10-Q
Table of Contents

 

 

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 April 1, 2018

OR

 

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

For the transition period from                  to                 

Commission File No. 001-06462

 

 

TERADYNE, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Massachusetts   04-2272148

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

600 Riverpark Drive, North Reading,

Massachusetts

  01864
(Address of Principal Executive Offices)   (Zip Code)

978-370-2700

(Registrant’s Telephone Number, Including Area Code)

 

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files)    Yes  ☒    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      (Do not check if a smaller reporting company)  
Smaller reporting company      Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

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

The number of shares outstanding of the registrant’s only class of Common Stock as of May 7, 2018 was 191,316,067 shares.

 

 

 


Table of Contents

TERADYNE, INC.

INDEX

 

         Page No.  
  PART I. FINANCIAL INFORMATION   
Item 1.   Financial Statements (Unaudited):   
 

Condensed Consolidated Balance Sheets as of April  1, 2018 and December 31, 2017

     1  
 

Condensed Consolidated Statements of Operations for the Three months ended April 1, 2018 and April 2, 2017

     2  
 

Condensed Consolidated Statements of Comprehensive Income for the Three months ended April 1, 2018 and April 2, 2017

     3  
 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended April 1, 2018 and April 2, 2017

     4  
 

Notes to Condensed Consolidated Financial Statements

     5  
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations      34  
Item 3.   Quantitative and Qualitative Disclosures about Market Risk      44  
Item 4.   Controls and Procedures      45  
  PART II. OTHER INFORMATION   
Item 1.   Legal Proceedings      46  
Item 1A.   Risk Factors      46  
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds      46  
Item 4.   Mine Safety Disclosures      47  
Item 6.   Exhibits      47  


Table of Contents

PART I

 

Item 1: Financial Statements

TERADYNE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

     April 1,
2018
     December 31,
2017
 
    

(in thousands,

except per share amount)

 
ASSETS      

Current assets:

     

Cash and cash equivalents

   $ 637,873      $ 429,843  

Marketable securities

     860,526        1,347,979  

Accounts receivable, less allowance for doubtful accounts of $2,206 and $2,219 at April 1, 2018 and December 31, 2017, respectively

     413,978        272,783  

Inventories, net

     131,857        107,525  

Prepayments and other current assets

     112,191        112,151  
  

 

 

    

 

 

 

Total current assets

     2,156,425        2,270,281  

Property, plant and equipment, net

     281,284        268,447  

Marketable securities

     89,259        125,926  

Deferred tax assets

     77,705        84,026  

Retirement plans assets

     17,928        17,491  

Other assets

     12,479        12,275  

Acquired intangible assets, net

     84,413        79,088  

Goodwill

     275,700        252,011  
  

 

 

    

 

 

 

Total assets

   $ 2,995,193      $ 3,109,545  
  

 

 

    

 

 

 
LIABILITIES      

Current liabilities:

     

Accounts payable

   $ 103,950      $ 86,393  

Accrued employees’ compensation and withholdings

     86,292        141,694  

Deferred revenue and customer advances

     85,892        83,614  

Other accrued liabilities

     64,782        59,083  

Contingent consideration

     15,581        24,497  

Income taxes payable

     34,828        59,055  
  

 

 

    

 

 

 

Total current liabilities

     391,325        454,336  

Retirement plans liabilities

     124,689        119,776  

Long-term deferred revenue and customer advances

     21,726        30,127  

Deferred tax liabilities

     6,185        6,720  

Long-term other accrued liabilities

     16,683        10,273  

Long-term contingent consideration

     —          20,605  

Long-term income taxes payable

     160,181        148,075  

Long-term debt

     369,421        365,987  
  

 

 

    

 

 

 

Total liabilities

     1,090,210        1,155,899  
  

 

 

    

 

 

 

Commitments and contingencies (See Note Q)

     
SHAREHOLDERS’ EQUITY      

Common stock, $0.125 par value, 1,000,000 shares authorized; 193,808 and 195,548 shares issued and outstanding at April 1, 2018 and December 31, 2017, respectively

     24,226        24,444  

Additional paid-in capital

     1,638,756        1,638,413  

Accumulated other comprehensive income

     25,881        18,776  

Retained earnings

     216,120        272,013  
  

 

 

    

 

 

 

Total shareholders’ equity

     1,904,983        1,953,646  
  

 

 

    

 

 

 

Total liabilities and shareholders’ equity

   $ 2,995,193      $ 3,109,545  
  

 

 

    

 

 

 

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, 2017, are an integral part of the condensed

consolidated financial statements.

 

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Table of Contents

TERADYNE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

     For the Three Months
Ended
 
     April 1,
2018
    April 2,
2017
 
     (in thousands, except
per share amount)
 

Revenues:

    

Products

   $ 403,925     $ 373,204  

Services

     83,542       83,709  
  

 

 

   

 

 

 

Total revenues

     487,467       456,913  

Cost of revenues:

    

Cost of products

     180,958       154,883  

Cost of services

     36,677       37,014  
  

 

 

   

 

 

 

Total cost of revenues (exclusive of acquired intangible assets amortization shown separately below)

     217,635       191,897  
  

 

 

   

 

 

 

Gross profit

     269,832       265,016  

Operating expenses:

    

Selling and administrative

     90,505       84,792  

Engineering and development

     74,408       75,978  

Acquired intangible assets amortization

     7,698       7,952  

Restructuring and other

     (313     2,511  
  

 

 

   

 

 

 

Total operating expenses

     172,298       171,233  
  

 

 

   

 

 

 

Income from operations

     97,534       93,783  

Non-operating (income) expense:

    

Interest income

     (5,981     (3,520

Interest expense

     6,890       5,402  

Other (income) expense, net

     805       (115
  

 

 

   

 

 

 

Income before income taxes

     95,820       92,016  

Income tax provision

     8,846       6,795  
  

 

 

   

 

 

 

Net income

   $ 86,974     $ 85,221  
  

 

 

   

 

 

 

Net income per common share:

    

Basic

   $ 0.45     $ 0.43  
  

 

 

   

 

 

 

Diluted

   $ 0.43     $ 0.42  
  

 

 

   

 

 

 

Weighted average common shares—basic

     195,255       200,005  
  

 

 

   

 

 

 

Weighted average common shares—diluted

     203,484       201,936  
  

 

 

   

 

 

 

Cash dividend declared per common share

   $ 0.09     $ 0.07  
  

 

 

   

 

 

 

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, 2017, are an integral part of the condensed

consolidated financial statements.

 

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TERADYNE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

     For the Three Months
Ended
 
     April 1,
2018
    April 2,
2017
 
     (in thousands)  

Net income

   $ 86,974     $ 85,221  

Other comprehensive income, net of tax:

    

Foreign currency translation adjustment, net of tax of $0, $0, respectively

     10,541       8,963  

Available-for-sale marketable securities:

    

Unrealized (losses) gains on marketable securities arising during period, net of tax of $(718), $420, respectively

     (2,687     513  

Less: Reclassification adjustment for losses (gains) included in net income, net of tax of $78, $(64), respectively

     1,668       (95
  

 

 

   

 

 

 
     (1,019     418  

Defined benefit pension and post-retirement plans:

    

Amortization of prior service (credit) cost included in net periodic pension and post-retirement expense/income, net of tax of $(18), $(38), respectively

     (61     (68
  

 

 

   

 

 

 

Other comprehensive income

     9,461       9,313  
  

 

 

   

 

 

 

Comprehensive income

   $ 96,435     $ 94,534  
  

 

 

   

 

 

 

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, 2017, are an integral part of the condensed

consolidated financial statements.

 

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TERADYNE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     For the Three Months
Ended
 
     April 1,
2018
    April 2,
2017
 
     (in thousands)  

Cash flows from operating activities:

    

Net income

   $ 86,974     $ 85,221  

Adjustments to reconcile net income to net cash used for operating activities:

    

Depreciation

     16,336       16,143  

Amortization

     9,204       11,070  

Stock-based compensation

     9,544       8,945  

Provision for excess and obsolete inventory

     3,522       2,726  

Deferred taxes

     8,696       (3,477

Contingent consideration adjustment

     (4,968     634  

Other

     1,393       2  

Changes in operating assets and liabilities, net of business acquired:

    

Accounts receivable

     (140,747     (123,792

Inventories

     (21,017     (62,152

Prepayments and other assets

     (679     1,104  

Accounts payable and other accrued expenses

     (46,706     (7,553

Deferred revenue and customer advances

     9,644       (3,333

Retirement plans contributions

     (1,020     (947

Income taxes

     (12,106     14,288  
  

 

 

   

 

 

 

Net cash used for operating activities

     (81,930     (61,121
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchases of property, plant and equipment

     (34,797     (22,066

Purchases of marketable securities

     (490,324     (153,317

Proceeds from sales of marketable securities

     800,671       213,593  

Proceeds from maturities of marketable securities

     212,698       88,184  

Acquisition of business, net of cash acquired

     (25,356     —    
  

 

 

   

 

 

 

Net cash provided by investing activities

     462,892       126,394  
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Issuance of common stock under stock purchase and stock option plans

     10,654       15,084  

Repurchase of common stock

     (134,276     (37,730

Payments related to net settlement of employee stock compensation awards

     (19,629     (12,289

Dividend payments

     (17,588     (14,021

Payments of contingent consideration

     (13,571     (1,050
  

 

 

   

 

 

 

Net cash used for financing activities

     (174,410     (50,006
  

 

 

   

 

 

 

Effects of exchange rate changes on cash and cash equivalents

     1,478       1,595  

Increase in cash and cash equivalents

     208,030       16,862  

Cash and cash equivalents at beginning of period

     429,843       307,884  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 637,873     $ 324,746  
  

 

 

   

 

 

 

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, 2017, are an integral part of the condensed

consolidated financial statements.

 

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TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

A. THE COMPANY

Teradyne, Inc. (“Teradyne”) is a leading global supplier of 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, 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;

 

    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”);

 

    industrial automation (“Industrial Automation”) products; 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, 2017 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, 2018, for the year ended December 31, 2017.

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.

Revenue from Contracts with Customers

Teradyne adopted Accounting Standards Update (ASU) 2014-09,Revenue from Contracts with Customers” (“ASC 606”) on January 1, 2018 using the modified retrospective method for all contracts not completed as of the date of adoption. The reported results for 2018 reflect the application of ASC 606 while the reported results for 2017 were prepared under the guidance of ASC 605, “Revenue Recognition” (“ASC 605”), which is also referred to herein as “Legacy GAAP” or the “previous guidance.” Teradyne recorded a net increase

 

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to retained earnings of $12.7 million as of January 1, 2018 due to the cumulative impact of adopting ASC 606. Refer to Note B: “Accounting Policies” in Teradyne’s 2017 Annual Report on Form 10-K for the policies in effect for revenue prior to January 1, 2018. The adoption of ASC 606 represents a change in accounting principle that will more closely align revenue recognition with the delivery of Teradyne’s hardware and services and will provide financial statement readers with enhanced disclosures. In accordance with ASC 606, revenue is recognized when or as a customer obtains control of promised goods or services. The amount of revenue recognized reflects the consideration to which Teradyne expects to be entitled to receive in exchange for fulfillment of the performance obligation. Teradyne’s primary source of revenue will continue to be from the sale of systems, instruments, robots, and the delivery of services.

In accordance with ASC 606, Teradyne recognizes revenues, when or as control is transferred to a customer. Teradyne’s determination of revenue is dependent upon a five step process outlined below.

Step 1: Identify the contract with the customer

Teradyne accounts for a contract with a customer when there is written approval, the contract is committed, the rights of the parties, including payment terms, are identified, the contract has commercial substance and consideration is probable of collection.

Step 2: Identify the performance obligations in the contract

Teradyne periodically enters into contracts with its customers in which a customer may purchase a combination of goods and or services, such as products with extended warranty obligations. Teradyne determines performance obligations by assessing whether the products or services are distinct from the other elements of the contract. In order to be distinct the product or service must perform either on its own or with readily available resources and must be separate within the context of the contract.

Step 3: Determine the transaction price

Teradyne considers the amount stated on the face of the purchase order to be the transaction price. Teradyne does not have material variable consideration which could impact the stated purchase price agreed to by Teradyne and the customer.

Step 4: Allocate the transaction price to the performance obligations in the contract

Transaction price is allocated to each individual performance obligation based on the standalone selling price of that performance obligation. Teradyne uses standalone transactions when available to value each performance obligation. If standalone transactions are not available, Teradyne will estimate the standalone selling price through market assessments or cost plus a reasonable margin analysis. Any discounts from standalone selling price are spread proportionally to each performance obligation.

Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation

In order to determine the appropriate timing for revenue recognition, Teradyne first determines if the transaction meets any of three criteria for over time recognition. If the transaction meets the criteria for over time recognition, Teradyne recognizes revenue as the good or service is delivered. Teradyne uses input variables such as hours or months utilized or costs incurred to determine the amount of revenue to recognize in a given period. Input variables are used as they best align consumption with benefit to the customer. For transactions which do not meet the criteria for over time recognition, Teradyne will recognize revenue at a point in time based on an assessment of the five criteria for transfer of control. Teradyne has concluded that revenue should be recognized when shipped or delivered based on contractual terms. Typically acceptance of Teradyne’s products and services is a formality as Teradyne delivers similar systems, instruments and robots to standard specifications. In cases where acceptance is not deemed a formality, Teradyne will defer revenue recognition until customer acceptance.

 

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Revenue recognized in accordance with ASC 606 was $483.2 million for the period ended April 1, 2018. Teradyne also recognized $4.3 million in revenue on leases of Teradyne systems which are accounted for outside of ASC 606.

Disaggregation of Revenue

The following table provides information about disaggregated revenue by primary geographical market, major product line and timing of revenue recognition.

 

    Semiconductor
Test
    System Test     Industrial
Automation
    Wireless
Test
    Corporate
and Other
    Consolidated  
    SOC(1)     Memory     Defense/
Aerospace
    Storage
Test
    Production
Board Test
                         
    (in thousands)  

Three Months Ended April 1, 2018

                 

Americas

                 

Point in Time

  $ 9,600     $ 2,862     $ 11,597     $ 279     $ 1,760     $ 14,373     $ 4,979     $ (221   $ 45,229  

Over Time

    8,791       696       6,188       —         757       89       112       —         16,633  

Europe, Middle East and Africa

                 

Point in Time

    12,125       139       1,497       —         4,037       22,573       1,041       —         41,412  

Over Time

    5,214       269       551       —         1,559       143       227       —         7,963  

Asia Pacific

                 

Point in Time

    224,851       66,273       101       10,122       1,861       11,583       13,664       —         328,455  

Over Time

    36,338       2,323       208       1,533       735       73       2,296       —         43,506  

Lease Revenue

    3,847       —         —         —         234       —         188       —         4,269  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 300,766     $ 72,562     $ 20,142     $ 11,934     $ 10,943     $ 48,834     $ 22,507     $ (221   $ 487,467  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) System on a chip (“SOC”)

Performance Obligations

Hardware

Teradyne hardware consists primarily of semiconductor test systems and instruments, defense/aerospace test instrumentation and systems, storage test systems and instruments, circuit-board test and inspection systems and instruments, collaborative robots, and wireless test systems. The hardware includes a standard 12 month warranty. This warranty is not considered a distinct performance obligation because it does not obligate Teradyne to provide a separate service to the customer and it cannot be purchased separately. Teradyne’s hardware is recognized at a point in time upon transfer of control to the customer.

Extended Warranty

Customers have the option to purchase an extended warranty, which extends the warranty period for systems and robots beyond the one year standard warranty. The extended warranty is purchased in the same transaction as the system or robot purchase and is classified as a separate performance obligation which meets the criteria for over time recognition. The relative standalone selling price of the extended warranty is recognized ratably over the course of the extended warranty based on months completed.

Training and Applications Support

Teradyne sells training and applications support to customers either in standalone transactions or included with system purchases. The training and support allow the customer to use Teradyne’s systems efficiently and

 

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effectively. Training and applications support included in system orders are valued based on their standalone selling price and all training and applications support is recognized over time as the customer receives and consumes the benefit associated with each. Both are recognized using an input method of hours consumed as this best depicts the transfer of services to the customer.

Service Agreements

Service agreements are recognized ratably over the period of agreement based on months completed.

Post-Contract Customer Support (“PCS”)

Teradyne provides support services for certain systems and robots outside of warranty. These services include telephone support, bug fixes, and when-and-if available upgrades. Standalone selling price for PCS is not directly observable as Teradyne does not sell these services separately. Teradyne has estimated the standalone selling price for these services based on adjusted market assessments. Revenue for PCS is recognized ratably over the performance period.

Teradyne does not allow customer returns or provide refunds to customers for any products or services.

Contract Balances

The following table provides information about contract liabilities. Teradyne does not have material contract assets on the balance sheet.

 

    April 1, 2018     January 1, 2018
(as adjusted)
    Increase  
    (in thousands)  

Deferred revenue and customer advances

  $ 85,892     $ 76,638     $ 9,254  

Long-term deferred revenue and customer advances

    21,726       20,848       878  

The amount of revenue recognized during the quarter ended April 1, 2018 that was included within the deferred revenue and customer advances balance at January 1, 2018 was $21.8 million and primarily relates to extended warranties, training, application support, and PCS. Each of these represents a distinct performance obligation. Customers typically pay for these services net 30 to 60 days from the date that transfer of control of the associated system or product occurs.

Remaining Performance Obligations

Teradyne does not have material remaining performance obligations from contracts with an original expected duration of greater than one year.

Significant Judgments

Teradyne makes no significant judgements in determining the amount or timing of revenue recognition.

Practical Expedients

Teradyne has adopted the practical expedients available within ASC 340 “Other Assets and Deferred Costs” for contract assets, specifically in relation to incremental costs of obtaining a contract. Teradyne generally expenses sales commissions when incurred because the amortization period would be less than one year. Teradyne records these costs within selling and administrative expenses.

 

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Teradyne has adopted the practical expedient which states an entity need not adjust the promised amount of consideration for the effects of a significant financing component if the entity expects, at contract inception, that the period between when the entity transfers a promised good or service to the customer and when the customer pays for that good or service will be one year or less. Teradyne does not have material payments associated with performance obligations outside this one year time frame.

Impacts

The following tables summarize the impact of ASC 606 to Teradyne’s consolidated financial statements. Differences are the result of timing differences between the recognition of revenue under ASC 606 and ASC 605 primarily with respect to software transactions deferred due to lack of vendor specific objective evidence of price under ASC 605 and Teradyne’s assessment of acceptance under ASC 606. Under Legacy GAAP Teradyne did not recognize revenue prior to acceptance if payment, title, or risk of loss was tied to acceptance. Under ASC 606, Teradyne recognizes revenue prior to receipt of acceptance if acceptance is deemed a formality.

Condensed Consolidated Balance Sheet:

 

     April 1, 2018  
     As
reported
     Adjustments to Recognize
under Legacy GAAP
     Legacy
GAAP
 
     (in thousands)  

ASSETS

        

Accounts receivable, less allowance for doubtful accounts

   $ 413,978      $ (67,728    $ 346,250  

Inventories, net

     131,857        27,749        159,606  

Deferred tax assets

     77,705        2,923        80,628  

LIABILITIES

        

Deferred revenue and customer advances

   $ 85,892      $ 4,990      $ 90,882  

Income taxes payable

     34,828        (5,167      29,661  

Long-term deferred revenue and customer advances

     21,726        9,178        30,904  

SHAREHOLDERS’ EQUITY

        

Retained earnings

   $ 216,120      $ (46,057    $ 170,063  

Condensed Consolidated Statement of Operation:

 

     Three months ended April 1, 2018  
     As
Reported
     Adjustments to Recognize
under Legacy GAAP
     Legacy
GAAP
 
     (in thousands except per share amounts)  

Total revenues

   $ 487,467      $ (65,642    $ 421,825  

Total cost of revenues

     217,635        (27,749      189,886  

Income tax provision

     8,846        (4,515      4,331  

Net income

     86,974        (33,378      53,596  

Net income per common share:

        

Basic

   $ 0.45      $ (0.17    $ 0.27  
  

 

 

    

 

 

    

 

 

 

Diluted

   $ 0.43      $ (0.16    $ 0.26  
  

 

 

    

 

 

    

 

 

 

Retirement Benefits

In March 2017, the FASB issued ASU 2017-07,Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit

 

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Cost.” Teradyne retrospectively adopted the new accounting guidance on presentation of net periodic pension costs and net periodic postretirement benefit costs in the first quarter of 2018. This guidance requires the service cost component of net benefit costs to be reported in the same line item in the consolidated statement of operations as other employee compensation costs. The non-service components of net benefit costs such as interest cost, expected return on assets, amortization of prior service cost, and actuarial gains or losses, are required to be reported separately outside of income or loss from operations. Following the adoption of this guidance, Teradyne continues to record the service cost component in the same line item as other employee compensation costs and the non-service components of net benefit costs such as interest cost, expected return on assets, amortization of prior service cost, and actuarial gains or losses are reported within other (income) expense, net. The retrospective adoption of this standard increased the first quarter of 2017 income from operations by $0.4 million due to the removal of the non-service component of pension expense and decreased other income (expense), net by the same amount with no impact to net income.

