available-for-sale

securities:

—

Commercial paper

i —

i 189,620

i —

i 189,620

U.S. Treasury securities

i —

i 77,789

i —

i 77,789

Corporate debt securities

i —

i 56,901

i —

i 56,901

Debt mutual funds

i 7,971

i —

i 7,971

U.S. government agency securities

i —

i 4,610

i —

i 4,610

Certificates of deposit and time deposits

i —

i 1,356

i —

i 1,356

Non-U.S.

government securities

i —

i 589

i —

i 589

Equity securities:

Mutual Funds

i 39,253

i —

i 39,253

i 1,088,176

i 412,112

i —

i 1,500,288

Derivative assets

i —

i 92

i —

i 92

Total

i 1,088,176

i 412,204

i —

i 1,500,380

Liabilities

Derivative liabilities

i —

i 118

i —

i 118

Total

i —

i 118

i —

i 118

Reported as follows:

(Level 1)

(Level 2)

(Level 3)

Total

(in thousands)

Assets

Cash and cash equivalents

i 1,040,952

i 81,247

i —

i 1,122,199

Marketable securities

i —

i 244,231

i —

i 244,231

Long-term marketable securities

i 47,224

i 86,634

i —

i 133,858

Prepayments and other current assets

i —

i 92

i —

i 92

Total

i 1,088,176

i 412,204

i —

i 1,500,380

Liabilities

Other current liabilities

i —

i 118

i —

i 118

Total

i —

i 118

i —

i 118

Changes in the fair value of Level 3 contingent consideration for the nine months ended October 2, 2022, and October 3, 2021 were as follows:

For the Three Months

Ended

For the Nine Months

Ended

(in thousands)

Balance at beginning of period

i —

i 7,227

Fair value adjustment (a)

i —

( i 7,227

)

Balance at end of period

i —

(a)

In the nine months ended October 3, 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 $ i 7.2 million, primarily due to a decrease in forecasted revenues and earnings before interest and taxes.

On March 25, 2022, the arbitration claim filed by Industrial Automation LLC, sellers of AutoGuide, against Teradyne alleging

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 for $ i 26.7 million. As a result, Teradyne has no remaining

earn-out

obligations.

The carrying amounts and fair values of Teradyne’s financial instruments at October 2, 2022 and December 31, 2021 were as follows:

Carrying Value

Fair Value

Carrying Value

Fair Value

(in thousands)

Assets

Cash and cash equivalents

i 710,746

i 1,122,199

Marketable securities

i 176,349

i 378,089

Derivative assets

i 546

i 92

Liabilities

Derivative liabilities

i 1,106

i 118

Convertible debt

i 64,791

i 154,486

i 108,426

i 604,648

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

available-for-sale

marketable securities at October 2, 2022:

Available-for-Sale

Cost

Unrealized

Gain

Unrealized

(Loss)

Fair
Market

Value

Fair Market

Value of

Investments

with Unrealized

Losses

(in thousands)

U.S. Treasury securities

i 69,598

i —

( i 4,244

)

i 65,354

Corporate debt securities

i 52,926

i 1

( i 7,063

)

i 45,864

i 45,622

Commercial paper

i 17,691

i 35

( i 7

)

i 17,719

i 8,983

Debt mutual funds

i 6,897

—

( i 456

)

i 6,441

i 3,075

U.S. government agency securities

i 4,790

—

( i 109

)

i 4,681

Certificates of deposit and time deposits

i 1,205

—

i 1,205

—

Non-U.S.

government securities

i 512

—

i 512

—

i 153,619

i 36

( i 11,879

)

i 141,776

i 127,715

Reported as follows:

Cost

Unrealized

Gain

Unrealized

(Loss)

Fair Market

Value

Fair Market

Value of

Investments

with Unrealized

Losses

(in thousands)

Marketable securities

i 65,744

i 35

( i 469

)

i 65,310

i 55,369

Long-term marketable securities

i 87,875

i 1

( i 11,410

)

i 76,466

i 72,346

i 153,619

i 36

( i 11,879

)

i 141,776

i 127,715

The following table summarizes the composition of

available-for-sale

marketable securities at 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

i 189,614

i 15

( i 9

)

i 189,620

i 22,784

U.S. Treasury securities

i 77,707

i 551

( i 470

)

i 77,789

i 46,435

Corporate debt securities

i 52,266

i 4,863

( i 227

)

i 56,901

i 19,422

Debt mutual funds

i 7,928

i 43

—

i 7,971

—

U.S. government agency securities

i 4,617

i 5

( i 12

)

i 4,610

i 3,296

Certificates of deposit and time deposits

i 1,356

—

i 1,356

—

Non-U.S.

