TERADYNE, INC (TER)

Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

We are a leading global supplier of automated test equipment and robotics products. We design, develop, manufacture and sell automated test systems and robotics products. Our automated test systems are used to test semiconductors, wireless products, data storage and complex electronics systems in many industries including consumer electronics, wireless, automotive, industrial, computing, communications, and aerospace and defense industries. Our Robotics products include collaborative robotic arms and autonomous mobile robots (“AMRs”) used by global manufacturing, logistics and industrial customers to improve quality, increase manufacturing and material handling efficiency and decrease manufacturing and logistics costs. Our automated test equipment and robotics products and services include:

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semiconductor test (“Semiconductor Test”) systems;

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robotics (“Robotics”) products; and

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defense/aerospace (“Defense/Aerospace”) test instrumentation and systems, circuit-board test and inspection (“Production Board Test”) systems, and wireless test systems (referred collectively as "All Other").

The market for our test products is concentrated with a limited number of significant customers accounting for a substantial portion of the purchases of test equipment. A few customers drive significant demand for our 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.

In 2024, we saw strength in our Semiconductor Test business, with memory and compute offerings growing considerably compared to 2023. We expect mobile, automotive, and industrial will grow in 2025 and that recent advancements in AI inference may help mid-term recovery in these markets. Beyond AI compute, we are investing in other areas of the semiconductor test market that offer the opportunity for accelerating long-term growth, including power semi-conductors and the shift towards vertically integrated products ("VIPs"). We have seen the benefits start to materialize in 2024 and expect them to continue through the mid-term.

2024 was a very weak industrial automation market resulting in a year-over-year decline in Robotics revenues while outperforming our peer group. In 2024, we built key OEM, systems integrators and large account strategic partnerships which will strengthen our go to market for years to come. Introduction of new products, including the MiR 1200 Pallet Jack will further expand our available markets to support our growth.

On May 27, 2024, we paid 483.1 million Euros, equivalent to $524.1 million, to purchase a combination of previously issued and outstanding shares and shares newly issued by Technoprobe, S.p.A. ("Technoprobe"). The shares purchased represent 10% of the issued and outstanding shares of Technoprobe. We also received a board seat as part of the purchase. Additionally, as part of the transaction, we completed the sale of the Device Interface Solutions ("DIS") business, a component of our Semiconductor Test segment, to Technoprobe for $85.0 million in cash, net of cash and cash equivalents sold, and a customary working capital adjustment. The sale resulted in a pre-tax gain of $57.1 million recorded as 'Gain on sale of business' in the consolidated statement of operations.

Our financial statements are denominated in U.S. dollars. While revenues in our test businesses are predominantly in U.S. dollars, the majority of our Robotics revenue is denominated in foreign currencies. Strengthening of the U.S. dollar would negatively affect Robotics revenue growth in 2025.

Our corporate strategy for our test businesses is to profitably grow market share while in Robotics, we plan to profitably grow revenue through the introduction of differentiated products targeting expanding markets. Our capital allocation plan will continue to be balanced between investing in organic and inorganic growth and returning cash to shareholders through share repurchases and dividends.

Supply Chain Constraints and Inflationary Pressures

The global supply shortage of electrical components, including semiconductor chips, impacted our supply chain in the first half of 2023. In the second half of 2023 and the full year of 2024, we saw improvements related to supply constraints and, consequently, did not experience material increases in our lead times and costs for components. In addition, in 2023 and 2024, inflationary pressures contributed to increased costs for product components and wage inflation, which had a minimal impact on our cost of products, gross margin and profit for the year. While our businesses could be impacted by supply constraints in the future, we do not anticipate supply chain constraints will have a material impact on our financial results in 2025.

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Government Regulations

We are subject to numerous United States and foreign laws and regulations, including, without limitation, tariffs, trade sanctions, trade barriers, trade embargoes, regulations relating to import-export control, technology transfer restrictions, and other laws and regulations. Additionally, United States and foreign governmental authorities have taken, and may continue to take, administrative, legislative or regulatory action that could impact our operations. We believe that our operations are in material compliance with applicable trade regulations. The costs we incurred in complying with applicable trade regulations for the year ended December 31, 2024 were not material, and we do not currently expect the cost of complying with existing trade laws and regulations to have a material adverse effect on our capital expenditures or earnings or on our competitive position in any one year. It is possible, however, that future developments, including changes in laws and regulations or government policies, could lead to material costs, and such costs may have a material adverse effect on our future business or prospects.