Financial Assets and Financial Liabilities

In January 2016, the FASB issued ASU 2016-01,Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” Teradyne adopted the new accounting guidance in the first quarter of 2018 using the modified retrospective approach. This guidance requires that changes in fair value of equity securities be accounted for directly in earnings. Previously, the changes in fair value were recorded in accumulated other comprehensive income on the balance sheet. Teradyne continues to record realized gains in interest income and realized losses in interest expense. The adoption of this new accounting guidance increased the January 1, 2018 retained earnings balance by $3.1 million and decreased the accumulated other comprehensive income balance by the same amount.

Contingencies and Litigation

Teradyne may be subject to certain legal proceedings, lawsuits and other claims as discussed in Note Q: “Commitments and Contingencies.” Teradyne accrues for a loss contingency, including legal proceedings, lawsuits, pending claims and other legal matters, when the likelihood of a loss is probable and the amount of the loss can be reasonably estimated. When the reasonable estimate of the loss is within a range of amounts, and no amount in the range constitutes a better estimate than any other amount, Teradyne accrues the amount at the low end of the range. Teradyne adjusts the accruals from time to time as additional information is received, but the loss incurred may be significantly greater than or less than the amount accrued. Loss contingencies are disclosed when they are material and there is at least a reasonable possibility that a loss has been incurred. Attorney fees related to legal matters are expensed as incurred.

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 now 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.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” The guidance in this ASU supersedes the lease recognition requirements in Accounting Standards Codification (“ASC”) Topic 840,

 

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“Leases.” The new standard establishes a right- of-use (“ROU”) model that requires a lessee to record an ROU asset and a lease liability on the balance sheet for all leases with terms longer than twelve months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the statements of operations. The new standard is effective for annual periods beginning after December 15, 2018 with early adoption permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. Teradyne is currently evaluating the impact of this ASU on its financial position and results of operations.

D. ACQUISITIONS

Energid Technologies Corporation

On February 26, 2018, Teradyne acquired all the issued and outstanding shares of Energid Technologies Corporation (“Energid”) for a total preliminary 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 preliminary purchase price allocation was goodwill of $15.7 million, acquired intangible assets of $10.9 million with an average estimated useful life of 6.1 years, and $1.0 million of net tangible assets. The acquisition was not material to our condensed consolidated financial statements.

E. INVENTORIES

Inventories, net consisted of the following at April 1, 2018 and December 31, 2017:

 

     April 1,
2018
     December 31,
2017
 
     (in thousands)  

Raw material

   $ 74,762      $ 62,668  

Work-in-process

     21,256        19,464  

Finished Goods

     35,839        25,393  
  

 

 

    

 

 

 
   $ 131,857      $ 107,525  
  

 

 

    

 

 

 

Inventory reserves for the periods ending April 1, 2018 and December 31, 2017 were $103.4 million and $102.9 million, respectively.

F. 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

Effective January 1, 2018, Teradyne adopted ASU 2016-01,Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” using the modified retrospective approach. This guidance requires that changes in fair value of equity securities be accounted for directly in earnings. Prior to 2018, the changes in fair value of equity securities were recorded in accumulated other comprehensive income on the balance sheet.

 

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

 

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

 

    The financial condition and near-term prospects of the issuer; and

 

    The intent and ability to retain the investment in the issuer for a period of time sufficient to allow for any anticipated recovery in market value.

Teradyne uses the market and income approach techniques to value its financial instruments and there were no changes in valuation techniques during the three months ended April 1, 2018 and April 2, 2017. As defined in ASC 820-10,Fair Value Measurements and Disclosures,” fair value is the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. ASC 820-10 requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:

Level 1: Quoted prices in active markets for identical assets as of the reporting date;

Level 2: Inputs other than Level 1, that are observable either directly or indirectly as of the reporting date. For example, a common approach for valuing fixed income securities is the use of matrix pricing. Matrix pricing is a mathematical technique used to value securities by relying on the securities’ relationship to other benchmark quoted prices, and is considered a Level 2 input; or

Level 3: Unobservable inputs that are not supported by market data. Unobservable inputs are developed based on the best information available, which might include Teradyne’s own data.

Teradyne’s available-for-sale debt securities are classified as Level 2, and equity securities are classified as Level 1. Acquisition-related contingent consideration is classified as Level 3. Teradyne determines the fair value of acquisition-related contingent consideration using a Monte Carlo simulation model. Assumptions utilized in the model include forecasted revenues, revenue volatility and discount rate. 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.

Realized gains recorded in the three months ended April 1, 2018 and April 2, 2017 were $0.3 million and $0.3 million, respectively. Realized losses recorded in the three months ended April 1, 2018 and April 2, 2017 were $1.5 million and $0.2 million, respectively. Realized gains are included in interest income and realized losses are included in interest expense.

Unrealized gains and losses on available-for-sale debt securities are included in accumulated other comprehensive income (loss). Changes in fair value of equity securities are included in other (income) expense, net. The cost of securities sold is based on the specific identification method.

During the three months ended April 1, 2018 and April 2, 2017, there were no transfers in or out of Level 1, Level 2 or Level 3 financial instruments.

 

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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 April 1, 2018 and December 31, 2017.

 

     April 1, 2018  
     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

   $ 155,543      $ —        $ —        $ 155,543  

Cash equivalents

     306,710        175,620        —          482,330  

Available-for-sale debt securities:

           

U.S. Treasury securities

     —          611,946        —          611,946  

Commercial paper

     —          252,158        —          252,158  

Corporate debt securities

     —          44,218        —          44,218  

U.S. government agency securities

     —          10,726        —          10,726  

Certificates of deposit and time deposits

     —          4,824        —          4,824  

Debt mutual funds

     2,741        —          —          2,741  

Non-U.S. government securities

     —          559        —          559  

Equity securities:

           

Mutual funds

     22,613        —          —          22,613  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 487,607      $ 1,100,051      $ —        $ 1,587,658  

Derivative assets

     —          12        —          12  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 487,607      $ 1,100,063      $ —        $ 1,587,670  
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Contingent consideration

   $ —        $ —        $ 15,581      $ 15,581  

Derivative liabilities

     —          224        —          224  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —        $ 224      $ 15,581      $ 15,805  
  

 

 

    

 

 

    

 

 

    

 

 

 

Reported as follows:

 

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

Assets

           

Cash and cash equivalents

   $ 462,253      $ 175,620      $ —        $ 637,873  

Marketable securities

     —          860,526        —          860,526  

Long-term marketable securities

     25,354        63,905        —          89,259  

Prepayments

     —          12        —          12  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 487,607      $ 1,100,063      $ —        $ 1,587,670  
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

     .           

Other current liabilities

   $ —        $ 224      $ —        $ 224  

Contingent consideration

     —          —          15,581        15,581  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —        $ 224      $ 15,581      $ 15,805  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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     December 31, 2017  
     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

   $ 197,955      $ —        $ —        $ 197,955  

Cash equivalents

     206,335        25,553        —          231,888  

Available-for-sale securities:

           

U.S. Treasury securities

     —          855,795        —          855,795  

Commercial paper

     —          282,840        —          282,840  

Certificates of deposit and time deposits

     —          167,342        —          167,342  

Corporate debt securities

     —          133,186        —          133,186  

Equity and debt mutual funds

     23,430        —          —          23,430  

U.S. government agency securities

     —          10,726        —          10,726  

Non-U.S. government securities

     —          586        —          586  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 427,720      $ 1,476,028      $ —        $ 1,903,748  

Derivative assets

     —          389        —          389  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 427,720      $ 1,476,417      $ —        $ 1,904,137  
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Contingent consideration

   $ —        $ —        $ 45,102      $ 45,102  

Derivative liabilities

     —          446        —          446  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —        $ 446      $ 45,102      $ 45,548  
  

 

 

    

 

 

    

 

 

    

 

 

 

Reported as follows:

 

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

Assets

           

Cash and cash equivalents

   $ 404,290      $ 25,553      $ —        $ 429,843  

Marketable securities

     —          1,347,979        —          1,347,979  

Long-term marketable securities

     23,430        102,496        —          125,926  

Prepayments

     —          389        —          389  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 427,720      $ 1,476,417      $ —        $ 1,904,137  
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Other accrued liabilities

   $ —        $ 446      $ —        $ 446  

Contingent consideration

     —          —          24,497        24,497  

Long-term contingent consideration

     —          —          20,605        20,605  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —        $ 446      $ 45,102      $ 45,548  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Changes in the fair value of Level 3 contingent consideration for the three months ended April 1, 2018 and April 2, 2017 were as follows:

 

     For the Three Months
Ended
 
     April 1,
2018
     April 2,
2017
 
     (in thousands)  

Balance at beginning of period

   $ 45,102      $ 38,332  

Payments (a)

     (24,553      (1,050

Fair value adjustment (b)

     (4,968      634  
  

 

 

    

 

 

 

Balance at end of period

   $ 15,581      $ 37,916  
  

 

 

    

 

 

 

 

(a) In the three months ended April 1, 2018, Teradyne paid $24.6 million of contingent consideration for the earn-out in connection with the acquisition of Universal Robots A/S (“Universal Robots”). In the three months ended April 2, 2017, Teradyne paid $1.1 million of contingent consideration for the earn-out in connection with the acquisition of Avionics Interface Technology, LLC (“AIT”).
(b) In the three months ended April 1, 2018, the fair value of contingent consideration for the earn-out in connection with the acquisition of Universal Robots was decreased by $5.0 million, primarily due to a decrease in forecasted revenue. In the three months ended April 2, 2017, the fair value of contingent consideration for the earn-out in connection with the acquisition of Universal Robots was increased by $0.6 million primarily due to an increase in forecasted revenue and a decrease in the discount rate.

The following table provides quantitative information associated with the fair value measurement of Teradyne’s Level 3 financial instruments:

 

Liability

   April 1, 2018
Fair Value
     Valuation
Technique
     Unobservable Inputs    Weighted
Average
 
     (in thousands)                     

Contingent consideration

(Universal Robots)

   $ 15,581       

Monte Carlo

Simulation

 

 

   Revenue for the period July 1,
    2015—December 31, 2018 volatility
     13.0
         Discount Rate      3.8

As of April 1, 2018, the significant unobservable inputs used in the Monte Carlo simulation to fair value the Universal Robots contingent consideration include forecasted revenue, revenue volatility and discount rate. Increases or decreases in the inputs would result in a higher or lower fair value measurement. The maximum payment for the remaining Universal Robots revenue earn-out is $25.0 million.

The carrying amounts and fair values of Teradyne’s financial instruments at April 1, 2018 and December 31, 2017 were as follows:

 

     April 1, 2018      December 31, 2017  
     Carrying Value      Fair Value      Carrying Value      Fair Value  
     (in thousands)  

Assets

           

Cash and cash equivalents

   $ 637,873      $ 637,873      $ 429,843      $ 429,843  

Marketable securities

     949,785        949,785        1,473,905        1,473,905  

Derivative assets

     12        12        389        389  

Liabilities

           

Contingent consideration

     15,581        15,581        45,102        45,102  

Derivative liabilities

     224        224        446        446  

Convertible debt (1)

     369,421        700,626        365,987        659,525  

 

(1) The carrying value represents the bifurcated debt component only, while the fair value is based on quoted market prices for the convertible note which includes the equity conversion features.

 

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Table of Contents

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 summarize the composition of available-for-sale marketable securities at April 1, 2018:

 

     April 1, 2018  
     Cost      Unrealized
Gain
     Unrealized
(Loss)
    Fair
Market

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

U.S. Treasury securities

   $ 614,365      $ 19      $ (2,438   $ 611,946      $ 610,938  

Commercial paper

     252,579        17        (438     252,158        249,871  

Corporate debt securities

     43,472        1,200        (454     44,218        17,742  

U.S. government agency securities

     10,791        —          (65     10,726        10,726  

Certificates of deposit and time deposits

     4,820        4        —         4,824        —    

Debt mutual funds

     2,799        —          (58     2,741        1,679  

Non-U.S. government securities

     559        —          —         559        —    
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
   $ 929,385      $ 1,240      $ (3,453   $ 927,172      $ 890,956  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Reported as follows:

 

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

Marketable securities

   $ 861,794      $ 54      $ (1,322   $ 860,526      $ 847,446  

Long-term marketable securities

     67,591        1,186        (2,131     66,646        43,510  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
   $ 929,385      $ 1,240      $ (3,453   $ 927,172      $ 890,956  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

The following table summarize the composition of available-for-sale marketable securities at December 31, 2017:

 

     December 31, 2017  
     Cost      Unrealized
Gain
     Unrealized
(Loss)
    Fair
Market
Value
     Fair Market
Value of
Investments
with Unrealized
Losses
 
     (in thousands)  

U.S. Treasury securities

   $ 858,258      $ 72      $ (2,535   $ 855,795      $ 850,163  

Commercial paper

     283,009        18        (187     282,840        258,933  

Certificates of deposit and time deposits

     167,523        6        (187     167,342        138,340  

Corporate debt securities

     131,179        2,380        (373     133,186        91,010  

Equity and debt mutual funds

     19,403        4,102        (75     23,430        1,723  

U.S. government agency securities

     10,775        —          (49     10,726        10,726  

Non-U.S. government securities

     582        4        —         586        —    
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
   $ 1,470,729      $ 6,582      $ (3,406   $ 1,473,905      $ 1,350,896  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

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Table of Contents

Reported as follows:

 

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

Marketable securities

   $ 1,349,970      $ 38      $ (2,029   $ 1,347,979      $ 1,288,844  

Long-term marketable securities

     120,759        6,544        (1,377     125,926        62,052  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
   $ 1,470,729      $ 6,582      $ (3,406   $ 1,473,905      $ 1,350,896  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

As of April 1, 2018, the fair market value of investments in debt securities with unrealized losses totaled $891.0 million. Of this value, $62.1 million had unrealized losses of $1.6 million for greater than one year and $828.9 million had unrealized losses of $1.9 million for less than one year.

As of December 31, 2017, the fair market value of investments with unrealized losses totaled $1,350.9 million. Of this value, $141.0 million had unrealized losses of $1.2 million for greater than one year and $1,209.9 million had unrealized losses of $2.2 million for less than one year.

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 April 1, 2018 and December 31, 2017 were temporary.

The contractual maturities of investments in debt securities held at April 1, 2018 were as follows:

 

     April 1, 2018  
     Cost      Fair Market
Value
 
     (in thousands)  

Due within one year

   $ 861,794      $ 860,526  

Due after 1 year through 5 years

     10,173        10,058  

Due after 5 years through 10 years

     14,583        13,823  

Due after 10 years

     40,036        40,024  
  

 

 

    

 

 

 

Total

   $ 926,586      $ 924,431  
  

 

 

    

 

 

 

Contractual maturities of investments in debt securities held at April 1, 2018 exclude $2.7 million of debt mutual funds as they do not have a contractual maturity date.

Derivatives

Teradyne conducts business in a number of foreign countries, with certain transactions denominated in local currencies. The purpose of Teradyne’s foreign currency management is to minimize the effect of exchange rate fluctuations on certain foreign currency denominated monetary assets and liabilities. Teradyne does not use derivative financial instruments for trading or speculative purposes.

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.

The notional amount of foreign currency forward contracts at April 1, 2018 and December 31, 2017 was $108.8 million and $116.8 million, respectively.

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.

 

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The following table summarizes the fair value of derivative instruments as of April 1, 2018 and December 31, 2017:

 

     Balance Sheet
Location
     April 1,
2018
    December 31,
2017
 
            (in thousands)  

Derivatives not designated as hedging instruments:

       

Foreign currency forward contracts assets

     Prepayments      $ 12     $ 389  

Foreign currency forward contracts liabilities

     Other current liabilities        (224     (446
     

 

 

   

 

 

 

Total derivatives

      $ (212   $ (57
     

 

 

   

 

 

 

The following table summarizes the effect of derivative instruments recognized in the statement of operations for the three months ended April 1, 2018 and April 2, 2017.

 

   

Location of Losses

Recognized in

Statement of Operations

  For the Three Months
Ended
 
      April 1,
2018
    April 2,
2017
 
       
        (in thousands)  

Derivatives not designated as hedging instruments:

     

Foreign currency forward contracts

  Other (income) expense, net   $ 1,575     $ 1,011  

 

(1) The table does not reflect the corresponding gains and losses from the remeasurement of monetary assets and liabilities denominated in foreign currencies.
(2) For the three months ended April 1, 2018 and April 2, 2017, net gains from the remeasurement of monetary assets and liabilities denominated in foreign currencies were $0.6 million and $1.5 million, respectively.

See Note G: “Debt” regarding derivatives related to the convertible senior notes.

G. DEBT

Convertible Senior Notes

On December 12, 2016, Teradyne completed a private offering of $460.0 million convertible senior unsecured notes (the “Notes”). The Notes will mature on December 15, 2023, unless earlier repurchased or converted. The Notes bear interest from December 12, 2016 at a rate of 1.25% per year payable semi-annually in arrears on June 15 and December 15 of each year, beginning on June 15, 2017.

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, under the following circumstances: (1) during any calendar quarter beginning after March 31, 2017 (and only during such calendar quarter), if the closing sale price of Teradyne’s common stock, for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than 130% of the conversion price on each applicable trading day; (2) during the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price (as defined in the Indenture) per $1,000 principal amount of Notes for each trading day of the measurement period was less than 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 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 conversion obligation by paying or delivering cash, shares of its common stock or a combination of cash and shares of its common stock, at Teradyne’s election. As of December 31, 2017 the conversion price was approximately $31.80 per share of Teradyne’s common stock. The conversion rate is subject to adjustment under certain circumstances.

 

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Concurrent with the offering of the Notes, Teradyne entered into convertible note hedge transactions (the “Note Hedge Transactions”) with the initial purchasers or their affiliates (the “Option Counterparties”). The Note Hedge Transactions cover, subject to customary anti-dilution adjustments, the number of shares of the common stock that underlie the Notes, with a strike price equal to the conversion price of the Notes of $31.80. The Note Hedge Transactions cover, subject to customary anti-dilution adjustments, approximately 14.5 million shares of Teradyne’s common stock.

The convertible note hedge is considered indexed to Teradyne’s stock as the terms of the Note Hedge Transactions do not contain an exercise contingency and the settlement amount equals the difference between the fair value of a fixed number of Teradyne’s shares and a fixed strike price. Because the only variable that can affect the settlement amount is Teradyne’s stock price, which is an input to the fair value of a fixed-for-fixed option contract, the convertible note hedge is considered indexed to Teradyne’s stock.

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 cover, subject to customary anti-dilution adjustments, approximately 14.5 million shares of common stock. As of December 31, 2017, the strike price of the warrants was approximately $39.91 per share. The strike price is subject to adjustments 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 Notes Hedge Transactions, after being partially offset by the proceeds from the sale of the warrants, was approximately $33 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.

Teradyne’s effective annual interest rate on the Notes will be approximately 5.0%. The Notes are classified as long-term debt in the balance sheet based on their December 15, 2023 maturity date. Debt issuance costs of approximately $7.2 million are being amortized to interest expense using the effective interest method over the seven year term of the Notes. As of April 1, 2018, unamortized debt issuance costs were approximately $6.0 million.

 

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

 

     April 1, 2018      December 31, 2017  
     (in thousands)  

Debt Principal

   $ 460,000      $ 460,000  

Unamortized discount

     90,579        94,013  
  

 

 

    

 

 

 

Net Carrying amount of convertible debt

   $ 369,421      $ 365,987  
  

 

 

    

 

 

 
     For the Three Months Ended  
     April 1, 2018      April 2, 2017  
     (in thousands)  

Contractual interest expense on the coupon

   $ 1,438      $ 1,438  

Amortization of the discount component and debt issue fees recognized as interest expense

     3,434        3,268  
  

 

 

    

 

 

 

Total interest expense on the convertible debt

   $ 4,872      $ 4,706  
  

 

 

    

 

 

 

As of April 1, 2018, the remaining unamortized discount was $90.6 million, which will be amortized over 5.8 years using the effective interest rate method. The carrying amount of the equity component was $100.8 million. As of April 1, 2018, the conversion rate was equal to the initial conversion price of approximately $31.80 per share and the if-converted value of the Notes was $661.2 million.

Revolving Credit Facility

On April 27, 2015, Teradyne entered into a Credit Agreement (the “Credit Agreement”) with Barclays Bank PLC, as administrative agent and collateral agent, and the lenders party thereto. The Credit Agreement provides for a five-year, senior secured revolving credit facility of up to $350 million (the “Credit Facility”). The Credit Agreement further provides that, subject to customary conditions, Teradyne may seek to obtain from existing or new lenders incremental commitments under the Credit Facility in an aggregate principal amount not to exceed $150 million.

Proceeds from the Credit Facility may be used for general corporate purposes and working capital. Teradyne incurred $2.3 million in costs related to the revolving credit facility. These costs are being amortized over the five-year term of the revolving credit facility and are included in interest expense in the statements of operations. As of May 11, 2018, Teradyne has not borrowed any funds under the Credit Facility.

The interest rates 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 1.00% per annum or LIBOR plus a margin ranging from 1.00% to 2.00% per annum, based on the Consolidated Leverage Ratio of Teradyne and its Restricted Subsidiaries. In addition, Teradyne will pay a commitment fee on the unused portion of the commitments under the Credit Facility ranging from 0.125% to 0.350% 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 LIBOR breakage costs.

The Credit Agreement contains customary events of default, representations, warranties and affirmative and negative covenants that, among other things, limit Teradyne’s and its Restricted Subsidiaries’ 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. As of May 11, 2018, Teradyne was in compliance with all covenants.