government securities

i 589

—

i 589

—

i 334,077

i 5,477

( i 718

)

i 338,836

i 91,937

Reported as follows:

Cost

Unrealized

Gain

Unrealized

(Loss)

Fair
Market

Value

Fair Market

Value of

Investments

with Unrealized

Losses

(in thousands)

Marketable securities

i 244,213

i 64

( i 46

)

i 244,231

i 54,798

Long-term marketable securities

i 89,864

i 5,413

( i 672

)

i 94,605

i 37,139

i 334,077

i 5,477

( i 718

)

i 338,836

i 91,937

As of October 2, 2022, the fair market value of investments with unrealized losses less than one year and greater than one year totaled $ i 99.7 million and $ i 28.0 million, respectively. As of December 31, 2021, the fair market value of investments with unrealized losses for less than one year and greater than one year totaled $ i 85.4 million and $ i 6.5 million, respectively.

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 October 2, 2022 and December 31, 2021 were not other than temporary.

The contractual maturities of investments in

available-for-sale

securities held at October 2, 2022 were as follows:


	October 2, 2022
	Cost		Fair Market Value
	(in thousands)

Due within one year	$	i 65,744	$	i 65,310
Due after 1 year through 5 years		i 35,934		i 34,116
Due after 5 years through 10 years		i 4,800		i 4,209
Due after 10 years		i 40,244		i 31,700

Total	$	i 146,722	$	i 135,335

Contractual maturities of investments in

available-for-sale

securities held at October 2, 2022 exclude debt mutual funds with a fair market value of $ i 6.4 million, as they do not have a contractual maturity date.

Derivatives

Teradyne conducts business in various foreign countries, with certain transactions denominated in local currencies. As a result, Teradyne is exposed to risks relating to changes in foreign currency exchange rates. Teradyne’s foreign currency risk management objective is to minimize the effect of exchange rate fluctuations associated with the remeasurement of monetary assets and liabilities denominated in foreign currencies, and changes in its cash inflows attributable to the forecasted cash flows from certain foreign currency denominated revenues.

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.

Teradyne also enters into foreign currency forward and option contracts designated as cash flow hedges to hedge the risk of changes in its cash inflows attributable to changes in foreign currency exchange rates. The cash flow hedges have maturities of less than six months and mature in the period of revenue recognition for certain products and services in b

cklog and forecasted to be recognized in a future period. Teradyne evaluates cash flow hedges for effectiveness at inception based on the critical terms match method. The hedges are not expected to incur any ineffectiveness however a quarterly qualitative assessment of effectiveness is done to determine if the critical terms match method remains appropriate to use. The change in fair value of the contracts is recorded in accumulated other comprehensive income (loss) and reclassified to earnings at maturity date.

Teradyne does not use derivative financial instruments for speculative purposes.

At October 2, 2022 and December 31, 2021, Teradyne had the following foreign currency forward contracts to buy and sell

non-U.S.

currencies for U.S. dollars and other

non-U.S.

currencies with the following notional amounts:

Buy

Position

Sell

Position

Net

Total

Buy

Position

Sell

Position

Net

Total

(in millions)

Japanese Yen

( i 37.5

)

—

( i 37.5

)

( i 31.4

)

—

( i 31.4

)

Taiwan Dollar

( i 35.2

)

—

( i 35.2

)

( i 35.1

)

—

( i 35.1

)

Korean Won

( i 5.4

)

—

( i 5.4

)

( i 4.2

)

—

( i 4.2

)

British Pound Sterling

( i 1.1

)

—

( i 1.1

)

( i 1.8

)

—

( i 1.8

)

Danish Krone

( i 0.5

)

—

( i 0.5

)

—

Singapore Dollar

—

i 24.4

—

i 61.9

Euro

—

i 36.7

—

i 44.9

Philippine Peso

—

i 2.8

—

i 3.9

Chinese Yuan

—

i 2.4

—

i 2.8

Total

( i 79.7

)

i 66.3

( i 13.4

)

( i 72.5

)

i 113.5

i 41.0

The fair value of the outstanding

foreign currency forward

contracts was a loss of $ i 1.1 million and $ i 0.1 million, respectively, at October 2, 2022 and December 31, 2021.

Unrealized 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.