For information regarding risks associated with import-export control regulations and similar applicable laws and regulations, see Part II - Item 1A "Risk Factors- Risks Related to Legal and Regulatory Compliance" included elsewhere in this Form 10-K.

Critical Accounting Policies and Estimates

We have identified the policies and estimates discussed below as critical to understanding our business and our results of operations and financial condition. The impact and any associated risks related to these estimates on our business operations is discussed throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations where such policies affect our reported and expected financial results. For a full description of our accounting policies related to the below items refer to Note B. Accounting Policies, included in the Notes to Consolidated Financial Statements in this Annual Report.

Critical accounting estimates are complex and may require significant judgment by management. Changes to the underlying assumptions may have a material impact on our financial condition and results of operations. These estimates may change, as new events occur, and additional information is obtained. Actual results could differ significantly from these estimates under different assumptions or conditions.

Revenue Recognition

In accordance with ASC 606, “Revenue from Contracts with Customers” (“ASC 606”), we recognize revenues, when or as control is transferred to a customer. Our determination of revenue requires judgment in the determination of performance obligations and allocation of the transaction price to performance obligations. We often sell bundled orders that include both product and services or multiple different products within the same order. We evaluate each of the deliverables to determine if it meets the definition of a performance obligation, which requires that it is capable of being distinct and distinct within the context of the contract. This determination is based on an assessment of contractual rights of the contract and the ability of the performance obligation to perform on its own or with readily available resources. In bundled transactions we estimate the standalone selling price of each identified performance obligation and use that estimate to allocate the transaction price among said performance obligations. The estimated standalone selling price is determined using all information reasonably available to us, including standalone transactions, market information and other observable inputs.

Equity Method Investments

We account for investments using the equity method of accounting when it has significant influence over the financial and operating policies, but not control, of the investee. The equity method investments are initially recorded at cost and included in the 'Equity method investment' in the consolidated balance sheet. We record our share of investee's net income or loss and other comprehensive income, and the amortization of equity method basis difference, calculated as the difference between the investment and the amount of underlying equity in net assets acquired, on a 3-month lag, which is applied consistently from period to period. Our share of investee's net income and the amortization of equity method basis difference are reported in 'Equity in net earnings of affiliate' in the consolidated statement of operations. We include our share of investee's other comprehensive income and a cumulative translation adjustment in the consolidated statements of comprehensive income. We monitor on an ongoing basis its equity method investments for indicators of other-than-temporary declines in fair value below carrying value.

Inventories

Inventories are stated at the lower of cost using a standard costing system which approximates cost based on a first-in, first-out basis or net realizable value. On a quarterly basis, we evaluate all inventories for net realizable value. 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 within the forecasted demand window, is written

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down to estimated net realizable value. Forecasted demand information is obtained from the sales and marketing groups and incorporates factors such as backlog and future revenues. The demand forecast is based on assumptions around the product life and customer and market expectations.

Retirement and Postretirement Plans

We recognize net actuarial gains and losses and the change in the fair value of the plan assets in our operating results in the year in which they occur or upon any interim remeasurement of the plans. Discount rate and expected return on assets are two assumptions which are important elements of pension plan expense and asset/liability measurement. We evaluate our discount rate and expected rate of return on assets assumptions annually on a plan and country specific basis. We evaluate other assumptions related to demographic factors, such as retirement age, mortality and turnover periodically, and update them to reflect our experience and expectations for the future.

In developing the expected return on U.S. Qualified Pension Plan (“U.S. Plan”) assets assumption, we evaluated input from our investment manager and pension consultants, including their forecast of asset class return expectations. We believe that 4.65% was an appropriate rate of return on assets to use for 2024. The December 31, 2024 asset allocation for our U.S. Plan was 94% invested in fixed income securities, 5% invested in equity securities, and 1% invested in other securities. Our investment manager regularly reviews the actual asset allocation and periodically rebalances the portfolio to ensure alignment with our target allocations.