 

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The Credit Facility is guaranteed by certain of Teradyne’s domestic subsidiaries and collateralized by assets of Teradyne and such subsidiaries, including a pledge of 65% of the capital stock of certain foreign subsidiaries.

H. PREPAYMENTS

Prepayments consist of the following and are included in prepayments on the balance sheet:

 

     April 1,
2018
     December 31,
2017
 
     (in thousands)  

Contract manufacturer and supplier prepayments

   $ 76,204      $ 82,503  

Prepaid maintenance and other services

     8,449        8,189  

Prepaid taxes

     9,938        5,039  

Other prepayments

     11,964        12,386  
  

 

 

    

 

 

 

Total prepayments

   $ 106,555      $ 108,117  
  

 

 

    

 

 

 

I. DEFERRED REVENUE AND CUSTOMER ADVANCES

Deferred revenue and customer advances consist of the following and are included in short and long-term deferred revenue and customer advances on the balance sheet:

 

     April 1,
2018
     December 31,
2017
 
     (in thousands)  

Maintenance and training

   $ 59,365      $ 57,256  

Extended warranty

     24,590        24,438  

Customer advances, undelivered elements and other

     23,663        32,047  
  

 

 

    

 

 

 

Total deferred revenue and customer advances

   $ 107,618      $ 113,741  
  

 

 

    

 

 

 

J. PRODUCT WARRANTY

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

 

     For the Three Months
Ended
 
     April 1,
2018
     April 2,
2017
 
     (in thousands)  

Balance at beginning of period

   $ 8,200      $ 7,203  

Accruals for warranties issued during the period

     3,063        3,021  

Adjustments related to pre-existing warranties

     (139      (471

Settlements made during the period

     (3,576      (2,699
  

 

 

    

 

 

 

Balance at end of period

   $ 7,548      $ 7,054  
  

 

 

    

 

 

 

 

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When Teradyne receives revenue for extended warranties, beyond one year, it is deferred and recognized on a straight-line basis over the contract period. Related costs are expensed as incurred. The balance below is included in short and long-term deferred revenue and customer advances on the balance sheet.

 

     For the Three
Months Ended
 
     April 1,
2018
     April 2,
2017
 
     (in thousands)  

Balance at beginning of period

   $ 24,438      $ 28,200  

Deferral of new extended warranty revenue

     5,139        4,048  

Recognition of extended warranty deferred revenue

     (4,987      (7,279
  

 

 

    

 

 

 

Balance at end of period

   $ 24,590      $ 24,969  
  

 

 

    

 

 

 

K. STOCK-BASED COMPENSATION

Under Teradyne’s stock compensation plans, Teradyne grants stock options, restricted stock units and performance-based restricted stock units, and employees are eligible to purchase Teradyne’s common stock through its Employee Stock Purchase Plan (“ESPP”).

Stock options to purchase Teradyne’s common stock at 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.

Time-based restricted stock unit awards granted to employees vest in equal annual installments over four years. Restricted stock unit awards granted to non-employee directors vest after a one year period, with 100% of the award vesting on the earlier of (a) the first anniversary of the grant date or the (b) the date of the following year’s Annual Meeting of Shareholders. Teradyne expenses the cost of the restricted stock unit awards subject to time-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.

Commencing in January 2014, Teradyne granted performance-based restricted stock units (“PRSUs”) to its executive officers with a performance metric based on relative total shareholder return (“TSR”). For TSR grants issued in 2018 and 2017, Teradyne’s three-year TSR performance is measured against the New York Stock Exchange (“NYSE”) Composite Index. The final number of TSR PRSUs that vest will vary based upon the level of performance achieved from 200% to 0% of the target shares capped at four times the grant date value. 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 date to the date described in the retirement provisions below. Compensation expense for employees meeting the retirement provisions prior to the grant date will be recognized in full on the date of the grant. Compensation expense is recognized regardless of the eventual number of units that are earned based upon the market condition, provided the executive officer remains an employee at the end of the three-year period. Compensation expense is reversed if at any time during the three-year service period the executive officer is no longer an employee, subject to the retirement and termination eligibility provisions noted below.

In January 2018 and 2017, Teradyne granted PRSUs to its executive officers with 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, net; amortization of acquired intangible assets; acquisition and divestiture related charges or credits; pension actuarial gains and losses; non-cash convertible debt interest expense; 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

 

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Table of Contents

200% to 0% 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 employees meeting the retirement provisions prior to the grant date will be recognized in full on the date of 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.

Beginning with PRSUs granted in January 2014, if the 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 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.

During the three months ended April 1, 2018 and April 2, 2017, Teradyne granted 0.1 million and 0.1 million TSR PRSUs, respectively, with a grant date fair value of $54.85 and $35.66, respectively. The fair value was estimated using the Monte Carlo simulation model with the following assumptions:

 

     For the Three Months
Ended
 
     April 1,
2018
    April 2,
2017
 

Risk-free interest rate

     2.2     1.5

Teradyne volatility-historical

     26.8     26.6

NYSE Composite Index volatility-historical

     12.4     13.4

Dividend yield

     0.8     1.0

Expected volatility was based on the historical volatility of Teradyne’s stock and the NYSE Composite Index for the 2018 and 2017 grant over the most recent three year period. The risk-free interest rate was determined using the U.S. Treasury yield curve in effect at the time of grant. Dividend yield was based upon an estimated annual dividend amount of $0.36 per share for 2018 grants and $0.28 per share for 2017 grants, divided by Teradyne’s stock price on the grant date of $47.70 for the 2018 grant and $28.56 for the 2017 grant.

During the three months ended April 1, 2018 and April 2, 2017, Teradyne granted 0.1 million and 0.1 million, respectively, of PBIT PRSUs with a grant date fair value of $46.62 and $27.72, respectively.

During the three months ended April 1, 2018, Teradyne granted 0.5 million of service-based restricted stock unit awards to employees at a weighted average grant date fair value of $46.58 and 0.1 million of service-based stock options to executive officers at a weighted average grant date fair value of $12.17.

During the three months ended April 2, 2017, Teradyne granted 0.8 million of service-based restricted stock unit awards to employees at a weighted average grant date fair value of $27.86 and 0.1 million of service-based stock options to executive officers at a weighted average grant date fair value of $7.13.

Restricted stock unit awards granted to employees vest in equal annual installments over four years. Stock options vest in equal annual installments over four years and have a term of seven years from the date of grant.

 

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Table of Contents

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

 

     For the Three Months
Ended
 
     April 1,
2018
    April 2,
2017
 

Expected life (years)

     5.0       5.0  

Risk-free interest rate

     2.4     2.0

Volatility-historical

     26.4     27.8

Dividend yield

     0.8     1.0

Teradyne determined the stock options’ expected life based upon historical exercise data for executive officers, the age of the executive officers and the terms of the stock option grant. Volatility was determined using historical volatility for a period equal to the expected life. The risk-free interest rate was determined using the U.S. Treasury yield curve in effect at the time of grant. Dividend yield was based upon an estimated annual dividend amount of $0.36 per share for 2018 grants and $0.28 per share for 2017 grants divided by Teradyne’s stock price on the grant date of $47.70 for the 2018 grant and $28.56 for the 2017 grant.

L. ACCUMULATED OTHER COMPREHENSIVE INCOME

Changes in accumulated other comprehensive income, which are presented net of tax, consist of the following:

 

     For the Three Months Ended April 1, 2018  
     Foreign
Currency
Translation
Adjustment
     Unrealized
Gains
(Losses) on
Marketable
Securities
    Retirement
Plans Prior
Service
Credit
    Total  
     (in thousands)  

Three Months Ended April 1, 2018

         

Balance at December 31, 2017, net of tax of $0, $1,815,  $(932), respectively

   $ 15,919      $ 1,362     $ 1,495     $ 18,776  

Other comprehensive income (loss) before reclassifications, net of tax of $0, $(718), $0, respectively

     10,541        (2,687     —         7,854  

Amounts reclassified from accumulated other comprehensive income, net of tax of $0, $78, $(18), respectively

     —          1,668       (61     1,607  
  

 

 

    

 

 

   

 

 

   

 

 

 

Net current period other comprehensive income (loss), net of tax of $0, $(640), $(18), respectively

     10,541        (1,019     (61     9,461  

Reclassification of income tax effects from the Tax Reform Act, net of tax of $0, $(691), $(78), respectively (a)

     —          691       78       769  

Reclassification of unrealized gains on equity securities, net of tax of $0, $(902), $0, respectively (b)

     —          (3,125     —         (3,125
  

 

 

    

 

 

   

 

 

   

 

 

 

Balance at April 1, 2018, net of tax of $0, $(418), $(1,028), respectively

   $ 26,460      $ (2,091   $ 1,512     $ 25,881  
  

 

 

    

 

 

   

 

 

   

 

 

 

 

(a) In the three months ended April 1, 2018, Teradyne early adopted the ASU 2018-02, “Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” As a result, the stranded tax effects resulting from the Tax Reform Act enacted in December 2017 was reclassified from accumulated other comprehensive income to retained earnings.
(b) In the three months ended April 1, 2018, Teradyne adopted the ASU 2016-01,Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” See Note B: “Accounting Policies.”

 

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Table of Contents
     For the Three Months ended April 2, 2017  
     Foreign
Currency
Translation
Adjustments
    Unrealized
Gains
(Losses) on
Marketable
Securities
    Retirement
Plans Prior
Service
Credit
    Total  
     (in thousands)  

Three Months Ended April 2, 2017

        

Balance at December 31, 2016, net of tax of $0, $209, $(778), respectively

   $ (21,921   $ (60   $ 1,767     $ (20,214

Other comprehensive income before reclassifications, net of tax of $0, $420,$0, respectively

     8,963       513       —         9,476  

Amounts reclassified from accumulated other comprehensive income, net of tax of $0, $(64), $(38), respectively

     —         (95     (68     (163
  

 

 

   

 

 

   

 

 

   

 

 

 

Net current period other comprehensive income (loss), net of tax of $0, $356, $(38), respectively

     8,963       418       (68     9,313  
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance as April 2, 2017, net of tax of $0, $565, $(816), respectively

   $ (12,958   $ 358     $ 1,699     $ (10,901
  

 

 

   

 

 

   

 

 

   

 

 

 

Reclassifications out of accumulated other comprehensive income (loss) to the statement of operations for the three months ended April 1, 2018 and April 2, 2017 were as follows:

 

Details about Accumulated Other Comprehensive (Loss) Income

Components

   For the Three Months
Ended
     Affected Line Item
in the Statements
of Operations
     April 1,
2018
    April 2,
2017
      
     (in thousands)       

Available-for-sale marketable securities:

       

Unrealized (losses) gains, net of tax of $(78), $64, respectively

   $ (1,668   $ 95      Interest (expense)
income

Defined benefit pension and postretirement plans:

       

Amortization of prior service credit, net of tax of $18, $38, respectively

     61       68      (a)
  

 

 

   

 

 

    

Total reclassifications, net of tax of $(60), $102, respectively

   $ (1,607   $ 163      Net income
  

 

 

   

 

 

    

 

(a) The amortization of prior service credit is included in the computation of net periodic pension cost and postretirement benefit; 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. Goodwill is considered impaired when the net book value of a reporting unit exceeds its estimated fair value.

 

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The changes in the carrying amount of goodwill by reportable segments for the three months ended April 1, 2018, were as follows:

 

     Wireless
Test
    Industrial
Automation
     System
Test
    Semiconductor
Test
    Total  
     (in thousands)  

Balance at December 31, 2017

           

Goodwill

   $ 361,819     $ 233,519      $ 158,699     $ 260,540     $ 1,014,577  

Accumulated impairment losses

     (353,843     —          (148,183     (260,540     (762,566
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 
     7,976       233,519        10,516       —         252,011  

Energid acquisition

     —         15,654        —         —         15,654  

Foreign currency translation adjustment

     —         8,035        —         —         8,035  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance at April 1, 2018

           

Goodwill

     361,819       257,208        158,699       260,540       1,038,266  

Accumulated impairment losses

     (353,843     —          (148,183     (260,540     (762,566
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 
   $ 7,976     $ 257,208      $ 10,516     $ —       $ 275,700  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

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:

 

     April 1, 2018  
     Gross
Carrying
Amount (1)
     Accumulated
Amortization
     Foreign
Currency
Translation
Adjustment
     Net
Carrying
Amount
 
     (in thousands)  

Developed technology

   $ 276,417      $ (231,266    $ 3,214      $ 48,365  

Customer relationships

     96,771        (84,940      340        12,171  

Tradenames and trademarks

     51,120        (28,108      825        23,837  

Non-compete agreement

     320        (280      —          40  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total intangible assets

   $ 424,628      $ (344,594    $ 4,379      $ 84,413  
  

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2017  
     Gross
Carrying
Amount
     Accumulated
Amortization
     Foreign
Currency
Translation
Adjustment
     Net
Carrying
Amount
 
     (in thousands)  

Developed technology

   $ 270,877      $ (226,190    $ 1,618      $ 46,305  

Customer relationships

     92,741        (83,585      171        9,327  

Tradenames and trademarks

     50,100        (27,120      416        23,396  

Non-compete agreement

     320        (260      —          60  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total intangible assets

   $ 414,038      $ (337,155    $ 2,205      $ 79,088  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Gross carrying amount includes $10.9 million of Energid acquired intangible assets.

Aggregate intangible asset amortization expense was $7.7 million and $8.0 million, respectively, for the three months ended April 1, 2018 and April 2, 2017.

 

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Estimated intangible asset amortization expense for each of the five succeeding fiscal years is as follows:

 

Year

   Amortization Expense  
     (in thousands)  

2018 (remainder)

     24,236  

2019

     28,316  

2020

     13,171  

2021

     5,298  

2022

     4,493  

Thereafter

     8,899  

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
 
     April 1, 2018      April 2, 2017  
     (in thousands, except per share amounts)  

Net income for basic and diluted net income per share

   $ 86,974      $ 85,221  
  

 

 

    

 

 

 

Weighted average common shares-basic

     195,255        200,005  

Effect of dilutive potential common shares:

     

Incremental shares from assumed conversion of convertible notes (1)

     4,398        —    

Convertible note hedge warrant shares (2)

     1,830        —    

Restricted stock units

     1,666        1,533  

Stock options

     321        390  

Employee stock purchase plan

     14        8  
  

 

 

    

 

 

 

Dilutive potential common shares

     8,229        1,931  
  

 

 

    

 

 

 

Weighted average common shares-diluted

     203,484        201,936  
  

 

 

    

 

 

 

Net income per common share-basic

   $ 0.45      $ 0.43  
  

 

 

    

 

 

 

Net income per common share-diluted

   $ 0.43      $ 0.42  
  

 

 

    

 

 

 

 

(1) Incremental shares from assumed conversion of the convertible notes was calculated using the difference between the average Teradyne stock price for the period and the conversion price of $31.80, 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.
(2) Convertible notes hedge warrant shares were calculated using the difference between the average Teradyne stock price for the period and the warrant price of $39.91, 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.

The computation of diluted net income per common share for the three months ended April 1, 2018 excludes the effect of the potential vesting of 0.4 million shares of restricted stock units because the effect would have been anti-dilutive.

The computation of diluted net income per common share for the three months ended April 2, 2017 excludes the effect of the potential exercise of stock options to purchase approximately 0.1 million shares because the effect would have been anti-dilutive.

 

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O. RESTRUCTURING AND OTHER

During the three months ended April 1, 2018, Teradyne recorded a $5.0 million credit for the decrease in the fair value of the Universal Robots contingent consideration liability, partially offset by $3.9 million recorded for employee severance charges, primarily in Semiconductor Test, and $0.8 million of acquisition related expenses.

During the three months ended April 2, 2017, Teradyne recorded $2.5 million of restructuring and other charges of which $1.3 million was for a lease impairment of a Wireless Test facility in Sunnyvale, CA which was terminated in September 2017, $0.6 million was for employee severance charges, and $0.6 million for the increase in the fair value of the Universal Robots contingent consideration liability.

P. RETIREMENT PLANS

ASC 715, “Compensation—Retirement Benefits” requires an employer with defined benefit plan or other postretirement benefit plan to recognize an asset or a liability on its balance sheet for the overfunded or underfunded status of the plan. The pension asset or liability represents a difference between the fair value of the pension plan’s assets and the projected benefit obligation.

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 unfunded qualified foreign plans as well as 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 (“IRC”).

In the three months ended April 1, 2018, Teradyne contributed $0.6 million to the U.S. supplemental executive defined benefit pension plan and $0.2 million to certain qualified pension plans for non-U.S. subsidiaries.

For the three months ended April 1, 2018 and April 2, 2017, Teradyne’s net periodic pension cost was comprised of the following:

 

     For the Three Months Ended  
     April 1, 2018      April 2, 2017  
     United
States
     Foreign      United
States
     Foreign  
     (in thousands)  

Service cost

   $ 571      $ 213      $ 560      $ 185  

Interest cost

     2,997        186        3,312        163  

Expected return on plan assets

     (3,369      (5      (3,000      (6

Amortization of prior service cost

     14        —          18        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total net periodic pension cost

   $ 213      $ 394      $ 890      $ 342  
  

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

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For the three months ended April 1, 2018 and April 2, 2017, Teradyne’s net periodic postretirement benefit cost (income) was comprised of the following:

 

     For the Three
Months

Ended
 
     April 1,
2018
     April 2,
2017
 
     (in thousands)  

Service cost

   $ 9      $ 10  

Interest cost

     50        50  

Amortization of prior service credit

     (93      (124

Special termination benefits

     1,626        —    
  

 

 

    

 

 

 

Total net periodic postretirement benefit cost (income)

   $ 1,592      $ (64
  

 

 

    

 

 

 

Q. COMMITMENTS AND CONTINGENCIES

Purchase Commitments

As of April 1, 2018, Teradyne had entered into purchase commitments for certain components and materials. The purchase commitments covered by the agreements aggregate to approximately $285.8 million, of which $275.7 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. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on Teradyne’s results of operations, financial condition or cash flows.

R. INCOME TAXES

The effective tax rate for the three months ended April 1, 2018 and April 2, 2017 was 9.2% and 7.4%, respectively.

The increase in the effective tax rate from the three months ended April 2, 2017 to the three months ended April 1, 2018 primarily resulted from a projected shift in the geographic distribution of income which increased income subject to taxation in the U.S. relative to lower tax rate jurisdictions and a reduction in discrete tax benefits recognized. These increases were partially offset by the benefit of the reduction in the U.S. corporate tax rate from 35% to 21% and the U.S. foreign derived intangible income deduction.

The effective tax rates for the three months ended April 1, 2018 and April 2, 2017 differed from the expected federal statutory rate primarily because of the favorable effect of statutory rates applicable to income earned outside the United States.

The tax rate for the three months ended April 1, 2018 and April 2, 2017 was also reduced by the benefit from U.S. research and development tax credits, partially offset by additions to the uncertain tax positions for transfer pricing, both of which are included in the projected annual effective tax rate.

Discrete tax benefits recorded in the three months ended April 1, 2018 amounted to $8.3 million composed of $7.6 million from stock based compensation and $0.7 million of other discrete tax benefits. Discrete tax expense amounted to $2.3 million composed of $1.7 million from the remeasurement of deferred tax assets as a result of reductions in tax rates and $0.6 million of other discrete tax expenses. The $7.6 million of discrete benefit from stock based compensation included $7.4 million of excess tax benefits recognized pursuant to ASU No. 2016-09 “Improvements to Employee Share-Based Payment Accounting.”

 

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Discrete tax benefits recorded in the three months ended April 2, 2017 amounted to $7.0 million of which $5.5 million resulted from stock based compensation, $0.7 million related to U.S. research and development tax credits and $0.8 million from other discrete tax benefits. The $5.5 million of discrete benefit from stock based compensation included $5.2 million of excess tax benefits recognized pursuant to ASU No. 2016-09 “Improvements to Employee Share-Based Payment Accounting.”

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 April 1, 2018, 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 April 1, 2018 and December 31, 2017, Teradyne had $37.3 million and $36.3 million, respectively, of reserves for uncertain tax positions. The $1.0 million net increase in reserves for uncertain tax positions is primarily composed of additions related to transfer pricing exposures and U.S. research and development tax credits.

Teradyne is currently under examination by the Internal Revenue Service. The timing of resolution and closure of the tax audit is highly unpredictable. Given the uncertainty, it is reasonably possible that the balance of unrecognized tax benefits could significantly change within the next twelve months. However, an estimate of the range of reasonably possible adjustments cannot presently be made.

Teradyne recognizes interest and penalties related to income tax matters in income tax expense. As of April 1, 2018 and December 31, 2017, $0.3 million and $0.3 million, respectively, of interest and penalties were accrued for uncertain tax positions. For the three months ended April 1, 2018, an expense of $0.03 million was recorded for interest and penalties related to income tax items. For the three months ended April 2, 2017, a benefit of $0.1 million was recorded for interest and penalties related to income tax items.

Teradyne qualifies for a tax holiday in Singapore by fulfilling the requirements of an agreement with the Singapore Economic Development Board under which certain headcount and spending requirements must be met. The tax savings due to the tax holiday for the three months ended April 1, 2018 was $3.0 million, or $0.01 per diluted share. The tax savings due to the tax holiday for the three months ended April 2, 2017 was $4.7 million, or $0.02 per diluted share. The tax holiday is scheduled to expire on December 31, 2020.