At October 2, 2022 and December 31, 2021, Teradyne had the following cash flow hedge contracts to buy and sell

non-U.S.

currencies for U.S. dollars with the following notional amounts:

Buy

Position

Sell

Position

Net

Total

Buy

Position

Sell

Position

Net

Total

(in millions)

Japanese Yen

( i 5.4

)

i 26.6

i 21.2

i —

Taiwan Dollar

( i 9.2

)

i 18.3

i 9.1

i —

Total

( i 14.6

)

i 44.9

i 30.3

i —

The fair value of the outstanding cash flow hedge contracts was a gain of $ i 0.5 million at October 2, 2022.

Unrealized gains and losses on foreign currency cash flow hedge contracts are included in accumulated other comprehensive income (loss). At maturity the gains or losses associated with cash flow hedge contracts are recorded to revenue.

The following table summarizes the fair value of derivative instruments as of October 2, 2022 and December 31, 2021:

Balance Sheet

Location

October 2,
2022

December 31,
2021

(in thousands)

Derivatives not designated as hedging instruments:

Foreign currency forward contracts

Prepayments

i 9

i 92

Foreign currency forward contracts

Other current liabilities

( i 1,106

)

( i 118

)

Derivatives designated as hedging instruments:

Foreign currency option contracts

Prepayments

i 537

—

Total derivatives

( i 560

)

( i 26

)

/ i

The following table summarizes the effect of derivative instruments recognized in the statement of operations for the three and nine months ended October 2, 2022 and October 3, 2021:

Location of Losses (Gains)

Recognized in
Statement of Operations

For the Three Months

Ended

For the Nine Months

Ended

(in thousands)

Derivatives not designated as hedging instruments:

Foreign currency forward contracts

Other (income) expense, net

i 1,246

i 2,288

( i 2,209

)

i 5,937

Derivatives designated as hedging instruments:

Foreign currency option contracts

Revenue

i —

Total derivatives

i 1,246

i 2,288

( i 2,209

)

i 5,937

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 nine months ended October 2, 2022, net losses from the remeasurement of monetary assets and liabilities denominated in foreign currencies were $ i 1.6 million and $ i 9.5 million, respectively. For the three and nine months ended October 3, 2021, net gains from the remeasurement of monetary assets and liabilities denominated in foreign currencies were $ i 1.0 million and $ i 1.3 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 $ i 460.0 million aggregate principal amount of i 1.25

% convertible senior unsecured notes (the “Notes”) due December 15, 2023 and received net proceeds, after issuance costs, of approximately

$ i 450.8

million,

$ i 33.0 million

of which was used to pay the net cost of the convertible note hedge transactions and $ i 50.1 million of which was used to repurchase i 2.0 million shares of Teradyne’s common stock under its existing stock repurchase program from purchasers of the Notes in privately negotiated transactions effected

through one of the initial purchasers or its affiliates conducted concurrently with the pricing of the Note offering. The Notes will mature on

December 15, 2023, unless earlier repurchased or converted. The Notes bear interest at a rate of i 1.25% per year i payable semiannually in arrears on June 15 and December 15 of each year. The Notes will be convertible at the option of the noteholders at any time prior to the close of

business on the business day immediately preceding September 15, 2023, only under the following circumstances: (1) during any calendar quarter beginning after

i March 31, 2017 (and only during such calendar quarter), if the closing sale price of Teradyne’s common stock, for at least i 20 trading days (whether or

not consecutive) during a period of i 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater

than i 130% of the conversion price on each applicable trading day; (2) during the i five business day period after any i five consecutive

trading day period

(the “measurement period”) in which the trading price (as defined in the Indenture) per $ i 1,000 principal amount of Notes for each

trading day of the measurement period was less than i 98% 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 i September 15, 2023 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their Notes at any time, regardless of the foregoing circumstances. Teradyne may satisfy its 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 October 2, 2022, the conversion price was approximately $ i 31.47 per share of Teradyne’s common stock. The conversion rate is subject to adjustment under certain circumstances. As of November 4, 2022, one hundred and sixteen holders had exercised the option to convert $ i 401.8 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 $ i 31.47.