The discount rate that we utilized for determining future pension obligations for the U.S. Plan is based on the FTSE Pension Index adjusted for the U.S. Plan’s expected cash flows and was 5.45% at December 31, 2024, up from 4.75% at December 31, 2023. We estimate that in 2025 we will recognize approximately $0.1 million of pension expense for the U.S. Plan. The U.S. Plan pension expense estimate for 2025 is based on a 5.45% discount rate and a 5.05% return on assets. Future pension expense or income will depend on future investment performance, changes in future discount rates and various other factors related to the employee population participating in our pension plans.

Goodwill, Intangible and Long-Lived Assets

We assess goodwill for impairment at least annually in the fourth quarter, as of December 31, on a reporting unit basis, or more frequently, when events and circumstances occur indicating that the recorded goodwill may be impaired. We review intangible and 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. Goodwill impairment will be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. Impairment of intangible and long-lived assets would result in the asset being written down to its estimated fair value. The calculated fair value of a reporting unit or intangible or long-lived asset is dependent upon discounted cash flow (“DCF”) models, discount rates, and market multiples. DCF models rely on our forecasted mid-term plans which are subjective based on customer or market conditions and can change materially. We utilize third party specialists when determining discount rates and selected market multiples. A change in any of these key assumptions could result in a reporting unit, intangible asset, or long-lived asset being impaired in a future period.

Convertible Debt

We adopted Accounting Standards Update (“ASU”) ASU 2020-06 – “Debt—Debt with Conversion and Other Options and Derivatives and Hedging—Contracts in Entity’s Own Equity,” on January 1, 2022 using the modified retrospective method of adoption. In accordance with ASU 2020-06, we account for a convertible debt instrument as a single liability measured at its amortized cost, as long as no other features require bifurcation and recognition as derivatives. Unsettled shares are recorded in current debt, and there is no recognition of a debt discount, which was previously amortized to interest expense. Settled shares reduce the outstanding debt balance in an amount equal to the cash paid, but do not result in any gain or loss on extinguishment. We use the if-converted method in the diluted EPS calculation for convertible instruments.

Income Taxes

Deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The measurement of deferred tax assets is reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax assets will not be realized. Evaluating the positive and negative evidence regarding the realization of the net deferred tax assets in accordance with ASC 740, “Accounting for Income Taxes” is a key judgment in the valuation of income taxes. This assessment included the evaluation of scheduled reversals of deferred tax liabilities, estimates of projected future taxable income and tax-planning strategies. Although realization is not assured, based on our assessment, we concluded that it is more likely than not that such assets, net of the existing valuation allowance, will be realized.

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Results of Operations

Information pertaining to fiscal year 2022 results of operations, including a year-to-year comparison against fiscal year 2023, was included in our Annual Report on Form 10-K for the year ended December 31, 2023 under Part II, Item 7, “Management’s Discussion and Analysis of Financial Position and Results of Operations,” which was filed with the SEC on February 22, 2024. This information is incorporated by reference herein.

The following table sets forth the percentage of total net revenues included in our consolidated statements of operations:

Revenues

Revenues for our reportable segments were as follows:

The increase in Semiconductor Test revenues of $166.7 million, or 8.5%, was driven primarily by higher tester sales for computing, ADAS, and memory applications, partially offset by lower tester sales for legacy automotive applications. The decrease in Robotics revenues of $10.4 million, or 2.8%, was driven primarily by continued weakness in the Industrial Automation market and softer sales in Universal Robots.

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Our reportable segments accounted for the following percentages of consolidated revenues:

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

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

The breakout of product and service revenues was as follows:

Our product revenues increased $198.6 million, or 9.5%, primarily driven by higher tester sales for computing, ADAS, and memory applications, partially offset by lower tester sales for legacy automotive application. Our service revenues decreased $55.1 million, or 9.5%, primarily in Semiconductor Test related to the sale of the DIS business on May 27, 2024.

In 2024, revenues from Samsung, a customer of our Semiconductor Test segment, accounted for 12.5% of our consolidated revenues. In 2023, revenues from Texas Instruments Inc., a customer of our Semiconductor Test segment, accounted for 10% of our consolidated revenues. In 2024 and 2023, our five largest direct customers in aggregate accounted for 36% and 32% of our consolidated revenues, respectively.

Gross Profit

Gross profit as a percent of total revenues increased by 1.1 points, primarily due to a higher volume and product and service mix.