In the fourth quarter of 2017, Teradyne recorded a provisional amount of $186.0 million of additional income tax expense which represents Teradyne’s best estimate of the impact of the Tax Cuts and Jobs Act of 2017 (the “Tax Reform Act”) in accordance with Teradyne’s understanding of the Tax Reform Act and guidance available at that time. The $186.0 million is composed of expense of $161.0 million related to the one-time transition tax on the mandatory deemed repatriation of foreign earnings, $33.6 million of expense related to the remeasurement of certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, a benefit of $10.3 million associated with the impact of correlative adjustments on uncertain tax positions, and $1.7 million of expense related to the remeasurement of certain uncertain tax positions resulting from the reduction in the federal tax rate. Although the provisional estimates are based on the best available interpretations of the Tax Reform Act, the final impacts may differ from the estimates due to, among other things, the issuance of additional regulatory and legislative guidance related to the Tax Reform Act. As of April 1, 2018, there has been no material change to the provisional amount recorded. Any adjustment to the provisional amounts will be recorded in 2018 when the analysis is complete.

S. SEGMENT INFORMATION

Teradyne has four operating segments (Semiconductor Test, System Test, Industrial Automation and Wireless Test), which are its reportable segments. The Semiconductor Test segment includes operations related

 

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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 test and circuit-board test. The Industrial Automation segment includes operations related to the design, manufacturing and marketing of collaborative robotic arms 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 directly 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, 2017, and Note B: “Accounting Policies” in this filing for any changes in the three months ended April 1, 2018.

Segment information for the three months ended April 1, 2018 and April 2, 2017 is as follows:

 

    Semiconductor
Test
    System
Test
    Industrial
Automation
    Wireless
Test
    Corporate
and
Other
    Consolidated  
    (in thousands)  

Three Months Ended April 1, 2018

           

Revenues

  $ 373,328     $ 43,019     $ 48,834     $ 22,507     $ (221   $ 487,467  

Income before income taxes (1)(2)

    88,079       5,888       784       464       605       95,820  

Total assets (3)

    758,737       90,785       406,557       59,739       1,679,375       2,995,193  

Three Months Ended April 2, 2017

           

Revenues

  $ 355,528     $ 39,845     $ 36,272     $ 25,268     $ —       $ 456,913  

Income (loss) before income taxes (1)(2)

    97,966       (2,759     (2,571     1,532       (2,152     92,016  

Total assets (3)

    740,334       106,754       331,016       61,356       1,602,820       2,842,280  

 

(1) Included in Corporate and Other are: contingent consideration adjustments, severance charges, interest income, interest expense, net foreign exchange gains (losses), and acquisitions related charges.
(2) 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.
(3) Total business assets are directly attributable to each business. Corporate assets consist of cash and cash equivalents, marketable securities and certain other assets.

Included in the Semiconductor Test segment are charges and credits in the following line items in the statements of operations:

 

     For the Three Months
Ended
 
     April 1,
2018
     April 2,
2017
 
     (in thousands)  

Restructuring and other—employee severance

   $ 3,761      $ (265

Cost of revenues—inventory charge

     2,166        1,319  

 

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Included in the System Test segment are charges in the following line item in the statements of operations:

 

     For the Three Months
Ended
 
     April 1,
2018
     April 2,
2017
 
     (in thousands)  

Cost of revenues—inventory charge

   $ 320      $ 885  

Included in the Industrial Automation segment are charges in the following line item in the statements of operations:

 

     For the Three Months
Ended
 
     April 1,
2018
     April 2,
2017
 
     (in thousands)  

Cost of revenues—inventory charge

   $ 200      $ —    

Restructuring and other—employee severance

     120        624  

Included in the Wireless Test segment are charges in the following line items in the statements of operations:

 

     For the Three Months
Ended
 
     April 1,
2018
     April 2,
2017
 
     (in thousands)  

Cost of revenues—inventory charge

   $ 836      $ 522  

Restructuring and other—employee severance

     —          1,313  

Included in Corporate and Other are charges and credits in the following line items in the statements of operations:

 

     For the Three Months
Ended
 
     April 1,
2018
     April 2,
2017
 
     (in thousands)  

Restructuring and other—Universal Robots contingent consideration adjustment

   $ (4,968    $ 634  

Restructuring and other—acquisition related expense

     774        —    

Restructuring and other—employee severance

     —          205  

T. SHAREHOLDERS’ EQUITY

Stock Repurchase Program

In January 2018, Teradyne’s Board of Directors cancelled the December 2016 stock repurchase program and authorized a new stock repurchase program for up to $1.5 billion of common stock. Teradyne intends to repurchase $750 million in 2018. During the three months ended April 1, 2018, Teradyne repurchased 2.9 million shares of common stock for $134.3 million at an average price of $45.69 per share.

In December 2016, the Board of Directors approved a $500 million share repurchase authorization which commenced on January 1, 2017. During the three months ended April 2, 2017, Teradyne repurchased 1.3 million shares of common stock for $37.7 million at an average price of $29.38 per share.

The total price includes commissions and is recorded as a reduction to retained earnings.

 

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Dividend

Holders of Teradyne’s common stock are entitled to receive dividends when they are declared by Teradyne’s Board of Directors.

In January 2018, Teradyne’s Board of Directors declared a quarterly cash dividend of $0.09 per share. Dividend payments for the three months ended April 1, 2018 were $17.6 million.

In January 2017, Teradyne’s Board of Directors declared a quarterly cash dividend of $0.07 per share. Dividend payments for the three months ended April 2, 2017 were $14.0 million.

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

U. SUBSEQUENT EVENTS

On April 25, 2018, Teradyne acquired all the issued and outstanding shares of Mobile Industrial Robots ApS (“MiR”), a Danish limited liability company located in Odense, Denmark, for an aggregate purchase price of approximately $148 million net of cash acquired, and up to an additional approximately $124 million payable upon the achievement of certain revenue and profit performance targets through 2020. The fair value of assets and liabilities acquired has not been disclosed because Teradyne has not completed the valuation. MiR is the leading maker of collaborative autonomous mobile robots for industrial applications. MiR will be part of Teradyne’s Industrial Automation segment.

 

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

Statements in this Quarterly Report on Form 10-Q which are not historical facts, so called “forward-looking statements,” are made pursuant to the safe harbor provisions of Section 21E of the Securities Exchange Act of 1934, as amended. Investors are cautioned that all forward-looking statements involve risks and uncertainties, including those detailed in our filings with the Securities and Exchange Commission. See also Part II, Item 1A of this Quarterly Report on Form 10-Q and Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2017. Readers are cautioned not to place undue reliance on these forward-looking statements which reflect management’s analysis only as of the date hereof. We assume no obligation to update these forward-looking statements to reflect actual results or changes in factors or assumptions affecting forward-looking statements, except as may be required by law.

Overview

We are a leading global supplier of automation equipment for test and industrial applications. We design, develop, manufacture and sell automatic test systems used to test semiconductors, wireless products, data storage and complex electronics systems in the consumer electronics, wireless, automotive, industrial, computing, communications, and aerospace and defense industries. Our industrial automation products include collaborative robotic arms, 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. Our automatic test equipment and industrial automation products and services include:

 

    semiconductor test (“Semiconductor Test”) systems;

 

    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”);

 

    industrial automation (“Industrial Automation”) products; and

 

    wireless test (“Wireless Test”) systems.

We have a customer base which includes integrated device manufacturers (“IDMs”), outsourced semiconductor assembly and test providers (“OSATs”), original equipment manufacturers (“OEMs”), wafer foundries, fabless companies that design, but contract with others for the manufacture of integrated circuits (“ICs”), developers of wireless devices and consumer electronics, manufacturers of circuit boards, automotive suppliers, wireless product manufacturers, storage device manufacturers, aerospace and military contractors, and distributors that sell collaborative robots.

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

The sales of our products and services are dependent, to a large degree, on customers who are subject to cyclical trends in the demand for their products. These cyclical periods have had, and will continue to have, a significant effect on our business because our customers often delay or accelerate purchases in reaction to changes in their businesses and to demand fluctuations in the semiconductor and electronics industries. Historically, these demand fluctuations have resulted in significant variations in our results of operations. During the first quarter of 2018, demand outlook for mobile device test capacity in 2018 declined sharply for our Semiconductor Test business. As a result, we reduced our revenue outlook for 2018 to reflect the demand decline.

In 2015, we acquired Universal Robots A/S (“Universal Robots”), the leading supplier of collaborative robots which are low-cost, easy-to-deploy and simple-to-program robots that work side by side with production

 

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workers to improve quality, increase manufacturing efficiency and decrease manufacturing costs. The acquisition of Universal Robots provides a growth engine to our business and complements our existing System Test and Wireless Test segments. The total purchase price for Universal Robots was approximately $315 million, which included cash paid of approximately $284 million and $32 million in fair value of contingent consideration payable upon achievement of revenue and earnings targets through 2018. The contingent consideration related to revenue for the period from July 1, 2015 to December 31, 2017 in the amount of $24.6 million was paid in March 2018. The remaining maximum contingent consideration that could be paid in 2019 is $25 million.

On February 26, 2018, we acquired Energid Technologies Corporation (“Energid”) for a total preliminary 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.

On April 25, 2018, we acquired Mobile Industrial Robots ApS (“MiR”), a Danish limited liability company, for an aggregate purchase price of approximately $148 million net of cash acquired, and up to an additional approximately $124 million payable upon the achievement of certain revenue and profit performance targets through 2020. MiR is the leading maker of collaborative autonomous mobile robots for industrial applications. MiR and Energid will be included in our Industrial Automation segment.

We believe our recent acquisitions have enhanced our opportunities for growth. We intend to continue to invest in our business, grow market share in our markets and expand further our addressable markets while tightly managing our costs.

Critical Accounting Policies and Estimates

We have identified the policies which are critical to understanding our business and our results of operations. There have been no significant changes during the three months ended April 1, 2018 to the items disclosed as our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017, except as noted below.

    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.

    Revenue from Contracts with Customers

We adopted Accounting Standards Update (ASU) 2014-09,Revenue from Contracts with Customers” (“ASC 606”) on January 1, 2018 using the modified retrospective method for all contracts not completed as of the date of adoption. The reported results for 2018 reflect the application of ASC 606 while the reported results for 2017 were prepared under the guidance of ASC 605, “Revenue Recognition” (“ASC 605”), which is also referred to herein as “Legacy GAAP” or the “previous guidance.” We recorded a net increase to retained earnings of $12.7 million as of January 1, 2018 due to the cumulative impact of adopting ASC 606. Refer to Note B: “Accounting Policies” in our 2017 annual report on Form 10-K for the policies in effect for revenue prior to January 1, 2018. The adoption of ASC 606 represents a change in accounting principle that will more closely align revenue recognition with the delivery of our hardware and services and will provide financial statement readers with enhanced disclosures. In accordance with ASC 606, revenue is recognized when or as a customer obtains control of promised goods or services. The amount of revenue recognized reflects the consideration to which we expect to be entitled to receive in exchange for fulfillment of the performance obligation. Our primary source of revenue will continue to be from the sale of systems, instruments, robots, and the delivery of services.

 

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In accordance with ASC 606, we recognize revenues, when or as control is transferred to a customer. Our determination of revenue is dependent upon a five step process outlined below.

Step 1: Identify the contract with the customer

We account for a contract with a customer when there is written approval, the contract is committed, the rights of the parties, including payment terms, are identified, the contract has commercial substance and consideration is probable of collection.

Step 2: Identify the performance obligations in the contract

We periodically enter into contracts with its customers in which a customer may purchase a combination of goods and or services, such as products with extended warranty obligations. We determine performance obligations by assessing whether the products or services are distinct from the other elements of the contract. In order to be distinct the product or service must perform either on its own or with readily available resources and must be separate within the context of the contract.

Step 3: Determine the transaction price

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

Step 4: Allocate the transaction price to the performance obligations in the contract

Transaction price is allocated to each individual performance obligation based on the standalone selling price of that performance obligation. We use standalone transactions when available to value each performance obligation. If standalone transactions are not available, we will estimate the standalone selling price through market assessments or cost plus a reasonable margin analysis. Any discounts from standalone selling price are spread over each performance obligation.

Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation

In order to determine the appropriate timing for revenue recognition, we first determine if the transaction meets any of three criteria for over time recognition. If the transaction meets the criteria for over time recognition, we recognize revenue as the good or service is delivered. We use input variables such as hours or months utilized or costs incurred to determine the amount of revenue to recognize in a given period. Input variables are used as they best align consumption with benefit to the customer. For transactions which do not meet the criteria for over time recognition, we will recognize revenue at a point in time based on an assessment of the five criteria for transfer of control. We have concluded that revenue should be recognized when shipped or delivered based on contractual terms. Typically acceptance of our products and services is a formality as we deliver similar systems, instruments and robots to standard specifications. In cases where acceptance is not deemed a formality, we will wait for customer acceptance before recognizing revenue.

Retirement Benefits

In March 2017, the FASB issued ASU 2017-07, “Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” We retrospectively adopted the new accounting guidance on presentation of net periodic pension costs and net periodic postretirement benefit costs in the first quarter of 2018. This guidance requires the service cost component of net benefit costs to be reported in the same line item in the consolidated statement of operations as other employee compensation costs. The non-service components of net benefit costs such as interest cost,

 

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expected return on assets, amortization of prior service cost, and actuarial gains or losses, are required to be reported separately outside of income or loss from operations. Following the adoption of this guidance, we continue to record the service cost component in the same line item as other employee compensation costs and the non-service components of net benefit costs such as interest cost, expected return on assets, amortization of prior service cost, and actuarial gains or losses are reported within other (income) expense, net. The retrospective adoption of this standard increased the first quarter of 2017 income from operations by $0.4 million due to the removal of the non-service component of pension expense and decreased other (income) expense, net by the same amount with zero impact to net income.

Financial Assets and Financial Liabilities

In January 2016, the FASB issued ASU 2016-01,Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” We adopted the new accounting guidance in the first quarter of 2018 using the modified retrospective approach. This guidance requires that changes in fair value of equity securities be accounted for directly in earnings. Previously, the changes in fair value were recorded in accumulated other comprehensive income on the balance sheet. We continue to record realized gains in interest income and realized losses in interest expense. The adoption of this new accounting guidance increased the January 1, 2018 retained earnings balance by $3.1 million and decreased the accumulated other comprehensive income balance by the same amount.

 

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SELECTED RELATIONSHIPS WITHIN THE CONDENSED CONSOLIDATED

STATEMENTS OF OPERATIONS

 

     For the Three Months
Ended
 
     April 1,
2018
    April 2,
2017
 

Percentage of revenues:

    

Revenues:

    

Products

     83     82

Services

     17       18  
  

 

 

   

 

 

 

Total revenues

     100       100  

Cost of revenues:

    

Cost of products

     37       34  

Cost of services

     8       8  
  

 

 

   

 

 

 

Total cost of revenues (exclusive of acquired intangible assets amortization shown separately below)

     45       42  
  

 

 

   

 

 

 

Gross profit

     55       58  

Operating expenses:

    

Selling and administrative

     19       19  

Engineering and development

     15       17  

Acquired intangible assets amortization

     2       2  

Restructuring and other

     —         1  
  

 

 

   

 

 

 

Total operating expenses

     35       37  
  

 

 

   

 

 

 

Income from operations

     20       21  

Non-operating (income) expense:

    

Interest income

     (1     (1

Interest expense

     1       1  

Other (income) expense, net

     —         —    
  

 

 

   

 

 

 

Income before income taxes

     20       20  

Income tax provision

     2       1  
  

 

 

   

 

 

 

Net income

     18     19
  

 

 

   

 

 

 

Results of Operations

First Quarter 2018 Compared to First Quarter 2017

Revenues

Revenues by our four reportable segments were as follows:

 

     For the Three Months
Ended
        
     April 1,
2018
     April 2,
2017
     Dollar
Change
 
     (in millions)  

Semiconductor Test

   $ 373.3      $ 355.5      $ 17.8  

Industrial Automation

     48.8        36.3        12.5  

System Test

     43.0        39.8        3.2  

Wireless Test

     22.5        25.3        (2.8
  

 

 

    

 

 

    

 

 

 
   $ 487.5      $ 456.9      $ 30.6  
  

 

 

    

 

 

    

 

 

 

 

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The increase in Semiconductor Test revenues of $17.8 million, or 5.0%, was driven primarily by increased sales in the flash memory test segment, partially offset by a decrease in image sensor and microcontroller sales. The increase in Industrial Automation revenues of $12.5 million, or 34.4%, was due to higher demand for collaborative robotic arms. The increase in System Test revenues of $3.2 million, or 8.0%, was primarily due to higher sales in Storage Test of system level testers. The decrease in Wireless Test revenues of $2.8 million, or 11.1%, was primarily due to lower demand for connectivity and cellular test systems.

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

 

     For the Three
Months

Ended
 
     April 1,
2018
    April 2,
2017
 

Taiwan

     28     25

China

     17       12  

United States

     13       12  

Korea

     11       7  

Europe

     10       8  

Philippines

     6       6  

Japan

     5       12  

Malaysia

     4       9  

Singapore

     3       5  

Thailand

     2       2  

Rest of World

     1       2  
  

 

 

   

 

 

 
     100     100
  

 

 

   

 

 

 

 

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

Gross Profit

Our gross profit was as follows:

 

     For the Three
Months
Ended
    Dollar/Point
Change
 
     April 1,
2018
    April 2,
2017
   
     (in millions)  

Gross profit

   $ 269.8     $ 265.0     $ 4.8  

Percent of Total Revenues

     55.4     58.0     (2.6

Gross profit as a percent of revenue decreased by 2.6 points, as a result of a decrease related to product mix primarily in Semiconductor Test, partially offset by an increase due to higher sales primarily in Semiconductor Test and Industrial Automation.

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

 

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During the three months ended April 1, 2018, we recorded an inventory provision of $3.5 million included in cost of revenues primarily due to downward revisions to previously forecasted demand levels. Of the $3.5 million of total excess and obsolete provisions, $2.2 million was related to Semiconductor Test, $0.8 million was related to Wireless Test, $0.3 million was related to System Test, and $0.2 million was related to Industrial Automation.

During the three months ended April 2, 2017, we recorded an inventory provision of $2.7 million included in cost of revenues primarily due to downward revisions to previously forecasted demand levels. Of the $2.7 million of total excess and obsolete provisions, $1.3 million was related to Semiconductor Test, $0.9 million was related to System Test, and $0.5 million was related to Wireless Test.

During the three months ended April 1, 2018 and April 2, 2017, we scrapped $0.3 million and $1.8 million of inventory, respectively. During the three months ended April 1, 2018 and April 2, 2017, we sold $2.2 million and $1.1 million of previously written-down or written-off inventory, respectively. As of April 1, 2018, we had inventory related reserves for inventory which had been written-down or written-off totaling $103.4 million. We have no pre-determined timeline to scrap the remaining inventory.

Selling and Administrative

Selling and administrative expenses were as follows:

 

     For the Three Months
Ended
       
     April 1,
2018
    April 2,
2017
    Dollar
Change
 
     (in millions)  

Selling and administrative

   $ 90.5     $ 84.8     $ 5.7  

Percent of Total Revenues

     18.6     18.6  

The increase of $5.7 million in selling and administrative expenses was due primarily to higher spending in Industrial Automation.

Engineering and Development

Engineering and development expenses were as follows:

 

     For the Three Months
Ended
       
     April 1,
2018
    April 2,
2017
    Dollar
Change
 
     (in millions)  

Engineering and development

   $ 74.4     $ 76.0     $ (1.6

Percent of Total Revenues

     15.3     16.6  

The decrease of $1.6 million in engineering and development expenses was primarily due to lower spending in Storage Test and Semiconductor Test, partially offset by higher spending in Industrial Automation.

Acquired Intangible Assets Amortization

Acquired intangible assets amortization expense was as follows:

 

     For the Three Months
Ended
       
     April 1,
2018
    April 2,
2017
    Dollar
Change
 
     (in millions)  

Acquired intangible assets amortization

   $ 7.7     $ 8.0     $ (0.3

Percent of Total Revenues

     1.6     1.7  

 

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Acquired intangible assets amortization expense decreased primarily in the Industrial Automation segment due to intangible assets that became fully amortized in June 2017, partially offset by increased amortization expense due to the Energid acquisition.

Restructuring and Other

During the three months ended April 1, 2018, we recorded a $5.0 million credit for the decrease in the fair value of the Universal Robots contingent consideration liability, partially offset by $3.9 million recorded for employee severance charges, primarily in Semiconductor Test, and $0.8 million of acquisition related expenses.

During the three months ended April 2, 2017, we recorded $2.5 million of restructuring and other charges of which $1.3 million was for a lease impairment of a Wireless Test facility in Sunnyvale, CA, which was terminated in September 2017, $0.6 million was for employee severance charges and $0.6 million for the increase in the fair value of the Universal Robots contingent consideration liability.

Interest and Other

 

     For the Three Months
Ended
        
     April 1,
2018
     April 2,
2017
     Dollar
Change
 
     (in millions)  

Interest income

   $ (6.0    $ (3.5    $ (2.5

Interest expense

     6.9        5.4        1.5  

Other (income) expense, net

     0.8        (0.1      0.9  

Interest income increased by $2.5 million due primarily to higher cash and marketable securities balances during the quarter and higher interest rates in 2018. Interest expense increased by $1.5 million due primarily to realized losses on sales of marketable securities. Other (income) expense, net included net foreign exchange losses and non-service components of net periodic pension costs and net periodic postretirement benefit costs.