Separately and concurrent with the pricing of the Notes, Teradyne entered into warrant transactions with the Option Counterparties (the “Warrant Transactions”) in which it sold

net-share-settled

(or, at its election subject to certain conditions, cash-settled) warrants to the Option Counterparties. The Warrant Transactions currently cover, subject to customary anti-dilution adjustments, approximately i 14.6 million shares of common stock. As of October 2, 2022, the strike price of the warrants was approximately $ i 39.50 per share. The strike price is subject to adjustment under certain circumstances. The Warrant Transactions could have a dilutive effect to Teradyne’s common stock to the extent that the market price per share of Teradyne’s common stock, as measured under the terms of the Warrant Transactions, exceeds the applicable strike price of the warrants.

The Note Hedge Transactions are expected to reduce the potential dilution to Teradyne’s common stock upon any conversion of the Notes. However, the Warrant Transactions could separately have a dilutive effect to the extent that the market value per share of Teradyne’s common stock exceeds the applicable strike price of the warrant. The net cost of the Note Hedge Transactions, after being partially offset by the proceeds from the sale of the warrants, was approximately $ i 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 $ i 100.8 million of the $ i 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

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 $ i 1.4 million to current debt for unsettled shares, an increase of $ i 1.8 million to deferred tax assets, an increase of $ i 6.6 million to long-term debt for unamortized debt discount, and an increase to retained earnings of $ i 94.6 million for the reclassification of the equity component. Mezzanine equity representing unsettled shares value was reduced to i zero and additional

paid-in

capital was reduced by $ i 100.8 million.

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 $ i 0.2 million, at October 2, 2022, are being amortized to interest expense using the effective interest method over the i seven-year term of the Notes.

The below tables represent the key components of Teradyne’s convertible senior notes:


	October 2, 2022		December 31, 2021
	(in thousands)
Debt principal	$	i 64,980	$	i 116,980
Unamortized debt issuance fees (1)		i 189		i 8,554

Net Carrying amount of convertible debt	$	i 64,791	$	i 108,426

Reported as follows:


	October 2, 2022		December 31, 2021
	(in thousands)
Current debt	$	i 14,596	$	i 19,182
Long-term debt		i 50,195		i 89,244

Net carrying amount of convertible debt	$	i 64,791	$	i 108,426

For the Three Months
Ended

For the Nine Months
Ended

(in thousands)

Contractual interest expense on the coupon

i 159

i 355

i 592

i 2,666

Amortization of debt issuance fees recognized as interest expense (2)

i 43

i 2,424

i 173

i 9,771

Total interest expense on the convertible debt

i 202

i 2,779

i 765

i 12,437

(1)	Unamortized debt issuance fees as of December 31, 2021 include unamortized debt discount of $ i 8.1 million, which was eliminated with the adoption of ASU 2020- 0 6 on January 1, 2022.

(2)	Three and nine months ended October 3, 2021 includes the amortization of debt discount component, which was eliminated with the adoption of ASU 2020-06 on January 1, 2022.

As of October 2, 2022, the conversion price was approximately $ i 31.47 per share and the

if-converted

value of the notes was $ i 155.2 million.

During the nine months ended October 2, 2022, thirty-three debt holders elected to convert $ i 52.0 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 i 1.2 million shares issued to the debt holders were received from exercising the convertible notes hedge call options.

Additional conversions of approximately $ i 14.6 million of debt principal will occur in the fourth quarter of 2022 and the liability is included in current debt.

Teradyne expects to make contractual interest payme

nts of $ i 0.6 million in the next 12 months and $ i 0.3 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 i three-year, senior secured revolving credit facility of $ i 400.0 million (the “Credit Facility”).

On December 10, 2021, the Credit Agreement was amended to extend the maturity date of the Credit Facility to December 10, 2026. On October 5, 2022, the Credit Agreement was amended to increase the amount of the Credit Facility to $ i 750.0 million from $ i 400.0 million.

The 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 $

i 200.0

million or

i 15

% of consolidated EBIDTA.

i 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 SOFR plus a margin ranging from 1.10% to 1.85% 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.

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 SOFR 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 i 65% of the capital stock of certain foreign subsidiaries.

As of November 4, 2022, Teradyne has i not borrowed any funds under the credit facility and was in compliance with all covenants.

See Note U: “Subsequent Event” regarding an increase in the amount of the Credit Facility.