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The breakout of product and service gross profit was as follows:

Service and product revenues gross profit percentage increased by 4.3 points and 0.2 points, respectively, primarily due to higher volume and product and service mix.

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 revenues information is obtained from the sales and marketing groups and incorporates factors such as backlog and future revenues. 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 within the forecasted demand window, is written down to estimated net realizable value.

During the year ended December 31, 2024, we recorded an inventory provision of $18.9 million included in cost of revenues, primarily due to downward revisions to previously forecasted demand levels for certain products. Of the $18.9 million of total excess and obsolete provisions, $13.6 million was related to Semiconductor Test, $2.3 million was related to Robotics, and $3.1 million was related to All Other.

During the year ended December 31, 2023, we recorded an inventory provision of $28.4 million included in cost of revenues, primarily due to downward revisions to previously forecasted demand levels for certain products. Of the $28.4 million of total excess and obsolete provisions, $22.5 million was related to Semiconductor Test, $2.3 million was related to Robotics, and $3.6 million was related to All Other.

During the years ended December 31, 2024 and 2023, we scrapped $10.6 million and $26.4 million of inventory, respectively, and sold $2.2 million and $5.2 million of previously written-down or written-off inventory, respectively. As of December 31, 2024, we had inventory related reserves for amounts which had been written-down or written-off totaling $141.4 million. We have no pre-determined timeline to scrap the remaining inventory.

Selling and Administrative

Selling and administrative expenses were as follows:

The increase of $39.7 million in selling and administrative expenses was primarily due to higher sales and marketing spending in Semiconductor Test.

Engineering and Development

Engineering and development expenses were as follows:

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The increase of $42.8 million in engineering and development expenses was primarily due to higher spending in Semiconductor Test.

Restructuring and Other

During the year ended December 31, 2024, we recorded $5.2 million of severance charges related to headcount reductions of 98 people primarily in Robotics and Semiconductor Test, which included charges related to a voluntary early retirement program for employees meeting certain conditions, $3.6 million of acquisition and divestiture expenses, and $1.3 million of charges related to lease terminations.

During the year ended December 31, 2023, we recorded a charge of $14.7 million of severance charges related to headcount reductions of 215 people primarily in Semiconductor Test and Robotics, which included charges related to a voluntary early retirement program for employees meeting certain conditions, $3.1 million of acquisition and divestiture expenses related to the Technoprobe transaction, a $1.5 million contract termination charge, and a charge of $1.1 million for an increase in environmental liabilities.

Interest and Other

Other (income) expense, net decreased by $6.8 million primarily due to $9.8 million loss on our call option in connection with our agreement to acquire a 10% investment in Technoprobe S.p.A, partially offset by the change in pension actuarial gains/losses, from a $2.7 million loss in 2023 to a $4.4 million gain in 2024.

Income (Loss) Before Income Taxes

(1)
Included in Corporate and Eliminations are gain on sale of business, interest income, interest expense, net foreign exchange gains (losses), intercompany eliminations, severance charges, pension and postretirement plan actuarial gains (losses), acquisition and divestiture related fees, legal and environmental fees, contract termination settlement charge, and modification of outstanding equity awards.

The increase in income before income taxes in Semiconductor Test was driven primarily by higher tester sales for computing, ADAS, and memory applications, partially offset by lower tester sales for legacy automotive application. The decrease in income before income taxes in Robotics was primarily driven by continued weakness in the Industrial Automation market and softer sales in Universal Robots along with higher selling and administrative costs. The decrease in income before income taxes in All Other was driven primarily by a decrease in sales of Wireless Test products.

Income Taxes

Income tax expense for 2024 and 2023 totaled $59.5 million and $76.8 million, respectively. The effective tax rate for 2024 and 2023 was 9.8% and 14.6%, respectively.

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The decrease in the effective tax rate from 2023 to 2024 is primarily attributable to a shift in the geographic distribution of income which resulted in a reduction in income in higher tax rate foreign jurisdictions, the benefit of the release of reserves for uncertain tax positions as a result of the expiration of statute and a decrease in non-deductible officer’s compensation. These decreases in expense were partially offset by reductions in benefits from foreign tax credits, U.S research and development credits and the U.S. foreign derived intangible income deduction.