Income Before Income Taxes

 

     For the Three Months
Ended
        
     April 1,
2018
     April 2,
2017
     Dollar
Change
 
     (in millions)  

Semiconductor Test

   $ 88.1      $ 98.0      $ (9.9

System Test

     5.9        (2.8      8.7  

Industrial Automation

     0.8        (2.6      3.4  

Wireless Test

     0.5        1.5        (1.0

Corporate and Other (1)

     0.6        (2.2      2.8  
  

 

 

    

 

 

    

 

 

 
   $ 95.8      $ 92.0      $ 3.8  
  

 

 

    

 

 

    

 

 

 

 

(1) Included in Corporate and Other are: contingent consideration adjustments, employee severance, interest income, interest expense, net foreign exchange gains and losses and acquisition related expenses.

The decrease in income before income taxes in Semiconductor Test was driven primarily by lower gross margin due to product mix. The increase in income before income taxes in System Test was primarily due to higher sales in Storage Test of system level testers. The increase in income before income taxes in Industrial Automation was due to higher demand for collaborative robotic arms. The decrease in income before income taxes in Wireless Test was primarily due to lower demand for connectivity and cellular test systems.

 

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Income Taxes

The effective tax rate for the three months ended April 1, 2018 and April 2, 2017 was 9.2% and 7.4%, respectively.

The increase in the effective tax rate from the three months ended April 2, 2017 to the three months ended April 1, 2018 primarily resulted from a projected shift in the geographic distribution of income which increased income subject to taxation in the U.S. relative to lower tax rate jurisdictions and a reduction in discrete tax benefits recognized. These increases were partially offset by the benefit of the reduction in the U.S. corporate tax rate from 35% to 21% and the U.S. foreign derived intangible income deduction.

Contractual Obligations

The following table reflects our contractual obligations as of April 1, 2018:

 

     Payments Due by Period  
     Total      Less than
1 year
     1-3 years      3-5 years      More than
5 years
     Other  
     (in thousands)  

Convertible debt

   $ 460,000      $ —        $ —        $ —        $ 460,000      $ —    

Purchase obligations

     285,804        275,723        10,081        —          —          —    

Retirement plans contributions

     128,698        5,524        8,745        8,962        105,467        —    

Operating lease obligations

     65,883        17,276        27,215        15,021        6,371        —    

Interest on long-term debt

     34,500        5,750        11,500        11,500        5,750        —    

Fair value of contingent consideration

     15,581        15,581        —          —          —          —    

Transition tax payable (1)

     160,896        715        25,641        25,641        108,899        —    

Other long-term liabilities reflected on the balance sheet under GAAP (2)

     44,594        —          21,726        —          —          22,868  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,195,956      $ 320,569      $ 104,908      $ 61,124      $ 686,487      $ 22,868  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Represents our estimate of a provisional tax amount for the transition tax liability associated with our accumulated foreign earnings as a result of the enactment of the Tax Reform Act on December 22, 2017.
(2) Included in other long-term liabilities are liabilities for customer advances, extended warranty, uncertain tax positions, deferred tax liabilities and other obligations. For certain long-term obligations, we are unable to provide a reasonably reliable estimate of the timing of future payments relating to these obligations and therefore we included these amounts in the column marked “Other.”

Liquidity and Capital Resources

Our cash, cash equivalents and marketable securities balances decreased by $316.1 million in the three months ended April 1, 2018 to $1,588 million.

Operating activities during the three months ended April 1, 2018 used cash of $81.9 million. Changes in operating assets and liabilities used cash of $212.6 million. This was due to a $162.4 million increase in operating assets and a $50.2 million decrease in operating liabilities.

The increase in operating assets was primarily due to a $140.7 million increase in accounts receivable due to an increase in shipments during the last month of the quarter and the impact of the new revenue recognition standard, a $21.0 million increase in inventories, and a $0.7 million increase in prepayments and other assets.

The decrease in operating liabilities was due to a $56.3 million decrease in accrued employee compensation due primarily to first quarter payments related to variable compensation, a $12.1 million decrease in income taxes, a $7.5 million decrease in other accrued liabilities, and $1.0 million of retirement plan contributions, partially offset by a $17.1 million increase in accounts payable and a $9.6 million increase in deferred revenue and customer advance payments.

 

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Investing activities during the three months ended April 1, 2018 provided cash of $462.9 million, due to $800.7 million and $212.7 million in proceeds from sales and maturities of marketable securities, respectively, partially offset by $490.3 million used for purchases of marketable securities, $34.8 million used for purchases of property, plant and equipment and $25.4 million used for the acquisition of Energid.

Financing activities during the three months ended April 1, 2018 used cash of $174.4 million, due to $134.3 million used for the repurchase of 2.9 million shares of common stock at an average price of $45.69 per share, $19.6 million used for payment related to net settlement of employee stock compensation awards, $17.6 million used for dividend payments, and $13.6 million used for a payment related to Universal Robots acquisition contingent consideration, partially offset by $10.7 million from the issuance of common stock under employee stock purchase and stock option plans.

Operating activities during the three months ended April 2, 2017 used cash of $61.1 million. Changes in operating assets and liabilities used cash of $182.4 million. This was due to a $184.9 million increase in operating assets and a $2.5 million increase in operating liabilities.

The increase in operating assets was primarily due to a $123.8 million increase in accounts receivable due to the delivery profile of first quarter shipments and a $62.2 million increase in inventories to support increased shipments in the second quarter.

The decrease in operating liabilities was due to a $31.0 million decrease in accrued employee compensation due primarily to first quarter payments related to variable compensation, a $3.3 million decrease in deferred revenue and customer advance payments, a $0.9 million decrease in other accrued liabilities and $0.9 million of retirement plan contributions, partially offset by a $24.3 million increase in accounts payable and a $14.3 million increase in income taxes.

Investing activities during the three months ended April 2, 2017 provided cash of $126.4 million, due to $213.6 million and $88.2 million in proceeds from sales and maturities of marketable securities, respectively, partially offset by $153.3 used for purchases of marketable securities and $22.1 million used for purchases of property, plant and equipment.

Financing activities during the three months ended April 2, 2017 used cash of $50.0 million, due to $37.7 million used for the repurchase of 1.3 million shares of common stock at an average price of $29.38 per share, $14.0 million used for dividend payments, $12.3 million used for payment related to net settlement of employee stock compensation awards and $1.1 million used for a payment related to AIT contingent consideration, partially offset by $15.1 million from the issuance of common stock under employee stock purchase and stock option plans.

In January 2018, our Board of Directors declared a quarterly cash dividend of $0.09 per share that was paid on March 23, 2018 to shareholders of record as of February 23, 2018. Dividend payments for the three months ended April 1, 2018 were $17.6 million.

In January 2017, our Board of Directors declared a quarterly cash dividend of $0.07 per share that was paid on March 20, 2017 to shareholders of record as of February 24, 2017. Dividend payments for the three months ended April 2, 2017 were $14.0 million.

In January 2018, our Board of Directors cancelled the December 2016 stock repurchase program and authorized a new stock repurchase program for up to $1.5 billion of common stock. We intend to repurchase $750 million in 2018. During the three months ended April 1, 2018, we repurchased 2.9 million shares of common stock for $134.3 million at an average price of $45.69 per share.

In December 2016, our Board of Directors approved a $500 million share repurchase authorization which commenced on January 1, 2017. During the three months ended April 2, 2017, we repurchased 1.3 million shares of common stock for $37.7 million at an average price of $29.38 per share.

 

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

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

Equity Compensation Plans

As discussed in Note O: “Stock Based Compensation” in our 2017 Annual Report on Form 10-K, we have a 1996 Employee Stock Purchase Plan and a 2006 Equity and Cash Compensation Incentive Plan (the “2006 Equity Plan”).

The purpose of the 1996 Employee Stock Purchase Plan is to encourage stock ownership by all eligible employees of Teradyne. The purpose of the 2006 Equity Plan is to provide equity ownership and compensation opportunities in Teradyne to our employees, officers, directors, consultants and/or advisors. Both plans were approved by our shareholders.

Recently Issued Accounting Pronouncements

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 now 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. We are currently evaluating the impact of this ASU on our financial position, results of operations and statements of cash flows.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” The guidance in this ASU supersedes the lease recognition requirements in Accounting Standards Codification (“ASC”) Topic 840, “Leases.” The new standard establishes a right- of-use (“ROU”) model that requires a lessee to record an ROU asset and a lease liability on the balance sheet for all leases with terms longer than twelve months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the statements of operations. The new standard is effective for annual periods beginning after December 15, 2018 with early adoption permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. We are currently evaluating the impact of this ASU on our financial position and results of operations.

 

Item 3: Quantitative and Qualitative Disclosures about Market Risks

For “Quantitative and Qualitative Disclosures about Market Risk” affecting Teradyne, see Part 2 Item 7a, “Quantitative and Qualitative Disclosures about Market Risks,” in our Annual Report on Form 10-K filed with the SEC on March 1, 2018. There were no material changes in our exposure to market risk from those set forth in our Annual Report for the fiscal year ended December 31, 2017.

 

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In addition to market risks described in our Annual Report on Form 10-K, we have an equity price risk related to the fair value of our convertible senior unsecured notes issued in December 2016. In December 2016, Teradyne issued $460 million aggregate principal amount of 1.25% convertible senior unsecured notes (the “Notes”) due December 15, 2023. As of April 1, 2018, the Notes had a fair value of $700.6 million. The table below provides a sensitivity analysis of hypothetical 10% changes of Teradyne’s stock price as of the end of the first quarter of 2018 and the estimated impact on the fair value of the Notes. The selected scenarios are not predictions of future events, but rather are intended to illustrate the effect such event may have on the fair value of the Notes. The fair value of the Notes is subject to equity price risk due to the convertible feature. The fair value of the Notes will generally increase as Teradyne’s common stock price increases and will generally decrease as the common stock price declines in value. The change in stock price affects the fair value of the convertible senior notes, but does not impact Teradyne’s financial position, cash flows or results of operations due to the fixed nature of the debt obligation. Additionally, we carry the Notes at face value less unamortized discount on our balance sheet, and we present the fair value for required disclosure purposes only. In connection with the offering of the Notes we also sold warrants to the option counterparties. These transactions have been accounted for as an adjustment to our shareholders’ equity. The convertible note hedge transactions are expected to reduce the potential equity dilution upon conversion of the Notes. The warrants along with any shares issuable upon conversion of the Notes will have a dilutive effect on our earnings per share to the extent that the average market price of our common stock for a given reporting period exceeds the applicable strike price or conversion price of the warrants or Notes, respectively.

 

Hypothetical Change in Teradyne Stock Price

   Fair Value      Estimated change
in fair value
    Hypothetical percentage
increase (decrease) in fair

value
 

10% Increase

   $ 758,281      $ 57,655       8.2

No Change

     700,626        —         —    

10% Decrease

     644,904        (55,722     (8.0

See Note G: “Debt” for further information.

 

Item 4: Controls and Procedures

As of the end of the period covered by this report, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15(b) or Rule 15d-15(f) promulgated under the Exchange Act. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective in ensuring that material information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, including ensuring that such material information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

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PART II. OTHER INFORMATION

 

Item 1: Legal Proceedings

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

 

Item 1A: Risk Factors

In addition to other information set forth in this Form 10-Q, you should carefully consider the factors discussed in Part I, “Item 1A: Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2017, which could materially affect our business, financial condition or future results. The risk factors described in our Annual Report on Form 10-K remain applicable to our business.

The risks described in our Annual Report on Form 10-K are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

Our business may suffer if we are impacted by the implementation of tariffs on our products.

Our business operations are international and may be disrupted by the implementation of tariffs on our products. In March 2018, the United States Trade Representative announced proposed tariffs on a list of products manufactured in China. While there is uncertainty as to whether the proposed tariffs will be implemented and, if they are implemented, as to the products that will be covered by the tariffs, the tariffs if implemented could have a material adverse effect on our business, financial condition or results of operations. In addition, tariffs implemented by China could disrupt our business operations or impact the sale of our products and, therefore, have a material adverse effect on our business, financial condition or results or operations.

 

Item 2: Unregistered Sales of Equity Securities and Use of Proceeds

In January 2018, our Board of Directors cancelled the December 2016 stock repurchase program and authorized a new stock repurchase program for up to $1.5 billion of common stock. We intend to repurchase $750 million in 2018. During the three months ended April 1, 2018, we repurchased 2.9 million shares of common stock for $134.3 million at an average price of $45.69 per share.

In December 2016, our Board of Directors approved a $500 million share repurchase authorization which commenced on January 1, 2017. During the three months ended April 2, 2017, we repurchased 1.3 million shares of common stock for $37.7 million at an average price of $29.38 per share.

The following table includes information with respect to repurchases we made of our common stock during the three months ended April 1, 2018 (in thousands except per share price):

 

Period

  (a) Total
Number of
Shares
(or Units)
Purchased
          (b) Average
Price Paid per
Share (or Unit)
          (c) Total Number of
Shares (or Units)
Purchased as Part of
Publicly  Announced
Plans or Programs
    (d) Maximum Number
(or Approximate Dollar
Value) of Shares (or
Units) that may Yet Be
Purchased Under the
Plans or Programs
 

January 1, 2018 – January 28, 2018

    83       $ 46.77             $ 1,500,000  

January 29, 2018 – February 25, 2018

    1,654       $ 44.28         1,317     $ 1,442,449  

February 26, 2018 – April 1, 2018

    1,622       $ 47.31         1,622     $ 1,365,724  
 

 

 

     

 

 

     

 

 

   
    3,359       (1   $ 45.80       (1     2,939    
 

 

 

     

 

 

     

 

 

   

 

(1) Includes 0.4 million shares at an average price of $46.59 withheld from employees for the payment of taxes.

 

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Table of Contents

We satisfy U.S. federal and state minimum withholding tax obligations due upon the vesting and the conversion of restricted stock units into shares of our common stock, by automatically withholding from the shares being issued, a number of shares with an aggregate fair market value on the date of such vesting and conversion that would satisfy the minimum withholding amount due.

 

Item 4: Mine Safety Disclosures

Not Applicable

 

Item 6: Exhibits

 

Exhibit

Number

  

Description

    2.1    Share Sale and Purchase Agreement by and among Teradyne Robotics Holdings Denmark ApS, Teradyne, Inc., and the shareholders of Mobile Industrial Robots ApS, dated April 25, 2018 (filed herewith)
  10.1    Amendment No.2 to Credit Agreement, dated as of March  21, 2018, among Teradyne, Inc., Barclays Bank PLC, as the administrative agent and collateral agent, and the lenders party thereto (filed herewith)
  31.1    Certification of Principal Executive Officer, pursuant to Rule 13a-14(a) of Securities and Exchange Act of 1934, as adopted pursuant to Section  302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
  31.2    Certification of Principal Financial Officer, pursuant to Rule 13a-14(a) of Securities and Exchange Act of 1934, as adopted pursuant to Section  302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
  32.1    Certification of Principal Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)
  32.2    Certification of Principal Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)
101.INS    XBRL Instance Document
101.SCH    XBRL Taxonomy Extension Schema Document
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document
101.LAB    XBRL Taxonomy Extension Label Linkbase Document
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document

 

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Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

TERADYNE, INC.
Registrant

/S/ GREGORY R. BEECHER

Gregory R. Beecher

Vice President,

Chief Financial Officer and Treasurer

(Duly Authorized Officer

and Principal Financial Officer)

May 11, 2018

 

48

EX-2.1

EXHIBIT 2.1

 

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Copenhagen · April 2018

 

File no. 061194-0005

Doc.no. 18558174.1

Execution version

Share Sale and Purchase Agreement

 

 

concerning Mobile Industrial Robots ApS

CVR no. 35 25 12 35

 

København

Langelinie Allé 35

2100 København Ø

Danmark

  

Aarhus

Værkmestergade 2

8000 Aarhus C

Danmark

  

Shanghai

Suite 2H08

No.1440 Yan’an Middle Road

Jing’an District, 200040

  

T  +45 72 27 00 00

F  +45 72 27 00 27

E  info@bechbruun.com

  

Advokatpartnerselskab

CVR-nr. 38538071

www.bechbruun.com


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CONTENTS

 

1.   

DEFINITIONS, INTERPRETATION AND ENTIRE AGREEMENT

     5  
2.   

PURPOSE AND BACKGROUND

     16  
3.   

CONCLUSION OF AGREEMENT

     17  
4.   

SALE AND PURCHASE OF SHARES

     18  
5.   

PURCHASE PRICE

     18  
6.   

EARN-OUTS

     20  
7.   

COOPERATION AND FURTHER COVENANTS

     30  
8.   

CLOSING

     31  
9.   

ACTIONS AFTER CLOSING

     33  
10.   

SPECIAL INDEMNIFICATIONS

     34  
11.   

WARRANTIES

     36  
12.   

SELLERS’ LIABILITY, LIMITATIONS AND CLAIMS PROCEDURE

     38  
13.   

GUARANTEE

     42  
14.   

RESTRICTIVE COVENANTS

     42  
15.   

CONFIDENTIALITY AND PUBLICATION

     43  
16.   

GOVERNING LAW AND DISPUTES

     44  
17.    OTHER PROVISIONS      45  


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SCHEDULES

 

Schedule 1(a):    Accounting Policies
Schedule 1(b):    Annual Reports
Schedule 1(c):    Due Diligence Information (CD Rom of the VDR)
Schedule 1(d):    EBIT Margin
Schedule 1(e):    Employment Addenda
Schedule 1(f):    Employment Agreement
Schedule 1(g):    Escrow Agreement
Schedule 1(h)    Calculation of Preliminary Closing Purchase Price
Schedule 1(i):    Service Agreement
Schedule 1(j):    List of Subsidiaries
Schedule 1(k):    Warrants
Schedule 3.1(a):    Transcripts from the Danish Business Authority
Schedule 3.1(b):    Minutes of board meeting in the Company (approval of the Agreement)
Schedule 3.1(d):    Certificates from Nordea and Vækstfonden
Schedule 3.1(e):    Confirmation from HD Ejendomme A/S
Schedule 3.2(a):    Buyer’s signing documents
Schedule 3.2(b):    Buyer’s approval of the Agreement
Schedule 5.3(a)    Calculation of Net Debt
Schedule 5.3(b)    Calculation of Working Capital
Schedule 6.2.1:    Illustrative calculations of the 2018 Revenue Earn-Out, the Phase-1 Revenue Earn-Out and the Phase-2 Revenue Earn-Out
Schedule 6.9:    Business Plan
Schedule 8.2(k)    Option Cancellation Agreement
Schedule 8.3(e):    Employment Bonus Scheme
Schedule 11.1:    Sellers’ Warranties
Schedule 14.1.1:    Permitted activities and investments
Schedule 15.4:    Joint press release
Schedule 17.2:    Addresses


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This

 

SHARE SALE AND PURCHASE AGREEMENT

was concluded on 25 April 2018 between on the one side

Jaccon 2 ApS

CVR no. 37 36 49 24

Ulriksholmvej 27

5230 Odense M

Denmark

(“JACCON”)

Esben ApS

CVR no. 37 22 08 17

Hunderupvej 63

5000 Odense C

Denmark

(“ESBEN”)

Visti Jensen Holding ApS

CVR no. 36 43 08 77

Bülowsvej 13

5230 Odense M

Denmark

(“VJH”)

Juul Holding ApS

CVR no. 20 94 37 42

Syvhøjevej 28

Højby

5260 Odense S

Denmark

(“JH”)

TPC Management ApS

CVR no. 25 24 43 62

Fredens Allé 10

Dalum

5250 Odense SV

Denmark

(“TPC”)

(each of JACCON, ESBEN, VJH, JH, and TPC referred to as a “Seller” and collectively the “Sellers”)


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and on the other side

Teradyne Robotics Holdings Denmark ApS

CVR no. 39484838

c/o Bech-Bruun Law firm

Langelinie Allé 35

2100 Copenhagen

Denmark

(the “Buyer”)

and

Teradyne, Inc.

600 Riverpark Drive

North Reading, MA 01864

USA

(the “Guarantor”)

concerning 100% of the issued and outstanding shares in Mobile Industrial Robots ApS (the “Company”).

WHEREAS, on the date hereof the Sellers have the power to cause and direct the transfer of the Shares (as defined) and desire to sell the Shares to Buyer, and Buyer desires to purchase the Shares from Sellers, upon the terms and subject to the conditions hereinafter set forth:

 

1. DEFINITIONS, INTERPRETATION AND ENTIRE AGREEMENT

 

1.3 In the Agreement, the following words and expressions have the meanings stated below, unless the context requires otherwise.

 

  Accelerated Earn-Out Payments    as stated in clause 6.9.7.
  Accounting Policies    the Company’s accounting principles, policies, practices and procedures together with the estimates and assessments all as applied up until and including the Closing Date by the Group and as described in Schedule 1(a), to the extent in accordance with Danish GAAP.
  Accounts Date    31 December 2017.
  Adjustment Amount    the difference, if any, between the Preliminary Closing Purchase Price and the Closing Purchase Price; see clause 5.5.