I. PREPAYMENTS

Prepayments consist of the following:


	October 2, 2022		December 31, 2021
	(in thousands)
Contract manufacturer and supplier prepayments	$	i 466,648	$	i 364,478
Prepaid maintenance and other services		i 13,760		i 13,660
Prepaid taxes		i 12,531		i 15,090
Other prepayments		i 9,739		i 13,038

Total prepayments	$	i 502,678	$	i 406,266

/ / i

J. PRODUCT WARRANTY

Teradyne generally provides a

one-year

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

For the Three Months

Ended

For the Nine Months

Ended

(in thousands)

Balance at beginning of period

i 16,036

i 25,676

i 24,577

i 16,633

Accruals for warranties issued during the period

i 4,930

i 6,641

i 15,460

i 28,719

Accruals related to

pre-existing

warranties

( i 654

)

( i 963

)

( i 5,024

)

( i 3,966

)

Settlements made during the period

( i 6,181

)

( i 5,233

)

( i 20,882

)

( i 15,265

)

Balance at end of period

i 14,131

i 26,121

i 14,131

i 26,121

When Teradyne receives revenue for extended warranties, beyond one year, it is deferred and recognized on a straight-line basis over the contract period. i 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 Nine Months

Ended

(in thousands)

Balance at beginning of period

i 65,791

i 63,525

i 64,168

i 51,929

Deferral of new extended warranty revenue

i 6,987

i 12,728

i 28,550

i 36,533

Recognition of extended warranty deferred revenue

( i 10,858

)

( i 8,771

)

( i 30,798

)

( i 20,980

)

Balance at end of period

i 61,920

i 67,482

i 61,920

i 67,482

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 i four years. Restricted stock unit awards granted to

non-employee

directors vest after a

i one-year

period, with i 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.

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 i 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 i 0% to i 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 i three-year period. Compensation expense is reversed if at any time during the three-year service period the executive officer is no longer an employee, subject to the retirement and termination eligibility provisions noted below.

PRSUs granted to Teradyne’s executive officers may also have a performance metric based on three-year cumulative

non-GAAP

profit before interest and tax (“PBIT”) as a percent of Teradyne’s revenue.

Non-GAAP

PBIT is a financial measure equal to GAAP income from operations less restructuring and other, 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 i 0% to i 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.

If a PRSU recipient’s employment ends prior to the determination of the performance percentage due to (1) permanent disability or death or (2) retirement or termination other than for cause, after attaining both at least age sixty and at least i 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 i 100% of the fair market value on the grant date vest in equal annual installments over four years from the grant date and have a maximum term of seven years.

During the nine months ended October 2, 2022 and October 3, 2021, Teradyne granted i 0.4 million and i 0.3 million of service-based restricted stock unit awards to employees at a weighted average grant date fair value of $ i 110.34 and $ i 113.76, respectively, and $ i 0.1 million of service-based restricted stock unit awards to

non-employee

directors at a weighted average grant date fair value of $ i 106.91 and $ i 127.77, respectively.

During the nine months ended October 2, 2022 and October 3, 2021, Teradyne granted i 0.1 million of PBIT PRSUs with a grant date fair value of $ i 110.84 and $ i 113.65,

respectively.

Duri

ng the nine months ended October 2, 2022 and October 3, 2021, Teradyne granted i 0.1 million of TSR PRSUs, with a grant date fair value of $ i 101.06 and $ i 125.02, respectively. i The fair value was estimated using the Monte Carlo simulation model with the following assumptions:

	For the Nine Months Ended
	October 2, 2022			October 3, 2021

Risk-free interest rate		i 1.4	%		i 0.2	%
Teradyne volatility-historical		i 47.1	%		i 43.9	%
NYSE Composite Index volatility-historical		i 22.7	%		i 22.9	%
Dividend yield		i 0.4	%		i 0.4	%

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 $ i 0.44 per share divided by Teradyne’s stock price on the grant date of $ i 112.12 for the 2022 grant and an estimated annual dividend amount of $ i 0.40 per share divided by Teradyne’s stock price on the grant date of $ i 113.48 for the 2021 grant.

During the nine months ended October 2, 2022 and October 3, 2021, Teradyne granted i 0.1 million of service-based stock options to executive officers at a weighted average grant date fair value of $ i 39.01 and $ i 36.60, respectively.

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


	For the Nine Months Ended
	October 2, 2022			October 3, 2021
Expected life (years)		i 4.0			i 5.0
Risk-free interest rate		i 1.6	%		i 0.4	%
Volatility-historical		i 43.7	%		i 37.8	%
Dividend yield		i 0.4	%		i 0.4	%

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 $ i 0.44 per share divided by Teradyne’s stock price on the grant date of $ i 112.12 for the 2022 grant and an estimated annual dividend amount of $ i 0.40 per share divided by Teradyne’s stock price on the grant date of $ i 113.48 for the 2021 grant.