We qualify 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 attributable to the Singapore tax holiday for the years ended December 31, 2024 and 2023 were $17.1 million or $0.10 per diluted share and $1.4 million or $0.01 per diluted share, respectively. In November 2020, we entered into an agreement with the Singapore Economic Development Board which extended our Singapore tax holiday under substantially similar terms to the agreement which expired on December 31, 2020. The new tax holiday is scheduled to expire on December 31, 2025.

Capital Resources and Material Cash Requirements

Our cash, cash equivalents and marketable securities balance decreased by $213.4 million in 2024 to $723.8 million. Cash decreased due to investments in businesses for $532.1 million, stock repurchases in the amount of $198.6 million, and quarterly cash dividend payments in the amount of $76.4 million, partially offset by proceeds from the sale of business and cash generated by our global operations.

Operating activities during 2024 provided cash of $672.2 million. Changes in operating assets and liabilities used cash of $23.9 million. This was due to a $75.5 million decrease in operating assets and a $51.6 million decrease in operating liabilities.

The decrease in operating assets was primarily due to a decrease in other assets and inventory of $119.5 million and $8.7 million respectively, partially offset by a $52.7 million increase in accounts receivable, driven by higher sales at year-end.

The decrease in operating liabilities was due to a $48.2 million decrease in accounts payable, a $6.2 million decrease in other accrued compensation, $5.8 million of retirement plan contributions, and a $3.6 million decrease in income taxes, partially offset by a $12.2 million increase in deferred revenue and customer advance payments.

Investing activities during 2024 used cash of $622.3 million, comprised of $532.1 million used for investments in businesses, $198.1 million used for purchases of property, plant and equipment, and $45.8 million used for purchases of marketable securities, partially offset by $90.3 million in proceeds from the sale of a business, $38.4 million and $24.0 million in proceeds from the maturities and sales of marketable securities, respectively, and $0.9 million in proceeds from life insurance.

Financing activities during 2024 used cash of $251.8 million, due to $198.6 million used for the repurchase of 1.7 million shares of common stock at an average price of $114.63 per share, $76.4 million used for dividend payments, and $14.1 million used for payments related to net settlement of employee stock compensation awards, partially offset by $37.3 million from the issuance of common stock under employee stock purchase and stock option plans.

Operating activities during 2023 provided cash of $585.2 million. Changes in operating assets and liabilities used cash of $9.6 million. This was due to a $33.2 million decrease in operating assets and a $42.8 million decrease in operating liabilities.

The decrease in operating assets was due to a $71.0 million decrease in accounts receivable due to lower sales and a $5.3 million decrease in inventories, partially offset by a $43.1 million increase in prepayments and other assets due to prepayments to our contract manufacturers.

The decrease in operating liabilities was due to a $57.2 million decrease in deferred revenue and customer advance payments, a $26.9 million decrease in income taxes, a $21.2 million decrease in accrued employee compensation, and $5.5 million of retirement plan contributions, partially offset by a $45.0 million increase in accounts payable, and a $23.0 million increase in other accrued liabilities.

Investing activities during 2023 used cash of $179.6 million, due to $161.9 million used for purchases of marketable securities, $159.6 million used for purchases of property, plant and equipment, and $5.0 million used for issuance of convertible loans, partially offset by $85.0 million and $61.4 million in proceeds from maturities and sales of marketable securities, respectively, and $0.5 million in proceeds from the cancellation of Teradyne owned life insurance policies related to the cash surrender value.

Financing activities during 2023 used cash of $501.9 million, due to $397.2 million used for the repurchase of 3.9 million shares of common stock at an average price of $102.47 per share, $67.9 million used for dividend payments, $50.3 million used for the

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payments of convertible debt principal, and $20.8 million used for payments related to net settlement of employee stock compensation awards, partially offset by $34.3 million from the issuance of common stock under employee stock purchase and stock option plans.

In January 2024, May 2024, August 2024 and November 2024, our Board of Directors declared a quarterly cash dividend of $0.12 per share. Total dividend payments in 2024 were $76.4 million. In January 2023, May 2023, August 2023 and November 2023, our Board of Directors declared a quarterly cash dividend of $0.11 per share. Total dividend payments in 2023 were $67.9 million.