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  Affiliate    with respect to any Person, any other Person directly or indirectly controlling, controlled by or under common control with such Person. For the purposes of this definition “control” when used in respect of any Person means the power to direct the management and policies of such Person, directly or indirectly, whether through ownership of voting securities, by contract or otherwise, and the terms “controlling” and “controlled” have correlative meanings.
  Agreement    this agreement, including all Schedules and Exhibits hereto which are hereby incorporated by reference herein.
  Annual Reports    the Company’s consolidated and audited annual reports for the financial years 1 January 2016 until 31 December 2016 and 1 January 2017 until the Accounts Date respectively, see Schedule 1(b).
  Basket    as stated in clause 12.4.1(b).
  Breach    any misrepresentation, incorrectness and/or other breach of any of the Sellers’ Warranties.
  Business Day    any day other than a Saturday or Sunday on which banks are generally open for business and not required or authorized by Law to be closed in Denmark and Massachusetts, United States of America (disregarding banking business being conducted exclusively through the Internet).
  Buyer’s Knowledge    the actual knowledge that either of Amy McAndrews, Mark Jagiela, Gregory Beecher, Charles Gray, Michael Callahan or Walter Vahey had on the Signing Date.
  Cap    as stated in clause 12.4.2.
  Closing    the Parties’ fulfilment of the obligations described in clause 8.


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  Closing Date    the date on which Closing takes place; see clause 8.1.
  Closing Memorandum    minutes of the meeting at which Closing takes place.
  Closing Purchase Price    as stated in clause 5.2.
  Closing Purchase Price Calculation    as stated in clause 5.4.
  Company    Mobile Industrial Robots ApS, CVR no. 35 25 12 35, a limited liability company incorporated and registered in accordance with Danish legislation.
  Confidential Information    as stated in clause 15.2.
  Corporate Documents    the charter and other documents by which any Person (other than an individual) establishes its legal existence or which govern its internal affairs, including its articles of incorporation or association and/or its by-laws.
  De Minimis Threshold    as stated in clause 12.4.1(a).
  Default Interest    an annual interest equal to the Interest plus five percentage points.
  Disputed Matters    the items on which the Parties are unable to agree following an Objection with respect to (i) the draft Closing Purchase Price Calculation as described in clause 5.4.4, (ii) a draft calculation of an EBIT Margin as described in clause 6.7, or (iii) a Quarterly Product Revenue Statement as described in clause 6.6.
  Disclosed    any written information fairly disclosed by the Sellers or on behalf of the Sellers in the Due Diligence Information or in this Agreement (the “Disclosed Information”) in a way that would allow a reasonably diligent person skilled in the field to which the information relates (e.g. business administration, accounting, regulatory, legal, etc.), given the nature and context of the disclosure, to


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     reasonably discern the relevance of such matter, including the substance of any potential claim, loss, liability or disadvantage based on reading and analysing the said information, provided that (i) if the relevant information (or relevant elements of a subject matter) has been disclosed in the Due Diligence Information, it has been disclosed in a document or several documents contained in one or more data room folders where, based on the location of such folder or folders, as the case may be, in the data room and its labelling, such facts or circumstances could have been reasonably expected to be disclosed and (ii), if there is inconsistent information within the Disclosed Information, only the more recent facts and circumstances shall be deemed disclosed, unless it would be a reasonable assumption, in the given context of such inconsistencies, that the former facts and circumstances were still relevant.
  Disclosed Information    as stated in the definition of “Disclosed”.
  DKK    Danish Kroner, the valid currency of Denmark.
  Due Diligence Information    the written information provided to the Buyer in the virtual data room established in connection with the transactions contemplated by this Agreement, included in Schedule 1(c).
  Earn-Out Payments    as stated in clause 6.1.
  Earn-Out Payments Cap Amount    an aggregate amount for the total Earn-Out Payments of EUR 101,300,000.
  Earn-Outs    the 2018 Revenue Earn-Out, the Phase-1 Revenue Earn-Out and the Phase-2 Revenue Earn-Out.
  EBIT Margin    as set forth in Schedule 1(d) and as determined in accordance with the Accounting Policies, but in any case excluding (a) charges or costs of any nature related to the acquisition of the Group by the Buyer, (b) gains or losses from the sale of long-lived assets or extraordinary items not being in the


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   ordinary course of business, (c) financial income, (d) financial expenses, (e) purchase price intangible asset amortization related to the acquisition of the Group by the Buyer, and including (f) direct and incremental out-of-pocket costs for third party services (other than Teradyne group internal group services) requested by the Group.
EBIT Margin Condition    the required minimum EBIT margin described in respect of the 2018 Revenue Earn-Out, the Phase-1 Revenue Earn-Out and Phase-2 Revenue Earn-Out respectively, cf. clauses 6.2.1, 6.3.1 and 6.4.1, however, such margin condition modified by the calculation examples set forth in Schedule 1(d).
EBIT Margin Calculation    as stated in clause 6.7.1.
Effective Date    24:00 h on the Closing Date.
Employment Addenda    the employment addenda between the Company and Jeppe Pedersen, Birthe Koldby Veje, Henrik Vesterlund Sørensen, Flemming Thinggard and Kent Hansen, respectively, attached in agreed form as Schedule 1(e)
Employment Agreement    the employment agreement between the Company and Niels Jul Jacobsen, attached in agreed form as Schedule 1(f).
Encumbrances    as defined in Schedule 11.1.
Enterprise Value    EUR 122,000,000.
Escrow Account    the account with the Escrow Agent in the joint names of the Sellers’ Representative and the Buyer.
Escrow Agent    Sydbank A/S.
Escrow Agreement    the agreement between the Sellers’ Representative, the Buyer and the Escrow Agent relating to the operation of the Escrow Account on the agreed terms set out in Schedule 1(g).


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Escrow Amount    an aggregate amount of EUR 24,400,000.
EUR    Euro, being the valid currency of Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain.
Expert    a state authorized public accountant appointed by Grant Thornton, Statsautoriseret Revisionspartnerselskab among its Danish partners. If Grant Thornton, Statsautoriseret Revisionspartnerselskab is unwilling to appoint the Expert among its partners, the Expert will be a state authorized public accountant otherwise agreed by Sellers’ Representative and Buyer, or, failing such agreement within 10 Business Days after Grant Thornton, Statsautoriseret Revisionspartnerselskab refused to appoint the Expert, upon request of either Sellers’ Representative or Buyer appointed by “FSR-Danish Auditors” from an internationally recognised auditing firm not having provided substantial services (substantial services for the purposes of this Agreement being understood as services involving fees of an amount equivalent to more than DKK 500,000 annually) to any of the Parties or the Group for the past 3 years, but none of Deloitte, PWC, KPMG or EY.
Final Net Debt    the Group’s Net Debt as per the Effective Date determined in accordance with clause 5.4.
Final Working Capital    the Group’s Working Capital as per the Effective Date determined in accordance with clause 5.4.
Governmental Authority    any national, supranational, foreign, provincial, state, municipal or local government, governmental, regulatory or administrative authority, agency, body, branch or bureau, instrumentality or commission or any court, tribunal, or judicial or arbitral body.
Group    the Company and the Subsidiaries.


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Group Company    a company in the Group.
Group Companies    several or all of the companies in the Group.
Interest    an annual interest rate of 2% p.a. with the calculation of interest being made on the basis of days actually elapsed and 365 days per year.
Law    any national, supranational, state, provincial, municipal or local statute, law, constitution, ordinance, code, regulation, directive, rule, order, requirement or rule of law (including common law) or code issued, enacted, adopted, promulgated, implemented or otherwise put into effect by or under the authority of any Governmental Authority or parliament.
Loss    any damage, direct loss and expense (including reasonable attorneys’ fees and other expenses in connection with any claim) suffered by the Buyer or any of its Affiliates (including the Group) in respect of a Breach, but always excluding any indirect or consequential losses including loss of profit, as further qualified in clause 12.2.1.
Net Debt    the Group’s net debt calculated in accordance with Schedule 5.3(a) and the Accounting Principles, provided that in case of any discrepancy between the Accounting Principles and Schedule 5.3(a), Schedule 5.3(a) shall prevail.
Notice    as stated in clause 17.2.
Objection    any objection of the Sellers’ Representative to the Buyer’s draft (i) Closing Purchase Price Calculation, (ii) an EBIT Margin Calculation, or (iii) a Quarterly Product Revenue Statement.
Option Cancellation Agreement    the agreement between the Company and Ed Mullen attached as Schedule 8.2(k).
Parties    the Sellers and the Buyer.
Party    a Seller or the Buyer.


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Pay-Off Amounts    such amounts in such currencies as notified under clause 3.1(d) as being the amount required, if any: (i) to discharge the indebtedness (whether or not due and payable) owed under or in connection with the Secured Debt at the Closing Date (for the avoidance of doubt, including the outstanding principal amount of any drawing and any accrued but unpaid interest thereon at the Closing Date); (ii) to release all guarantees and security in relation to the Secured Debt at the Closing Date; and (iii) to terminate the Secured Debt at the Closing Date (such amount being inclusive of any applicable break costs, prepayment or early termination fees and other related fees or fees of a similar nature), assuming such discharge, release and termination takes effect from the Closing Date.
Person    any individual, corporation, partnership, firm, joint venture, association, joint stock company, trust, incorporated or non-incorporated organisation, country, state, city, municipality, government, political subdivision, agency, authority, or instrumentality of a government or other entity.
Phase-1 Revenue Earn-Out    as set out in clause 6.3.
Phase-1 Revenue Hurdle    DKK 420,000,000.
Phase-1 Revenue Period    the period running from 1 January 2018 – 31 December 2019.
Phase-1 Revenue Target    DKK 600,000,000.
Phase-2 Revenue Earn-Out    as set out in clause 6.4.
Phase-2 Revenue Hurdle    DKK 840,000,000.
Phase-2 Revenue Period    the period running from 1 January 2018 – 31 December 2020.
Phase-2 Revenue Target    DKK 1,200,000,000.


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Preliminary Closing Purchase Price    EUR 118,409,863, calculated in accordance with Schedule 1(h) and on the basis of the Sellers’ Representative good faith estimate of the Net Debt and the Working Capital of the Group as of the Effective Date determined in accordance with the principles set forth in clause 5.2.
Principal Sellers    each of Niels Jul Jacobsen, Thomas Visti Jensen, Esben Hallundbæk Østergaard, Torben Frigaard Rasmussen and Søren Michael Juul Jørgensen,
Products    the Group’s current and future products.
Purchase Price    as stated in clause 5.1.
Quarterly Product Revenue Statement    as stated in clause 6.5.2.
Reference Working Capital    the reference Working Capital of the Group in the amount of DKK 10,094,000.
Revenues    any and all revenues generated by the Group; such Revenues for purpose of calculating the Earn-Out Payments to be adjusted and determined in accordance with the principles set out in clause 6.9.
Schedule    a schedule to the Agreement.
Secured Debt    the Company’s outstanding commitments as of the Closing Date under credit facility agreement with Nordea and the loan agreement with Vækstfonden.
Sellers’ Bank Account    a EUR client account of DLA Piper Denmark Law Firm P/S with Nordea Danmark, filial af Nordea Bank AB (publ), Sverige, reg. no. 2191, account no. 5036 375 525, IBAN: DK3720005036375525 and SWIFT/BIC: NDEADKKK .
Sellers’ Knowledge    the actual knowledge that either of Niels Jul Jacobsen, Thomas Visti Jensen, Claus Larsen, Torben Frigaard Rasmussen and Søren Michael Juul Jørgensen had on the Signing Date.
Sellers’ Representative    as stated in clause 17.1.


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Sellers’ Warranties    as described in Schedule 11.1.
Service Agreement    the Service Agreement between the Company and Thomas Visti Jensen attached in agreed form as Schedule 1(i).
Shares    all shares issued by the Company currently consisting of DKK 1,420,200 shares of DKK 1 each, equal to 100% of the Company’s total issued nominal share capital.
Signing Date    the date on which the Sellers the Buyer and the Guarantor have signed the Agreement.
SKAT    as stated in clause 9.2.2.
Subsidiaries    the companies set out in Schedule 1(j) and any further subsidiaries and any other affiliated companies owned by the Company or a Subsidiary from time to time.
Taxes    any and all taxes and tax liabilities, whether actual or deferred or contingent and whether or not provided for in the Annual Reports, the Management Accounts (as defined in Schedule 14.1) or the Closing Purchase Price Calculation, payable to or imposed by a Governmental Authority in respect of income taxes, sales and use taxes, transfer taxes, franchise taxes, value-added taxes, withholding taxes, stamp duties, customs duties, payroll taxes, social security taxes and charges, environmental taxes and property taxes and all other taxes and public duties of any kind and any fees, penalties and interest amounts relating thereto.
Title Warranties    the Warranties in clauses 3.1, 3.2, 3.3, 3.4, 3.5 and 3.6 of Schedule 11.1.
Third Party Claim    as stated in clause 12.6.1.
Third Party Rights    any type of legal charge, lien, right of first refusal, purchase option, retention of title, option or title, in each case in favour of a third Person.


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USD    United States Dollar, being the valid currency of the United States of America.
Warranties    the warranties given by the Sellers or the Buyer in accordance with clause 11 and Schedule 11.1 as the case may be.
Warrants    all warrants or other kind of equity based options in any Group Company issued and to be issued by a Group Company, whether vested or unvested, including such warrants set out in the table attached as Schedule 1(k).
2018 Revenue Earn-Out    as set out in clause 6.2.
2018 Revenue Hurdle    DKK 160,000,000.
2018 Revenue Period    the period running from 1 January 2018 – 31 December 2018.
2018 Revenue Target    DKK 200,000,000.

 

1.1 The Agreement is the result of the Parties’ negotiations, and it cannot be interpreted against a Party as a consequence of such Party having drafted one or more of the provisions of the Agreement.

 

1.4 The words “include”, “includes” or “including” and similar expressions mean for the purpose of this Agreement “including, but not limited to”.

 

1.5 Defined terms in the singular include the plural and vice versa, unless the context requires otherwise.

 

1.6 The table of contents and the headings of the Agreement are for guidance only and have no legal effect on the understanding or interpretation of the provisions of the Agreement.

 

1.7 The terms defined in this Agreement have the defined meanings when used in any Schedule, appendix, certificate or other document delivered or made available pursuant thereto.

 

1.8 References to a Person are also to its successors and permitted assigns.


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1.9 Unless the context otherwise requires, references to any agreement shall mean such agreement as amended or modified from time to time.

 

1.10 References to any Law shall be as amended from time to time and shall include all rules and regulations promulgated thereunder.

 

1.11 Unless the context otherwise requires, references to any time shall refer to time in Denmark.

 

1.12 The Agreement contains the entire agreement between the Parties concerning the Buyer’s acquisition of the Shares and supersedes all previous agreements between the Parties and the Guarantor on the subject matter.

 

1.13 With respect to the conversion of currencies, the following shall apply:

 

  (a) The conversion of foreign currencies into DKK in connection with the Closing Purchase Price Calculation and the Quarterly Product Revenue Statements shall be made pursuant to the currency exchange and conversion provisions contained in the Accounting Policies.

 

  (b) The conversion of DKK amounts stated in the Closing Purchase Price Calculation into EUR for purposes of payment of the Adjustment Amount, if any, shall be calculated by applying the exchange rate as published by the Danish Central Bank (Nationalbanken) for a transaction between the two currencies in question quoted as at the close of business (in Copenhagen) on the Closing Date with respect to the Adjustment Amount.

 

  (c) With respect to any Loss or other claim under any of the Sellers’ Warranties as well as any other claims pursuant to this Agreement other than claims comprised in paragraph (b) above incurred in a currency not being EUR, such amount shall be raised and settled in the relevant currency of the underlying Loss.

 

2. PURPOSE AND BACKGROUND

At Closing the Sellers will own the Shares and wish to sell them to the Buyer, and the Buyer wishes to acquire the Shares on the terms and conditions set out in the Agreement.


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3. CONCLUSION OF AGREEMENT

 

3.1 The Sellers have prior to the Signing Date provided the Buyer with:

 

  (a) documentation evidencing that the Agreement has been duly executed and delivered by duly authorized Persons who may represent the relevant Sellers that are limited liability companies; see Schedule 3.1(a);

 

  (b) documentation evidencing that the Sellers have obtained all requisite corporate approvals for the execution and delivery of this Agreement by Sellers including approval of the contemplated share sale from the Company’s board of directors pursuant to the Company’s articles of association and statements from each of the Sellers irrevocably waiving any pre-emption rights to the Shares, see Schedule 3.1(b);

 

  (c) a draft Closing Memorandum;

 

  (d) a certificate from each of Nordea Danmark, filial af Nordea Bank AB (publ), Sverige, and Vækstfonden stating (i) the amounts and currency required to effect full prepayment of the Pay-Off Amounts, and (ii) all payee account details as will be required by the Buyer to effect payment of the Pay-Off Amounts in accordance with clause 8.3(b) and, in a form acceptable to the Buyer acting reasonably, confirming finally and irrevocably and with binding effect for Nordea Danmark, filial af Nordea Bank AB (publ), Sverige, and Vækstfonden, that (iii) subject to performance of the payment instructions as set out in the certificate all Third Party Rights in respect of the Secured Debt shall be deemed to be fully and finally discharged and released, cf. Schedule 3.1(d); and

 

  (e) documentation evidencing that HD Ejendomme A/S has waived any right to amend or terminate its lease agreement with the Company regarding the premises at Emil Neckelmanns Vej 15E, 5220 Odense SØ as a consequence of the transactions contemplated by this Agreement, cf. Schedule 3.1(e).

 

3.2 The Buyer and the Guarantor have prior to the Signing Date provided the Sellers with documentation evidencing:

 

  (a) that the Agreement has been duly executed and delivered by Persons authorized to represent the Buyer and the Guarantor; see Schedule 3.2(a); and

 

  (b) that the Buyer and the Guarantor have obtained all requisite corporate approvals, including approval of their board of directors, for the execution and delivery of this Agreement by the Buyer and the Guarantor; see Schedule 3.2(b).


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4. SALE AND PURCHASE OF SHARES

 

4.1 The Sellers agree to sell the Shares to the Buyer, free and clear of any Encumbrances and including all rights to undistributed dividends, and the Buyer agrees to acquire the Shares free and clear of any Encumbrances and including all rights to undistributed dividends from the Sellers, subject to the terms set out in the Agreement.

 

4.2 With effect from and after the Closing Date, the Buyer shall own all rights attaching to the Shares, including title, voting rights and the right to receive dividends.

 

5. PURCHASE PRICE

 

5.1 The purchase price for the Shares, including each element thereof, shall be calculated and paid in EUR and shall be equal to the Closing Purchase Price plus the Earn-Out Payments, if any (the “Purchase Price”).

 

5.2 The “Closing Purchase Price” shall be equal to:

 

5.2.1 the Enterprise Value,

 

5.2.2 less an amount corresponding to the Final Net Debt (it being understood that if the aggregate of all liabilities comprised by the Final Net Debt is less than the aggregate of all assets comprised by the Final Net Debt so that the amount of the Final Net Debt is negative, such nominal amount shall be added to the Enterprise Value, thereby increasing the final amount of the Closing Purchase Price),

 

5.2.3 plus an amount equal to the amount by which the Final Working Capital exceeds the Reference Working Capital (it being understood that if the Reference Working Capital exceeds the Final Working Capital, so that the amount to be calculated under this clause 5.2.3 is negative, such nominal amount shall be deducted from the Enterprise Value, thereby reducing the final amount of the Closing Purchase Price).

 

5.3 The Net Debt shall be calculated in accordance with Schedule 5.3(a). The Working Capital shall be calculated in accordance with Schedule 5.3(b). These Schedules contain examples of the calculation of the Net Debt and the Working Capital, respectively, including specific line items to be comprised by the Working Capital and the Net Debt.


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5.4 Closing Purchase Price Calculation procedure

 

5.4.1 No later than 40 Business Days following the Closing Date, the Buyer shall deliver to the Sellers’ Representative a draft calculation of (i) the Final Net Debt, (ii) the Final Working Capital and (iii) the Closing Purchase Price, cf. clause 5.2 (collectively the “Closing Purchase Price Calculation”).

 

5.4.2 The Buyer shall procure that the Sellers’ Representative and the Sellers’ advisors are given access to all of the Group’s information and documentation relevant for the Purchase Price Calculation as well as to the Company’s management and accounting staff.

 

5.4.3 If the Sellers’ Representative agrees with the draft Closing Purchase Price Calculation, the Closing Purchase Price Calculation is final and binding on the Parties and constitutes the Final Net Debt, the Final Working Capital and the Closing Purchase Price, respectively.

 

5.4.4 If the Sellers’ Representative disagrees with any part of the Closing Purchase Price Calculation, the Sellers’ Representative shall deliver a written notice (the “Notice of Objection”) to the Buyer. The Notice of Objection must specify in detail the nature and amount (estimated if necessary) of the Sellers’ disagreement(s). The Notice of Objection must be delivered to the Buyer no later than 20 Business Days after the Sellers’ Representative’s receipt of the Closing Purchase Price Calculation, failing which the Closing Purchase Price Calculation becomes final and binding on the Parties and constitutes the Final Net Debt, the Final Working Capital and the Purchase Price, respectively.

 

5.4.5 In the event that the Sellers’ Representative has timely submitted a Notice of Objection to the Buyer, the Parties shall endeavour to resolve their differences within 20 Business Days after the Buyer’s receipt of the Notice of Objection, failing which all items stated in the Notice of Objection on which the Parties have not reached written agreement (the “Disputed Items”) shall be submitted to the Expert.