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

Unrealized
Gains on
Cash Flow
Hedges

Retirement

Plans
Prior

Service

Credit

Total

(in thousands)

Nine Months Ended October 2, 2022

Balance at December 31, 2021, net of tax of $ i 0, $ i 1,055, $ i 0, $( i 1,128), respectively

( i 10,818

)

i 3,704

i —

i 1,166

( i 5,948

)

Other comprehensive (loss) gain before reclassifications, net of tax of $ i 0, $( i 3,570), $ i 0, $ i 0, respectively

( i 66,258

)

( i 13,491

)

i 537

i —

( i 79,212

)

Amounts reclassified from accumulated other comprehensive income, net of tax of $ i 0, $ i 48, $ i 0, $( i 2), respectively

i —

i 386

i —

( i 5

)

i 381

Net current period other comprehensive (loss) gain, net of tax of $ i 0, $( i 3,522), $ i 0, $( i 2), respectively

( i 66,258

)

( i 13,105

)

i 537

( i 5

)

( i 78,831

)

Balance at October 2, 2022, net of tax of $ i 0, $( i 2,467), $ i 0, $( i 1,130), respectively

( i 77,076

)

( i 9,401

)

i 537

i 1,161

( i 84,779

)

Nine Months Ended October 3, 2021

Balance at December 31, 2020, net of tax of $ i 0, $ i 1,910, $ i 0, $( i 1,126), respectively

i 25,389

i 6,954

i —

i 1,173

i 33,516

Other comprehensive loss before reclassifications, net of tax of $ i 0, $( i 516), $ i 0, $ i 0, respectively

( i 26,672

)

( i 1,952

)

—

i —

( i 28,624

)

Amounts reclassified from accumulated other comprehensive income, net of tax of $ i 0, $( i 186), $ i 0, $( i 2), respectively

i —

( i 670

)

i —

( i 5

)

( i 675

)

Net current period other comprehensive loss, net of tax of $ i 0, $( i 702), $ i 0, $( i 2), respectively

( i 26,672

)

( i 2,622

)

i —

( i 5

)

( i 29,299

)

Balance at October 3, 2021, net of tax of $ i 0, $ i 1,208, $ i 0, $( i 1,128), respectively

( i 1,283

)

i 4,332

i —

i 1,168

i 4,217

/ i

Reclassifications out of accumulated other comprehensive income (loss) to the statement of operations for the three and nine months ended October 2, 2022 and October 3, 2021 were as follows:

Details about Accumulated Other Comprehensive Income (Loss) Components

For the Three Months

Ended

For the Nine Months

Ended

Affected Line Item

in the Statements

of Operations

(in thousands)

Available-for-sale

marketable securities:

Unrealized (losses) gains, net of tax of $ i 11, $ i 65, $( i 48

)

, $ i 186, respectively

( i 177

)

i 229

( i 386

)

i 670

Other (income)
expense, net

Defined benefit postretirement plan:

Amortization of prior service credit, net of tax of $ i 0, $ i 0, $ i 2, $ i 2, respectively

i 2

i 5

(a)

Total reclassifications, net of tax of $ i 11, $ i 65, $ i 46, $ i 188, respectively

( i 175

)

i 231

( i 381

)

i 675

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

350-10,

“Intangibles—Goodwill and Other”

on December 31 of each fiscal year unless interim indicators of impairment exist. In the nine months ended October 2, 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.

The changes in the carrying amount of goodwill by reportable segments for the nine months ended October 2, 2022, were as follows:

Industrial

Automation

Wireless
Test

Semiconductor
Test

System Test

Total

(in thousands)

Balance at December 31, 2021

Goodwill

i 405,971

i 361,819

i 262,101

i 158,699

i 1,188,590

Accumulated impairment losses

—

( i 353,843

)

( i 260,540

)

( i 148,183

)

( i 762,566

)

Total Goodwill

i 405,971

i 7,976

i 1,561

i 10,516

i 426,024

Foreign currency translation adjustment

( i 50,126

)

i —

( i 99

)

i —

( i 50,225

)

Balance at October 2, 2022

Goodwill

i 355,845

i 361,819

i 262,002

i 158,699

i 1,138,365

Accumulated impairment losses

—

( i 353,843

)

( i 260,540

)

( i 148,183

)

( i 762,566

)

Total Goodwill

i 355,845

i 7,976

i 1,462

i 10,516

i 375,799

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

(in thousands)