In January 2023, our Board of Directors cancelled the 2021 repurchase program and approved a new repurchase program for up to $2.0 billion of common stock. In 2024, we repurchased 1.7 million shares of common stock for $198.6 million, which excludes related excise tax, at an average price of $114.63 per share. In 2023, we repurchased 3.9 million shares of common stock for $397.2 million, which excludes related excise tax, at an average price of $102.47 per share against the 2023 repurchase program. The cumulative repurchases as of December 31, 2024, under the 2023 repurchase program, were 5.6 million shares of common stock for $595.2 million, exclusive of tax, at an average price per share of $106.21. In 2025, we intend to repurchase up to $400.0 million.

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

On May 27, 2024, we paid 483.1 million Euros, equivalent to $524.1 million, to purchase a combination of previously issued and outstanding shares and shares newly issued by Technoprobe, S.p.A. ("Technoprobe"). The shares purchased represent 10% of the issued and outstanding shares of Technoprobe. We also received a board seat as part of the purchase. Additionally, as part of the transaction, we completed the sale of the Device Interface Solutions ("DIS") business, a component of the Semiconductor Test segment, to Technoprobe for $85.0 million in cash, net of cash and cash equivalents sold, and a customary working capital adjustment. The sale resulted in a pre-tax gain of $57.1 million recorded as 'Gain on sale of business' in the consolidated statement of operations.

On May 1, 2020, we entered into a credit agreement providing a three-year, senior secured revolving credit facility of $400 million. On December 10, 2021, the credit agreement was amended to extend the senior secured revolving credit facility to December 10, 2026. On October 5, 2022, the credit agreement was amended to increase the amount of the credit facility to $750.0 million from $400.0 million. On November 7, 2023, the Credit Agreement was amended to allow for the purchase of the shares of Technoprobe. On May 16, 2024, we borrowed $185.0 million under the credit agreement to partially fund the acquisition of 10% of the issued and outstanding shares of Technoprobe. We fully repaid our borrowings on the revolving credit facility prior to December 31, 2024. As of February 20, 2025, there are no outstanding borrowings under the credit facility.

We expect operations to continue to be the primary source of cash to operate the business and meet material cash commitments, including any payments of convertible debt principal, our stock repurchase program, our quarterly dividends, our office lease obligations, contractual obligations related to inventory purchases and the construction of new facilities. We believe our cash, cash equivalents and marketable securities balance will be sufficient to pay our quarterly dividend and meet our working capital and expenditure needs for at least the next twelve months. Inflation has not had a significant long-term impact on earnings.

At December 31, 2024, our future contractual obligations were related to debt, leases, retirement plan liabilities, deferred tax benefits, and purchase obligations. See Note K. “Debt”, Note J. “Leases”, Note Q. “Retirement Plans”, and Note T. “Income Taxes” of Notes to Consolidated Financial Statements in this Annual Report for information about those obligations, which Notes are incorporated by reference into this section. Our purchase obligations were approximately $419.8 million, with $409.6 million expected to be paid within twelve months.

Retirement Plans

ASC 715-20, “Compensation—Retirement Benefits—Defined Benefit Plans,” requires an employer with defined benefit plans or other postretirement benefit plans to recognize an asset or a liability on its balance sheet for the overfunded or underfunded status of the plans as defined by ASC 715-20. The pension asset or liability represents the difference between the fair value of the pension plans’ assets and the projected benefit obligation as of December 31. For other postretirement benefit plans, the liability is the difference between the fair value of the plan’s assets and the accumulated postretirement benefit obligation as of December 31.

For the year ended December 31, 2024, our pension expense, which includes the U.S. Qualified Pension Plan (“U.S. Plan”), certain qualified plans for non-U.S. subsidiaries, and a U.S. Supplemental Executive Defined Benefit Plan, was approximately $0.1 million. Pension expense is calculated based upon a number of actuarial assumptions. Discount rate and expected return on assets are two assumptions which are important elements of pension plan expense and asset/liability measurement. We evaluate our discount rate and expected rate of return on assets assumptions annually on a plan and country specific basis. We evaluate other assumptions related

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to demographic factors, such as retirement age, mortality and turnover periodically, and update them to reflect our experience and expectations for the future.