 

5.4.6 Each Party shall give (and the Buyer shall procure that the Company shall give) the Expert such access to all information and documentation as well as to the Company’s management and accounting staff which in the opinion of the Expert is relevant for the assessment and resolution of the Disputed Items.

 

5.4.7 The Expert shall assess and resolve the Disputed Items in accordance with the Agreement and the Accounting Principles as soon as possible (the Expert shall only assess and resolve the Disputed Items and no other items in the Closing Purchase Price Calculation) and shall, based on such assessment and resolution, determine the Final Net Debt, the Final Working Capital and the Purchase Price, respectively. If the determination of the Disputed Items depends on an accounting estimate, the Expert must make an independent estimate on the basis of what he or she considers to be fair and reasonable under the Agreement and consistent with the Accounting Principles. The Expert shall act as expert only and is not competent to make decisions concerning the legal interpretation of the Agreement.


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5.4.8 The Closing Purchase Price Calculation, as determined by the Expert, is final and binding on the Parties and is not subject to review or amendment by arbitration, subject only to fraud or manifest error.

 

5.4.9 The Expert shall decide on the allocation of the Expert’s costs and expenses between the Parties. The Expert shall take into consideration the degree to which the Expert’s resolution on the Disputed Items is in favour of the Parties’ respective positions.

 

5.4.10 If the Buyer notifies the Sellers’ Representative of a Claim in respect of a Breach of the Sellers’ Warranties prior to such time when the Closing Purchase Price Calculation has been agreed or determined in accordance with this clause 5.4, the matter(s) giving rise to such Claim shall be disregarded and excluded from the calculation of the Net Debt, the Working Capital and the Purchase Price, as any such Claim and matter(s) shall exclusively be subject to the specific remedies set forth in clause 12.

 

5.5 Adjustment Amount

No later than 10 Business Days after the Closing Purchase Price Calculation has become final and binding on the Parties, cf. clause 5.4, the owing Party shall pay to the other Party the Adjustment Amount plus Interest from the Closing Date. Default Interest shall be payable from the expiry of the 10 Business Day period.

 

6. EARN-OUTS

 

6.1 The Sellers shall be entitled to receive additional consideration with respect to the (i) 2018 Revenue Earn-Out, (ii) Phase-1 Revenue Earn-Out and (iii) Phase-2 Revenue Earn-Out (collectively referred to as the “Earn-Out Payments”) payable by the Buyer, subject to certain financial performance conditions being satisfied as specified in clauses 6.2 through 6.4.

 

6.2 2018 Revenue Earn-Out

 

6.2.1

The Sellers shall be eligible for an additional Earn-Out Payment with respect to the 2018 Revenue Earn-Out of up to EUR 27,300,000 depending on the consolidated Revenues of the Group during the 2018 Revenue Period as illustrated in Schedule 6.2.1. Accordingly, the Sellers shall be entitled to an additional linear Earn-Out Payment of EUR 0.6825 for every DKK 1 of consolidated Revenues of the Group during the 2018 Revenue Period that exceeds the 2018 Revenue Hurdle up to a


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  maximum Earn-Out Payment with respect to the forecast Earn-Out of EUR 27,300,000 if the 2018 Revenue Target is met or exceeded. Notwithstanding the preceding sentences of this clause 6.2.1 and any other provisions of this Agreement, no Earn-Out Payment with respect to the 2018 Revenue Earn-Out shall be paid if the Group does not achieve a minimum EBIT Margin of 8% during the 2018 Revenue Period, however, calculated in accordance with the calculation examples set forth in Schedule 6.2.1.

 

6.3 Phase-1 Revenue Earn-Out

 

6.3.1 The Sellers shall be eligible for an additional Earn-Out Payment with respect to the Phase-1 Revenue Earn-Out of up to EUR 35,200,000 depending on the consolidated Revenues of the Group during the Phase-1 Revenue Period as illustrated in Schedule 6.2.1. Accordingly, the Sellers shall be entitled to an additional linear Earn-Out Payment of EUR 0.1956 for every DKK 1 of consolidated Revenues of the Group during the Phase-1 Revenue Period that exceeds the Phase-1 Revenue Hurdle up to a maximum Earn-Out Payment with respect to the forecast Earn-Out of EUR 35,200,000 if the Phase-1 Revenue Target is met or exceeded. Notwithstanding the preceding sentences of this clause 6.3.1 and any other provisions of this Agreement, no Earn-Out Payment with respect to the Phase-1 Revenue Earn-Out shall be paid if the Group does not achieve a minimum EBIT Margin of 16% during the Phase-1 Revenue Period, however, calculated in accordance with the calculation examples set forth in Schedule 6.2.1.

 

6.4 Phase-2 Revenue Earn-Out

 

6.4.1 The Sellers shall be eligible for an additional Earn-Out Payment with respect to the Phase-2 Revenue Earn-Out of up to EUR 38,800,000 depending on the consolidated Revenues of the Group during the Phase-2 Revenue Period as illustrated in Schedule 6.2.1. Accordingly, the Sellers shall be entitled to an additional linear Earn-Out Payment of EUR 0.1078 for every DKK 1 of consolidated Revenues of the Group during the Phase-2 Revenue Period that exceeds the Phase-2 Revenue Hurdle up to a maximum Earn-Out Payment with respect to the forecast Earn-Out of EUR 38,800,000 if the Phase-2 Revenue Target is met or exceeded. Notwithstanding the preceding sentences of this clause 6.4.1 and any other provisions of this Agreement, no Earn-Out Payment with respect to the Phase-2 Revenue Earn-Out shall be paid if the Group does not achieve a minimum EBIT Margin of 17% during the Phase-2 Revenue Period, however, calculated in accordance with the calculation examples set forth in Schedule 6.2.1.

 

6.5 Determination of Revenues; Quarterly Product Revenue Statements

 

6.5.1 The Revenues shall be determined in accordance with the principles set forth in clause 6.9.


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6.5.2 Following the Closing Date, no later than 40 calendar days following the end of its fiscal quarter and 90 calendar days following the end of its fiscal year, the Buyer shall by Notice to the Sellers’ Representative provide a statement setting forth the consolidated Revenues of the Group during the previous fiscal quarter of the Buyer (the “Quarterly Product Revenue Statement”) and the associated EBIT Margin. Further, a Quarterly Product Revenue Statement relating to a fourth quarter shall always be accompanied by the Group’s consolidated audited annual report for the relevant fiscal year. Such obligation to prepare Quarterly Product Revenue Statements shall expire once the Quarterly Product Revenue Statement has been prepared that follows the end of the Phase-2 Revenue Period.

 

6.5.3 The Sellers’ Representative shall be entitled to request access to and the Buyer shall be obligated to provide the Sellers’ Representative with any underlying information and documentation reasonably required by the Sellers’ Representative in order to review the Quarterly Product Revenue Statements, including the relevant parts of the Buyer’s and the Group’s accounts, reasonable access to relevant personnel and, if existing, auditor’s long form audit reports.

 

6.5.4 Without prejudice for any subsequent Objections made by the Sellers’ Representative, the Sellers’ Representative and a representative of the Buyer shall meet by conference call each quarter to discuss the Quarterly Product Revenue Statement and to give the Sellers’ Representative the opportunity to discuss any items concerning the conduct of the Buyer or the Group until the lapse of the Phase-2 Revenue Period. The Sellers’ Representative shall participate in the meeting and shall in good faith report on any issues concerning the conduct of the Buyer or the Group until lapse of the Phase-2 Revenue Period that has or could reasonably be expected to have an impact on the Group’s ability to achieve the Revenues or associated EBIT Margins required to achieve one or more of the Earn-Outs. The Sellers’ Representative may not, neither in these nor any other discussions, whether relating to the Earn-Outs or any other issues, disclose to the Sellers any confidential information relating to the Group, the Buyer or any of its Affiliates, except for facts and circumstances that already have been disclosed by or on behalf of the Buyer to the Sellers, noting, that the Sellers’ Representative is entitled to share and discuss confidential information comprised by this clause 6.5.4 with his advisors under professional duty of confidentiality.

 

6.6 Objection to the Quarterly Product Revenue Statement

 

6.6.1

If the Sellers’ Representative disagrees with any element of any Quarterly Product Revenue Statement, the Sellers’ Representative must give Notice of an Objection to the Buyer no later than 25 Business Days after the Sellers’ Representative’s receipt of a Quarterly Product Revenue Statement covering the fourth quarter in a given calendar year (accompanied by the Group’s consolidated audited annual


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  report for the relevant fiscal year), if relevant, such notice period will not commence before 10 Business Days after the delivery by the Buyer of such reasonable additional relevant information that the Sellers’ Representative have requested in writing before the expiry of the afore-mentioned 25 Business Days’ time limit in order for the Sellers’ Representative to access in detail the basis for the Quarterly Product Revenue Statement in question. The Sellers’ Representative must describe in reasonable detail each Objection including, if applicable, the Sellers’ Representative’s calculation of the relevant Earn-Out Payment and refer to the provisions of the Agreement that the Sellers invoke in support of their position. Unless (i) any Objection has been served on the Buyer within the time frame stipulated above and (ii) the Objection contains all such information as specified in the immediate preceding sentence, the respective Quarterly Product Revenue Statements will be final and binding on the Parties.

 

6.6.2 If the Sellers give Notice of an Objection in accordance with clause 6.6.1, the procedures and time frames stipulated in clause 5.4 shall apply mutatis mutandis with regard to determining the Revenues and Earn-Out Payment relating to the 2018 Revenue Earn-Out, the Phase-1 Revenue Earn-Out or the Phase-2 Revenue Earn-Out as the case may be.

 

6.7 Determination of EBIT Margin; EBIT Margin Calculations

 

6.7.1 No later than 90 calendar days following the end of the last quarter of the 2018 Revenue Period, the Phase-1 Revenue Period and the Phase-2 Revenue Period respectively, the Buyer shall by Notice to the Sellers’ Representative provide a calculation of the EBIT Margin for the 2018 Revenue period, the Phase-1 Revenue Period and the Phase-2 Revenue Period respectively (the “EBIT Margin Calculation”).

 

6.7.2 If the Sellers’ Representative disagrees with any element of an EBIT Margin Calculation, the Sellers’ Representative must give Notice of an Objection to the Buyer no later than 25 Business Days after the Sellers’ Representative’s receipt of the relevant EBIT Margin Calculation, if relevant, such notice period will not commence before 10 Business Days after the delivery by the Buyer of such reasonable additional relevant information that the Sellers’ Representative have requested in writing before the expiry of the afore-mentioned 25 Business Days’ time limit in order for the Sellers’ Representative to access in detail the basis for the EBIT Margin Calculation in question. The Sellers’ Representative must describe in reasonable detail each Objection including, if applicable, the Sellers’ Representative’s calculation of the EBIT Margin and refer to the provisions of the Agreement that the Sellers invoke in support of their position. Unless (i) any Objection has been served on the Buyer within the time frame stipulated above and (ii) the Objection contains all such information as specified in the immediate preceding sentence, the respective EBIT Martin Calculation will be final and binding on the Parties.


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6.7.3 If the Sellers give Notice of an Objection in accordance with clause 6.7.2, the procedures and time frames stipulated in clause 5.4 shall apply mutatis mutandis with regard to determining the EBIT Margin relating to the 2018 Revenue Earn-Out, the Phase-1 Revenue Earn-Out or the Phase-2 Revenue Earn-Out as the case may be.

 

6.8 Due date of Earn-Out Payments relating to 2018 Revenue Earn-Out, the Phase-1 Revenue Earn-Out or the Phase-2 Revenue Earn-Out

 

6.8.1 The Earn-Out Payment provided for in clause 6.2 (2018 Revenue Earn-Out) shall become due and payable in cash in EUR to the Sellers’ Bank Account 10 Business Days after completion of the audit of the consolidated annual accounts of the Group for 2018 complying with applicable statutory filing obligations according to Danish Law, it being understood that, if the Sellers’ Representative gives Notice of an Objection in accordance with clause 6.6.1, the Buyer shall initially only be obliged to pay the undisputed amount, if any, to the Sellers and then subsequently, when the Revenues and/or the EBIT Margin (as the case may be) and the relevant Earn-Out Payment have been finally determined in accordance with clause 6.6.2, the Buyer shall pay the additional Earn-Out Payment including Interest, if any, to the Sellers’ Bank Account. From the relevant due date (as described above) with respect to the 2018 Revenue Earn-Out Interest shall accrue until payment has been made in full.

 

6.8.2 The Earn-Out Payment provided for in clause 6.3 (Phase-1 Revenue Earn-Out) shall become due and payable in cash in EUR to the Sellers’ Bank Account 10 Business Days after completion of the audit of the consolidated annual accounts of the Group for 2019 complying with applicable statutory filing obligations according to Danish Law, it being understood that, if the Sellers’ Representative gives Notice of an Objection in accordance with clause 6.6.1, the Buyer shall initially only be obliged to pay the undisputed amount, if any, to the Sellers and then subsequently, when the Revenues and/or the EBIT Margin (as the case may be) and the relevant Earn-Out Payment have been finally determined in accordance with clause 6.6.2, the Buyer shall pay the additional Earn-Out Payment including Interest, if any, to the Sellers’ Bank Account. From the relevant due date (as described above) with respect to the Phase-1 Revenue Earn-Out Interest shall accrue until payment has been made in full.

 

6.8.3

The Earn-Out Payment provided for in clause 6.4 (Phase-2 Revenue Earn-Out) shall become due and payable in cash in EUR to the Sellers’ Bank Account 10 Business Days after completion of the audit of the consolidated annual accounts of the Group for 2020 complying with applicable statutory filing obligations according to Danish Law, it being understood that, if the Sellers’ Representative gives Notice of an Objection in accordance with clause 6.6.1, the Buyer shall initially only be obliged to pay the undisputed amount, if any, to the Sellers and then


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  subsequently, when the Revenues and/or the EBIT Margin (as the case may be) and the relevant Earn-Out Payment have been finally determined in accordance with clause 6.6.2, the Buyer shall pay the additional Earn-Out Payment including Interest, if any, to the Sellers’ Bank Account. From the relevant due date (as described above) with respect to the Phase-2 Revenue Earn-Out Interest shall accrue until payment has been made in full.

 

6.9 Accounting Policies, Conduct of business during the Earn-Out period

 

6.9.1 For purpose of determining the 2018 Revenue Earn-Out, the Phase-1 Revenue Earn-Out and the Phase-2 Revenue Earn-Out, respectively, the relevant Revenues and EBIT Margins shall be determined by applying the Accounting Policies, except that when calculating the Revenues and EBIT Margins for purposes of determining the 2018 Revenue Earn-Out, the Phase-1 Revenue Earn-Out and the Phase-2 Revenue Earn-Out,

 

  a) if Products are sold from a Group Company to the Buyer or an Affiliate of the Buyer that is not a Group Company (including if such sales are made to sell the Products on to third Persons), such sales to the Buyer or its Affiliates shall be deemed to have been made at the Group’s distributor list prices applicable at the time of the sale net of any standard distributor discounts and rebates (e.g. bonus),

 

  b) Revenues are calculated net of all types of discounts / rebates,

 

  c) any amounts that do not become collectible (whether due to credit memo or bad debt) will not count as Revenues and will be reduced from the Revenues calculation during the period in which such amounts become uncollectible (e.g. written-off); if such amounts turn out to be uncollectible after a Quarterly Product Revenue Statement has been delivered, including the final Quarterly Product Revenue Statement relating to the 2018 Revenue Earn-Out, the Phase-1 Revenue Earn-Out or the Phase-2 Revenue Earn-Out, the Buyer may make corresponding adjustments in any subsequent Quarterly Product Revenue Statement or submit an additional Quarterly Product Revenue Statement, and the Sellers shall repay to the Buyer any Earn-Out Payments that they already received with respect to such uncollectible amounts, always provided that if the Group (i) has recovered or will be entitled to recover such amount (or any part thereof) under a trade credit insurance then an adjustment shall only be made with respect to the residual amount not being covered by the trade credit insurance, (ii) further provided that if the Group after the Closing Date will not maintain the Group’s past practice with respect to taking out trade credit insurances, the uncollectible amounts shall be calculated as if such practice had been maintained on substantially similar terms as those in place as of the Effective Date, and/or (iii) if the relevant amount subsequently is paid to the Group,


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  d) Revenues exclude VAT, and

 

  e) if any trade or commercial arrangements between a Group Company and the Buyer or any Affiliate of the Buyer (which is not already covered by clause 6.9.1 (a)) has not been made on arms’ length conditions, such trade or commercial arrangements shall be deemed to have been made on arms’ length conditions and the Revenues shall be calculated accordingly.

 

6.9.2 If the Sellers have indemnified the Buyer or a Group Company for any Breach or any indemnification pursuant to clause 10, then for the purpose of determining the Revenues and EBIT Margin, any such indemnification payment shall (on a EUR for EUR basis or other relevant currency, as the case may be) be treated as Revenues if and to the extent the underlying Breach or cause for indemnification resulted in a reduction of Revenues of any Group Company.

 

6.9.3 For purpose of determining any payment related to the 2018 Revenue Earn-Out, the Phase-1 Revenue Earn-Out and the Phase-2 Revenue Earn-Out, respectively, if there are any discrepancies between the Accounting Policies and the provisions set out in this clause 6.9, the provisions in this clause 6.9 shall prevail.

 

6.9.4 During the period from the Closing Date until the lapse of the Phase-2 Revenue Period, the Buyer undertakes and shall cause the Group to:

 

  a) conduct the business of the Group as a stand-alone and separate business unit in the ordinary course consistent with past practice with a view, in good faith, to maximize the Revenues and achieve the EBIT Margin of the Group consistent with Schedule 6.9,

 

  b) use its commercially reasonable efforts to provide the resources and make the investments necessary to operate the business of the Group consistent with Schedule 6.9,

 

  c) not materially change the pricing or margin strategy of the Group as contemplated in Schedule 6.9,

 

  d) use its commercially reasonable efforts to carry out the additional staff hiring as contemplated in Schedule 6.9,


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  e) not change the legal structure of the Group in a manner that will have any adverse effect on the calculation of Revenues or EBIT Margin for purposes of the Earn-Outs, it being understood that that the shares of Mobile Industrial Robots Inc. may in any event be transferred to the Guarantor or an Affiliate of the Guarantor established in the U.S., provided, however, that after such transfer, Mobile Industrial Robots Inc. will remain a “Subsidiary” and member of the “Group” for all purposes of this Agreement including but not limited to the calculation of Revenues and EBIT Margin for the Earn-Outs in Clause 6,

 

  f) generally maintain the Group’s operations as a distinct business and not integrate its business with other entities (or outsource production) in a manner that would or would reasonably be expected to negatively impact the Group’s ability to achieve the Revenues and EBIT Margins required for the full Earn-Out Payments,

 

  g) not complete a sale or transfer of the Company or the Group to a third Person during the 2018 Revenue Period, the Phase-1 Revenue Period or the Phase-2 Revenue Period, including any sale or transfer of the Group’s material assets, and

 

  h) not take any action, the purpose of which is to deprive the Sellers of or materially reduce any of the Earn-Out Payments,

unless, in each case above, except for h), any such measure is a reasonable response to any changes or developments in (A) the economic or competitive environment of the Group as a whole, (B) market conditions for the Group as a whole or (C) the financial, business or operating condition of the Group as a whole.

 

6.9.5 The Buyer shall procure that the Group is managed and operated in a commercially reasonable manner and, subject to the exceptions at the end of clause 6.9.4, consistent in all material respects with Schedule 6.9, as it may be amended from time to time in accordance with this Agreement. The Buyer may submit a request in writing to the Sellers’ Representative to consent to any measure, action or omission, including a modification to Schedule 6.9 that, without such consent, would otherwise constitute a violation of the provisions of clause 6.9.4. If the Sellers’ Representative gives its consent, no such violation shall be deemed to have occurred. The Sellers’ Representative shall in good faith provide its consent unless the Sellers’ Representative reasonably and in good faith believes that the proposed modification, measure, action or omission shall impact or potentially may impact the Group’s ability to achieve the Revenues or EBIT Margin required to achieve one or more of the Earn-Outs. The Parties agree that the filing of patent applications and/or the implementation of engineering design changes related to the business of the Group will not constitute a non-compliance with the provisions of this clause 6.9.5 and/or clause 6.9.4.


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6.9.6 As long as Thomas Visti Jensen continues to work for any Group Company, and then after, but during the Earn-Out periods, any successor CEO of any Group Company, such person shall cooperate with the Buyer to procure that the Group is managed and operated in a commercially reasonable manner and, subject to the exceptions at the end of clause 6.9.4, consistent in all material respects with Schedule 6.9, as it may be amended from time to time in accordance with this Agreement. If during the period Thomas Visti Jensen is CEO of the Group, in response to the Group performing during the Phase-2 Revenue Period inconsistent with Schedule 6.9, the Buyer takes actions consistent with Schedule 6.9, such actions shall for the avoidance of doubt not constitute non-compliance with clause 6.9.4.