Balance at October 2, 2022

Developed technology

i 272,547

( i 232,802

)

( i 7,620

)

i 32,125

Customer relationships

i 57,739

( i 50,623

)

i 126

i 7,242

Tradenames and trademarks

i 59,387

( i 40,809

)

( i 2,365

)

i 16,213

Total intangible assets

i 389,673

( i 324,234

)

( i 9,859

)

i 55,580

Balance, December 31, 2021

Developed technology

i 272,547

( i 223,413

)

( i 4,093

)

i 45,041

Customer relationships

i 57,739

( i 48,921

)

i 209

i 9,027

Tradenames and trademarks

i 59,387

( i 37,237

)

( i 583

)

i 21,567

Total intangible assets

i 389,673

( i 309,571

)

( i 4,467

)

i 75,635

Aggregate

intangible asset amortization expense was $ i 4.7 million and $ i 14.7 million, respectively, for the three and nine months ended October 2, 2022 and $ i 5.4 million and $ i 16.3 million, respectively, for the three and nine months ended October 3, 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	$	i 4,592
2023		i 17,922
2024		i 17,617
2025		i 10,855
2026		i 2,262
Thereafter		i 2,332

/ i

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 Nine Months

Ended

(in thousands, except per share amounts)

Net income for basic and diluted net income per share

i 183,485

i 256,718

i 543,200

i 790,549

Weighted average common shares-basic

i 156,364

i 164,583

i 159,325

i 165,690

Effect of dilutive potential common shares:

Convertible note hedge warrant shares (1)

i 8,284

i 9,819

i 9,114

i 9,774

Incremental shares from assumed conversion of convertible notes (2)

i 1,453

i 6,464

i 1,965

i 8,784

Restricted stock units

i 564

i 1,035

i 673

i 1,147

Stock options

i 45

i 73

i 56

i 87

Employee stock purchase plan

i 23

i 13

i 23

i 10

Dilutive potential common shares

i 10,369

i 17,404

i 11,831

i 19,802

Weighted average common shares-diluted

i 166,733

i 181,987

i 171,156

i 185,492

Net income per common share-basic

i 1.17

i 1.56

i 3.41

i 4.77

Net income per common share-diluted

i 1.10

i 1.41

i 3.17

i 4.26

(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 nine months ended October 2, 2022 excludes the effect of the potential vesting of i 0.7 million and i 0.9 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 nine months ended October 3, 2021 excludes the effect of the potential vesting of i 0.1 million and i 0.1 million, respectively, of restricted stock units because the effect would have been anti-dilutive.

/ i

O. RESTRUCTURING AND OTHER

During the three months ended October 2, 2022, Teradyne recorded $ i 1.2 million of severance charges primarily in Industrial Automation and $ i 0.7 million for an increase in legal liabilities.

During the three months ended October 3, 2021, Teradyne recorded $ i 0.6 million of severance charges primarily in Industrial Automation.

During the nine months ended October 2, 2022, Teradyne recorded a charge of $ i 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 $ i 26.7 million, a charge of $ i 2.7 million for an increase in environmental and legal liabilities, and $ i 2.1 million of severance charges primarily in Industrial Automation. Previously, in the three months ended December 31, 2021, Teradyne recorded a charge of $ i 12.0 million related to this

earn-out

dispute.

During the nine months ended October 3, 2021, Teradyne recorded a gain of $ i 7.2 million for the decrease in the fair value of the AutoGuide contingent consideration liability, partially offset by a charge of $ i 1.7 million for an increase in environmental and legal liabilities, and $ i 1.2 million of severance charges primarily in Industrial Automation.

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.

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 nine months ended October 2, 2022 and October 3, 2021, Teradyne contributed $ i 2.5 million and $ i 2.5 million, respectively, to the U.S. supplemental executive defined benefit pension plan, and $ i 0.7 million and $ i 0.8 million, respectively, to certain qualified pension plans for

non-U.S.

subsidiaries.