In developing the expected return on U.S. Plan assets assumption, we evaluated input from our investment manager and pension consultants, including their forecast of asset class return expectations. We believe that 4.65% was an appropriate rate of return on assets to use for 2024. The December 31, 2024 asset allocation for our U.S. Plan was 94.0% invested in fixed income securities, 5% invested in equity securities, and 1% invested in other securities. Our investment manager regularly reviews the actual asset allocation and periodically rebalances the portfolio to ensure alignment with our target allocations.

We recognize net actuarial gains and losses and the change in the fair value of plan assets in our operating results in the year in which they occur or upon any interim remeasurement of the plans. We calculate the expected return on plan assets using the fair value of the plan assets. Actuarial gains and losses are generally measured annually as of December 31 and, accordingly, recorded during the fourth quarter of each year or upon any interim remeasurement of the plans.

The discount rate that we utilized for determining future pension obligations for the U.S. Plan is based on the FTSE Pension Index adjusted for the U.S. Plan’s expected cash flows and was 5.45% at December 31, 2024, up from 4.75% at December 31, 2023. We estimate that in 2025, we will recognize approximately $0.1 million of pension expense for the U.S. Plan. The U.S. Plan pension expense estimate for 2025 is based on a 5.45% discount rate and a 5.05% return on assets. Future pension expense or income will depend on future investment performance, changes in future discount rates and various other factors related to the employee population participating in our pension plans.

As of December 31, 2024, our pension plans had no unrecognized pension prior service cost.

The assets of the U.S. Plan consist substantially of fixed income securities. U.S. Plan assets have decreased from $112.6 million at December 31, 2023 to $81.4 million at December 31, 2024, while the U.S. Plan’s liability decreased from $101.1 million at December 31, 2023 to $69.4 million at December 31, 2024.

Our funding policy is to make contributions to our pension plans in accordance with local laws and to the extent that such contributions are tax deductible. During 2024, we made contributions of $3.1 million to the U.S. supplemental executive defined benefit pension plan, and $1.0 million to certain qualified plans for non-U.S. subsidiaries. In 2025, we expect to contribute approximately $3.3 million to the U.S. supplemental executive defined benefit pension plan. Contributions to be made in 2025 to certain qualified plans for non-U.S. subsidiaries are based on local statutory requirements and are estimated at approximately $1.1 million.

Equity Compensation Plans

In addition to our 1996 Employee Stock Purchase Plan discussed in Note R: “Stock-Based Compensation” in Notes to Consolidated Financial Statements, we have a 2006 Equity and Cash Compensation Incentive Plan (the “2006 Equity Plan”) under which equity securities are authorized for issuance. The 2006 Equity Plan was initially approved by stockholders on May 25, 2006.

At our annual meeting of stockholders held May 21, 2013, our stockholders approved an amendment to the 2006 Equity Plan to increase the number of shares issuable thereunder by 10.0 million, for an aggregate of 32.0 million shares issuable thereunder, and our stockholders also approved an amendment to our 1996 Employee Stock Purchase Plan to increase the number of shares issuable thereunder by 5.0 million, for an aggregate of 30.4 million shares issuable thereunder. At our annual meeting of stockholders held May 12, 2015, our stockholders approved an amendment to the 2006 Equity Plan to extend its term until May 12, 2025. At our annual meeting of stockholders held May 7, 2021, our stockholders approved an amendment to our 1996 Employee Stock Purchase Plan to increase the number of shares issuable thereunder by 3.0 million, for an aggregate of 33.4 million shares issuable thereunder.

The following table presents information about these plans as of December 31, 2024 (share numbers in thousands):

(1)
Includes 1,527,351 shares of restricted stock units that are not included in the calculation of the weighted average exercise price.

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(2)
Consists of 3,638,237 securities available for issuance under the 2006 Equity Plan and 3,224,044 of securities available for issuance under the Employee Stock Purchase Plan.

The purpose of the 2006 Equity Plan is to motivate employees, officers and directors by providing equity ownership and compensation opportunities in Teradyne. The aggregate number of shares available under the 2006 Equity Plan as of December 31, 2024 was 3,638,237 shares of our common stock. The 2006 Equity Plan authorizes the grant of stock-based awards in the form of (1) non-qualified and incentive stock options, (2) stock appreciation rights, (3) restricted stock awards and restricted stock unit awards, (4) phantom stock, and (5) other stock-based awards. Awards may be tied to time-based vesting schedules and/or performance-based vesting measured by reference to performance criteria chosen by the Compensation Committee of the Board of Directors, which administers the 2006 Equity Plan. Awards may be made to any employee, officer, consultant and advisor of Teradyne and our subsidiaries, as well as to our directors. The maximum number of shares of stock-based awards that may be granted to one participant during any one fiscal year is 2,000,000 shares of common stock.