 

6.9.7 If the Buyer or any Group Company carries out any actions or omissions that constitute a non-compliance with the provisions of clause 6.9 and the action or omission has or could reasonably be expected to have a material impact on the Group’s ability to achieve the Revenues or the EBIT Margin required to achieve one or more of the Earn-Outs, then the Sellers’ Representative shall without undue delay upon actual knowledge of the action or omission provide the Buyer with written Notice of such non-compliance. The Buyer shall have 20 Business Days to correct or dispute such Notice of non-compliance. If the Buyer disputes the asserted non-compliance or the Sellers’ Representative does not accept the Buyer’s correction to the asserted non-compliance, then the Sellers’ Representative and a designated Buyer’s representative shall (i) discuss the dispute and, (ii) if the Buyer should ultimately agree that there was a non-compliance with the provisions of clause 6.9, discuss for purposes of calculating the relevant Earn-Out in good faith any adjustments to the Revenues or the EBIT Margin, as the case may be, generated by the Group Companies as if such non-compliance had not taken place. If the Buyer and the Sellers’ Representative are unable to reach agreement about whether there was a non-compliance with the provisions of clause 6.9 and/or the respective adjustment of the Revenues or the EBIT Margin generated by the Group Companies due to such non-compliance, each of them may initiate a claim under clause 16. The subject matter of such arbitration shall be to ascertain: (i) if a non-compliance of the provisions of clause 6.9 has occurred, and if the arbitrators determine non-compliance has occurred; (ii) if the non-compliance has had an impact on the Group’s ability to achieve one or more of the Earn-Outs; and if the arbitrators determine such non-compliance has had such an impact; (iii) the amount of the Earn-Outs to be accelerated (“Accelerated Earn-Out Payments”), provided that such Accelerated Earn-Out Payments shall in no event exceed the Earn-Out Payments Cap Amount, as set forth below:


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6.9.7.1 If the arbitrators determine that a non-compliance has had a material impact on the Group’s ability to achieve one or more of the Earn-Outs, then the arbitrators shall determine the Accelerated Earn-Out Payments as set forth below:

 

  a) if the non-compliance occurred during the 2018 Revenue Earn-Out Period, an amount of EUR 13,650,000 million under the 2018 Revenue Earn-Out shall become immediately accelerated and payable to the Sellers and in addition thereto if it is the arbitrators’ assessment that in the absence of such non-compliance and based on the Group’s accumulated Revenues performance since 1 January 2018 it is more likely than not that the Sellers would have achieved an Earn-Out Payment in excess of EUR 13,650,000 under the 2018 Revenue Earn-Out, the Phase-1 Revenue Earn-Out and/or the Phase-2 Revenue Earn-Out, then such excess Earn-Out Payments as determined by the arbitrators shall also become accelerated and payable to the Sellers,

 

  b) if the non-compliance occurred during the Phase-1 Revenue Earn-Out Period, but after lapse of the 2018 Revenue Period, an amount of EUR 17,600,000 million under the Phase-1 Earn-Out shall become immediately accelerated and payable to the Sellers and in addition thereto if it is the arbitrators’ assessment that in the absence of such non-compliance and based on the Group’s accumulated Revenues performance since 1 January 2018 it is more likely than not that the Sellers would have achieved an Earn-Out Payment in excess of EUR 17,600,000 under the Phase-1 Revenue Earn-Out and/or the Phase-2 Revenue Earn-Out, then such excess Earn-Out Payments as determined by the arbitrators shall also become accelerated and payable to the Sellers,

 

  c) if the non-compliance occurred during the Phase-2 Revenue Earn-Out Period but after lapse of the Phase-1 Revenue Period and if it is the arbitrators’ assessment that in the absence of such non-compliance and based on the Group’s accumulated Revenues performance since 1 January 2018 it is more likely than not that the Sellers would have achieved an Earn-Out Payment under the Phase-2 Revenue Earn-Out, then all or a part of the Phase-2 Revenue Earn-Out as determined by the arbitrators shall become accelerated and payable to the Sellers.

 

6.9.7.2 If the arbitrators determine that a non-compliance has had an impact, but not a material impact, on the Group’s ability to achieve one or more of the Earn-Outs, then the arbitrators shall determine the Accelerated Earn-Out Payments based on a reasonable estimate of the amount of the Earn-Out the Group more likely than not would have achieved in the absence of such non-compliance.


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6.9.8 After the lapse of each of the 2018 Earn-Out Period, the Phase-1 Revenue Earn-Out Period or the Phase-2 Revenue Period, respectively, and notwithstanding any Accelerated Earn-Out Payments pursuant to clause 6.9.7, to the extent that the Group has achieved Revenues and the EBIT Margin under the applicable Earn-Out, the Buyer shall make any required Earn-Out Payment as provided in this Agreement, however, deducting any Accelerated Earn-Out Payments already determined and paid pursuant to clause 6.9.7. Any rights set forth in clause 6.9.7 shall be the only remedies of the Sellers in case of any non-compliance of the Buyer with the provisions of clause 6.9, provided however, that in addition hereto, the Buyer shall reimburse reasonable costs to advisors of the Sellers’ Representative incurred in connection with establishing grounds to document the specific non-compliance with the provisions of this clause 6.9. If the Parties cannot agree on the amount of such reasonable advisor costs to be reimbursed, the amount of advisor costs of the Sellers’ Representative to be reimbursed by the Buyer shall be decided by arbitration pursuant to clause 16.2. The arbitrators shall when deciding the dispute inter alia take into consideration the degree to which the Sellers’ positions on the alledged non-compliance with the provisions of this clause 6.9 were justified.

 

6.10 Capitalized Value of Earn-Out Payments

In respect of section 12 B of the Danish Tax Assessment Act (Ligningsloven) the Parties have agreed that the capitalized value of the Earn-Out Payments amounts to EUR 90,000,000.

 

7. COOPERATION AND FURTHER COVENANTS

 

7.1 General Cooperation

 

7.1.1 Subject to the terms and conditions of this Agreement, the Buyer and the Sellers and their respective Affiliates shall use their best efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary or desirable under applicable Law to consummate the transactions contemplated by this Agreement. The Sellers and the Buyer agree to execute and deliver, and to cause their respective Affiliates to execute and deliver, such other documents, certificates, agreements and other writings and to take such other actions as may be necessary or desirable in order to consummate or implement expeditiously the transactions contemplated by this Agreement and to vest in Buyer ownership of the Shares.


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7.2 Access to Information

 

7.2.1 On and after the Closing Date, the Buyer will afford promptly to the Sellers and their professional advisors reasonable access to the Group Companies’ books of account, financial and other records (including auditor’s work papers), employees and auditors to the extent necessary for the Sellers in connection with any third Person (i.e., not the Buyer or any of Buyer’s Affiliates) audit, investigation, dispute or litigation relating to a Group Company; provided that any such access by the Sellers shall not unreasonably interfere with the conduct of the business of the Group. The Sellers shall bear all of the out-of-pocket costs and expenses (including attorneys’ fees, but excluding reimbursement for general overhead, salaries and employee benefits) reasonably incurred in connection with the foregoing.

 

7.3 Waiver of Claims

 

7.3.1 Each Seller (including on behalf of its Affiliates and closely related Persons) hereby irrevocably waives any claims it or they may have against any Group Company as of the Closing Date, except for ordinary outstanding claims for board of directors’ fees, salary, bonus and similar payments arising out of the employment agreements and consultancy agreements, if applicable.

 

8. CLOSING

 

8.1 Closing shall, unless otherwise agreed by the Parties, take place at the offices of Bech-Bruun Law Firm, Langelinie Allé 35, 2100 Copenhagen, Denmark, on 25 April 2018, at 13:00 CET.

 

8.2 At Closing, the Sellers’ Representative must deliver the following documents:

 

  (a) the Company’s original register of shareholders evidencing that the Buyer is entered as the owner of the Shares free from any Third Party Rights;

 

  (b) letters of resignation from each member of the board of directors of the Company;

 

  (c) the Escrow Agreement duly executed by the Sellers;

 

  (d) a final version of the Closing Memorandum executed on behalf of the Sellers;

 

  (e) evidence of the authority of the individual(s) signing the Closing Memorandum on behalf of the Sellers;

 

  (f) the Service Agreement, duly signed by Thomas Visti Jensen and the Company;


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  (g) the Employment Agreement, duly executed by Niels Jul Jacobsen and the Company;

 

  (h) the Employment Addenda, duly signed by the Company and the respective employees being parties thereto;

 

  (i) the new Employment Bonus Scheme attached as Schedule 8.3(e), duly signed by the Company and the respective employees being parties thereto;

 

  (j) evidence, in a form acceptable to the Buyer, that (i) all Warrants have been effectively accelerated with the effect that as of 26 April 2018 all non-exercised Warrants will effectively expire unless exercised by 25 April 2018 at the latest and (ii) that as at the time of Closing no Warrants have been exercised;

 

  (k) the Option Cancellation Agreement, duly signed by the Company and Ed Mullen attached as Schedule 8.2(k); and

 

  (l) an updated version of the Company’s articles of association reflecting that article 11.1.1 has been deleted.

 

8.3 At Closing, the Buyer must take the following actions and deliver the following documents:

 

  (a) transfer the Preliminary Closing Purchase Price less the Escrow Amount into the Sellers’ Bank Account in immediately available funds in EUR, as evidenced by confirmation from the Sellers’ Bank Account that the payment has been received, such payment being a sufficient discharge of the Buyer’s liability for such sum owed to the Sellers and accordingly the Buyer shall not be concerned to see the application thereof between the Sellers;

 

  (b) transfer the Pay-Off Amounts into the accounts notified by the Sellers to the Buyer pursuant to clause 3.1(d) in immediately available funds;

 

  (c) transfer the Escrow Amount into the Escrow Account in immediately available funds;

 

  (d) the Escrow Agreement duly executed by the Buyer;

 

  (e) approve by way of signing the Closing Memorandum that the Company implements the new Employment Bonus Scheme attached as Schedule 8.3(e) in the Group;


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  (f) a final version of the Closing Memorandum executed on behalf of the Buyer; and

 

  (g) evidence of the authority of the individual(s) signing the Closing Memorandum on behalf of the Buyer.

 

8.4 The actions taken under clauses 8.2 and 8.3 will be considered to have been taken simultaneously, and none of the actions taken by one Party will be considered to have been taken until the actions to be taken by the other Party have also been taken. In connection with the completion of Closing, the Parties must approve and sign the Closing Memorandum.

 

9. ACTIONS AFTER CLOSING

 

9.1 Notification of Resignations

 

9.1.1 The Buyer undertakes to, or cause the relevant Group Company to, notify the Danish Business Authority no later than 2 Business Days after the Closing Date and for similar relevant foreign public authorities and registers, if any, no later than 20 Business Days after the Closing Date about the retirement of board members in accordance with clause 8.2(b) and pending the de-registrations of such board members, the Buyer shall indemnify and hold harmless such individuals against any and all claims of whatever nature arising out of the operations of the Group after the Closing Date. The Buyer undertakes promptly to provide the Sellers’ Representative with evidence of such completed de-registrations.

 

9.2 Joint Taxation

 

9.2.1 The Company is presently not subject to mandatory tax consolidation pursuant to Section 31 of the Danish Company Tax Act. When the Buyer as of the Closing Date commences to control the Company for the purpose of Section 31 of the Danish Company Tax Act, the Company will be jointly taxed with the Buyer and existing Danish (direct or indirect) subsidiaries of the Guarantor.

 

9.2.2 The Buyer will procure that notice is given to the Danish tax authorities (“SKAT”) of the Company’s commencement of joint taxation with the Buyer and the existing Danish subsidiary of the Buyer’s UK parent company per the Closing Date. The notice will be submitted to SKAT no later than 30 Business Days after the Closing Date.


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10. SPECIAL INDEMNIFICATIONS

 

10.1 Tax Indemnity

 

10.1.1 Notwithstanding any other provisions of this Agreement, the Sellers undertake—to the extent not fully provided for in the Closing Purchase Price Calculation—to indemnify and hold harmless the Buyer or, at the Buyer’s election, the respective Group Companies, on a EUR for EUR basis, from and against any Tax claims, including any losses and costs (including fees of external advisers, claims, penalties, interests etc.) incurred by any Group Company (i) relating to any period until the Effective Date that are payable by any Group Company after the Effective Date or (ii) that are triggered or arise, directly or indirectly, as a consequence of the transactions contemplated by this Agreement, including, but not limited to, the acceleration and/or expiry of the Warrants and/or the introduction by the Company of the Employment Bonus Scheme. With respect to fiscal years and/or accounting periods beginning before the Effective Date and ending after the Effective Date, the portion of Taxes related to the time period until the Effective Date shall be deemed equal to the amount which would have to be assessed by the competent Tax authority if the Effective Date was the end of the respective business year and/or accounting period of the relevant Group Company. Notwithstanding the aforementioned, the Sellers shall not be liable in respect of any claim pursuant to this clause 10.1.1 to the extent that Taxes arise or are increased by reason of (i) any change after the Effective Date in the bases, methods or policies of Tax accounting of the Buyer, the Company or any Group Company other than in the ordinary course of business as conducted at the Effective Date, or (ii) any Tax claim occurring due to or otherwise as a result of the joint taxation with Buyer or Buyer’s Affiliates as further described in clause 9.2 which would not have occurred without such joint taxation. To the extent that the Sellers can reasonably demonstrate that an actual Tax relief is available to the Buyer or any Group Company in relation to the Tax claim in question, the Buyer shall reimburse such actual Tax relief if and when it is received by the respective Group Company.

 

10.1.2 Any payment under clause 10.1.1 above shall be due and payable by the Sellers from the Escrow Account and if such payment is made after release of the Escrow Account only then directly from the Sellers within 15 Business Days after the Sellers’ Representative has been notified in writing by the Buyer about the payment obligation and the corresponding payment date pursuant to this Agreement and has received a copy of the relevant Tax assessment notice or Tax return, but in no event earlier than 5 Business Days before the relevant Tax to be indemnified is due and payable to the Tax authority. If any Tax for which indemnification is sought under clause 10.1.1 is contested, the payment of such Tax by the Sellers shall be due 5 Business Days after such Tax has been finally and bindingly determined by the relevant Tax authority or court of proper jurisdiction, provided that the Tax authority has suspended payment of such Tax until such Tax becomes final and binding. If the Tax authority did not suspend payment of such Tax, the Sellers shall make respective advance indemnification payments to the Buyer. If the final amount to be indemnified for such Tax is lower than the advance indemnification payment made by the Sellers, the Buyer shall reimburse the difference to Sellers, including all interest received thereon from the respective Tax authority, if any.


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10.1.3 Any claims under clause 10.1.1 shall become time-barred 3 months after the later of (i) the underlying Tax has been finally and bindingly determined by the Tax Authorities or (ii) the expiry of the statutory limitation period for the Tax claim in question.

 

10.1.4 Any costs and payments of the Group Companies relating to the Closing, including exit bonuses, shall for purposes of this clause 10.1 be attributed to the time period before the Closing.

 

10.2 Other specific indemnities

 

10.2.1 Notwithstanding any other provisions of this Agreement, the Sellers undertake—to the extent not fully provided for in the Closing Purchase Price Calculation—to indemnify and hold harmless the Buyer or, at the Buyer’s election, the respective Group Companies, on a EUR for EUR basis, from and against (i) any claims, losses and/or costs (including, but not limited to, costs (whether external or internal) of any repairs or other remedial works undertaken by the Group Companies, fees of external advisers, claims from customers, penalties, interests etc.) incurred by any Group Company as a result of or in connection with the issues detailed in index 4.23.1 of the Due Diligence Information.

 

10.2.2 Notwithstanding any other provisions of this Agreement, the Sellers undertake—to the extent not fully provided for in the Closing Purchase Price Calculation - to indemnify and hold harmless the Buyer or, at the Buyer’s election, the respective Group Companies, on a EUR for EUR basis, from and against any claims, losses and/or costs incurred by any Group Company in connection with the intellectual property matters set forth in indices 14.1 and 14.2 of the Due Diligence Information.

 

10.2.3 Notwithstanding any other provisions of this Agreement, the Sellers undertake to indemnify and hold harmless the Buyer or, at the Buyer’s election, the respective Group Companies, on a EUR for EUR basis, from and against any claims, losses and/or costs (excluding however, for the avoidance of doubt, ordinary bonus payments pursuant to the Employment Bonus Scheme) relating to (i) the redemption or purchase of shares in any Group Company (other than the Shares) which have been or may be subscribed for or purchased by any Person on the basis of any Warrants issued, offered or promised, directly or indirectly, by any Group Company to such Person as at or before the Closing Date and/or (ii) the settlement, cancellation, annulment and/or expiry of any Warrants issued, offered or promised, directly or indirectly, by any Group Company to any Person as at or before the Closing Date.


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10.2.4 Any payment under clauses 10.2.1, 10.2.2 and 10.2.3 above shall be due and payable by the Sellers from the Escrow Account and if such payment is made after release of the Escrow Account only then directly from the Sellers within 15 Business Days after the Sellers’ Representative has been notified in writing by the Buyer about the payment obligation and the corresponding payment date pursuant to this Agreement. For the avoidance of doubt, the Buyer shall be entitled to set-off any claim made pursuant to clauses 10.2.1, 10.2.2 and 10.2.3 against the Sellers’ right to any Earn-Outs.

 

10.2.5 Any claims under clauses 10.2.1, 10.2.2 and 13.2.3 shall become time-barred 3 years after Closing.

 

10.3 Limitations

 

10.3.1 None of the limitations in clauses 11 or 12 shall apply to this clause 10, except for clauses 12.2 – 12.3 and 12.6, however, the Sellers’ aggregated liability pursuant to this clause 10 together with liability for any other Losses due to a Breach of the Sellers’ Warranties shall in no event exceed the Cap and the Sellers’ liability pursuant to this clause 10 shall always be several and not joint. Notwithstanding anything to the contrary in this clause 10.2 and for the avoidance of doubt, any amount for which the Sellers have indemnified the Buyer or a Group Company pursuant to clause 10.1 shall not be included in the Basket pursuant to clause 12.4.1(b). Moreover, for the avoidance of doubt, no multiple shall be applied in whatever context establishing and calculating a claim with reference to clause 10.2, cf. also clause 12.2.1.

 

11. WARRANTIES

 

11.1 Sellers’ Warranties

 

11.1.1 The Sellers have made the Warranties stated in Schedule 11.1 to the Buyer, such Warranties being (i) the only representations or warranties given by the Sellers, and (ii) made as of the Signing Date and to be deemed repeated as of the Closing Date unless such Warranty expressly is made as of the Signing Date only. The Buyer acknowledges that it is not relying on any express or implied representations or warranties whatsoever, except as expressly set forth in this Agreement and further acknowledges that the Sellers make no representation or warranty whatsoever with respect to any projections, estimates, forecasts or budgets delivered to or made available to the Buyer or its representatives of future revenues, future results of operations (or any component thereof), future cash flows or future financial condition (or any component thereof) of the Group or the future business and operations of the Group.


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11.1.2 Except with respect to Breaches of the Title Warranties, the Sellers are not liable for any Breach of the Sellers’ Warranties to the extent it is within the Buyer’s Knowledge that the Sellers’ Warranties were incorrect or misleading or to the extent matters rendering any of the Sellers’ Warranties incorrect or misleading have been Disclosed to the Buyer before the Buyer and the Guarantor have signed this Agreement.

 

11.2 Buyer’s Warranties

The Buyer has made the following Warranties to the Sellers as of the Signing Date and as of the Closing Date:

 

  (a) The Buyer is a corporation duly organized and validly existing under the laws of the Denmark and has all necessary corporate power and authority to enter into this Agreement, to carry out its obligations hereunder and to consummate the transactions contemplated hereby.

 

  (b) The execution and delivery by the Buyer of this Agreement, the performance by the Buyer of its obligations hereunder and the consummation by the Buyer of the transactions contemplated hereby have all been duly authorized by all requisite action on the part of the Buyer.

 

  (c) This Agreement has been duly executed and delivered by the Buyer and this Agreement constitutes a legal, valid and binding obligation of the Buyer, enforceable against the Buyer in accordance with its terms subject to the effect of any applicable bankruptcy, insolvency and similar laws affecting creditors’ rights generally.

 

  (d) No consent of any shareholder, board of directors or any other Person or body is required in connection with the execution, delivery and performance by the Buyer of the Agreement.

 

  (e)

Except as may be required under any merger control Laws, the execution, delivery and performance by the Buyer of this Agreement does not and will not (i) violate, conflict with or result in the breach of the Buyer’s Corporate Documents, (ii) violate or conflict with or require consent or notification under any, judgment, court order or other decision made by a court, arbitration tribunal or public authority against or binding upon the Buyer, (iii) conflict with or constitute a violation of or require consent or notification under any law or regulation applicable to the Buyer, or (iv) conflict with or


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  result in breach of or require consent or notification under any agreement to which the Buyer is a party, except for any such agreements in respect of which a breach will not adversely affect the Buyer’s ability to perform any of its obligations under and to consummate the transactions contemplated, by this Agreement.

 

  (f) The Buyer is not a party to any dispute before a court, arbitration tribunal or public authority which may prevent or delay Closing if the Buyer is unsuccessful in such dispute.

 

11.3 Buyer’s due diligence

 

11.3.1 The Buyer has, prior to the execution of this Agreement, conducted its own independent investigation, review and analysis of the Group’s business, assets, liabilities, results of operation, financial condition, software, technology, intellectual property rights and prospects, including through review of the Due Diligence Information as set out in Schedule 1(c).

 

12. SELLERS’ LIABILITY, LIMITATIONS AND CLAIMS PROCEDURE