For the three and nine months ended October 2, 2022 and October 3, 2021, Teradyne’s net periodic pension cost was comprised of the following:

For the Three Months Ended

October 3, 2021

United

States

Foreign

United

States

Foreign

(in thousands)

Service cost

i 397

i 153

i 452

i 240

Interest cost

i 1,222

i 96

i 1,098

i 86

Expected return on plan assets

( i 732

)

( i 16

)

( i 936

)

( i 17

)

Total net periodic pension cost

i 887

i 233

i 614

i 309

For the Nine Months Ended

October 3, 2021

United

States

Foreign

United

States

Foreign

(in thousands)

Service cost

i 1,191

i 539

i 1,357

i 720

Interest cost

i 3,665

i 333

i 3,295

i 257

Expected return on plan assets

( i 2,195

)

( i 54

)

( i 2,809

)

( i 50

)

Net actuarial gain

( i 45

)

—

( i 400

)

—

Total net periodic pension cost

i 2,616

i 818

i 1,443

i 927

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 nine months ended October 2, 2022 and October 3, 2021, Teradyne’s net periodic postretirement benefit cost (credit) was comprised of the following:

For the Three Months

Ended

For the Nine Months

Ended

(in thousands)

Service cost

i 16

i 48

Interest cost

i 44

i 43

i 132

i 128

Amortization of prior service credit

( i 2

)

( i 2

)

( i 7

)

( i 7

)

Net actuarial loss (gain)

i —

i 54

( i 228

)

Total net periodic postretirement benefit cost (credit)

i 58

i 57

i 227

( i 59

)

Q. COMMITMENTS AND CONTINGENCIES

Purchase Commitments

As of October 2, 2022, Teradyne had entered into purchase commitments for certain components and materials. The purchase commitments covered by the agreements aggregate to approximately $ i 887.1 million, of which $ i 808.3 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

earn-out

amount payable under the Purchase Agreement, or $ i 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 $ i 26.7 million. As a result, Teradyne has no remaining

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

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 October 2, 2022 and December 31, 2021, Teradyne had a product warranty accrual of $ i 14.1 million and $ i 24.6 million, respectively, included in other accrued liabilities, and revenue deferrals related to extended warranties of $ i 61.9 million and $ i 64.2 million, respectively, included in short and long-term deferred revenue and customer advances.

In addition, in the ordinary course of business, Teradyne provides minimum purchase guarantees to certain vendors to ensure continuity of supply against the market demand. Although some of these guarantees provide penalties for cancellations and/or modifications to the purchase commitments as the market demand decreases, most of the guarantees do not. Therefore, as the market demand decreases, Teradyne

re-evaluates

these guarantees and determines what charges, if any, should be recorded.

With respect to its agreements covering product, business or entity divestitures and acquisitions, Teradyne provides certain representations, warranties and covenants to purchasers and agrees to indemnify and hold such purchasers harmless against breaches of such representations, warranties and covenants. Many of the indemnification claims have a definite expiration date while some remain in force indefinitely. With respect to its acquisitions, Teradyne may, from time to time, assume the liability for certain events or occurrences that took place prior to the date of acquisition.

As a matter of ordinary course of business, Teradyne occasionally guarantees certain indebtedness obligations of its subsidiary companies, limited to the borrowings from financial institutions, purchase commitments to certain vendors, and lease commitments to landlords.

Based on historical experience and information known as of October 2, 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 Nine Months

Ended

U.S. statutory federal tax rate

i 21.0

Non-deductible

officers’ compensation

i 1.8

i 0.8

i 1.4

i 0.8

Foreign taxes

( i 0.7

)

( i 4.4

)

( i 2.4

)

( i 4.4

)

Tax credits

( i 2.1

)

( i 1.9

)

( i 1.9

)

( i 1.4

)

International provisions of the U.S. Tax Cuts and Jobs Act of 2017

( i 1.4

)

( i 1.5

)

( i 1.2

)

( i 1.6

)

Discrete benefit related to equity compensation

( i 0.1

)

( i 0.1

)

( i 1.9

)

( i 1.6

)

Other, net

i 0.4

( i 0.1

)

i 0.8

( i 0.1

)

Effective tax rate

i 18.9

i 13.8

i 15.8

i 12.7

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 October 2, 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 October 2, 2022 and December 31, 2021, Teradyne had $ i 14.8 million and $ i 14.5 million, respectively, of reserves for uncertain tax positions. The $ i 0.3 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 October 2, 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 October 2, 2022 and December 31, 2021, $ i 0.4 million and $ i 0.3 million, respectively, of interest and penalties were accrued for uncertain tax positions. For the nine months ended October 2, 2022 and October 3, 2021, expense

of $ i 0.1 million and $ i 0.3 million, respectively, w

ere

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 nine months ended October 2, 2022 was $ i 9.7 million, or $ i 0.05 per diluted share. The tax savings due to the tax holiday for the nine months ended October 3, 2021 was $ i 23.9 million, or $ i 0.13 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 i 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.

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.