As of December 31, 2024, total unrecognized compensation expense related to non-vested restricted stock units and options was $82.6 million and is expected to be recognized over a weighted average period of 2.5 years.

Performance Graph

The following graph compares the change in our cumulative total shareholder return in our common stock with (i) the Standard & Poor’s 500 Index and (ii) the Morningstar Global Semiconductor Equipment & Materials GR USD Industry Group. The comparison assumes $100.00 was invested on December 31, 2019 in our common stock and in each of the foregoing indices and assumes reinvestment of dividends, if any. Historic stock price performance is not necessarily indicative of future price performance.

Recently Issued Accounting Pronouncements

In November 2023, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") No. 2023-07, "Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures", which requires us to disclose significant segment expenses and other segment items used by the Chief Operating Decision Maker ("CODM") on an annual and interim basis as well as provide in interim periods all disclosures about a reportable segment’s profit or loss and assets that are currently required annually. Additionally, we are required to disclose the title and position of the CODM. We retrospectively adopted and complied with this standard for the annual period ending December 31, 2024. See Note U: "Segment, Geographic and Significant Customer Information." The adoption of this standard had no impact on our results of operations, cash flows or financial condition.

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In December 2023, the FASB issued ASU 2023-09 –“Income Taxes (Topic 740): Improvements to Income Tax Disclosures”, which requires expanded disclosures relating to the tax rate reconciliation, income taxes paid, income (loss) before income tax expense (benefit) and income tax expense (benefit), requiring a greater disaggregation of information for each. The provisions of ASU 2023-09 are effective for fiscal years beginning after December 15, 2024. The amendments in this update should be applied on a prospective basis, but retrospective application is permitted. We are currently evaluating the impact of this new standard.

In November 2024, the FASB issued ASU 2024-03-"Income Statement - Reporting Comprehensive Income -Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses", which requires disclosure of additional expense information on an annual and interim basis, including the amounts of inventory purchases, employee compensation, depreciation and intangible amortization included within each income statement expense caption. This standard is effective for fiscal years beginning after December 15, 2026, and interim periods within fiscal years beginning after December 15, 2027, with early adoption permitted. The amendments in this update should be applied on a prospective basis, but retrospective application is permitted. We are currently evaluating the impact of this new standard.

Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

We are a leading global supplier of automated test equipment and robotics products. We design, develop, manufacture and sell automated test systems and robotics products. Our automated test systems are used to test semiconductors, wireless products, data storage and complex electronics systems in many industries including consumer electronics, wireless, automotive, industrial, computing, communications, and aerospace and defense industries. Our Robotics products include collaborative robotic arms and autonomous mobile robots (“AMRs”) used by global manufacturing, logistics and industrial customers to improve quality, increase manufacturing and material handling efficiency and decrease manufacturing and logistics costs. Our automated test equipment and robotics products and services include:

•
semiconductor test (“Semiconductor Test”) systems;

•
storage and system level test (“Storage Test”) systems, defense/aerospace (“Defense/Aerospace”) test instrumentation and systems and circuit-board test and inspection (“Production Board Test”) systems (collectively these products represent “System Test”);

•
wireless test (“Wireless Test”) systems; and

•
robotics (“Robotics”) products.

The market for our test products is concentrated with a limited number of significant customers accounting for a substantial portion of the purchases of test equipment. A few customers drive significant demand for our 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.

In 2023, the demand in our Semiconductor Test business continued to be impacted by a correction cycle driven by excess semiconductor inventory, primarily in the mobility segment of the market. The depth of this slowdown and the timing of the recovery are uncertain, however, strong automotive and image sensor demand partially offset these declines. The growth of DDR5 and High Bandwidth Memory ("HBM") devices for data center applications continued to drive demand for our products in the memory market in 2023. Over the midterm, we expect the ramp of 3 nanometer and gate-all-around process technology, increasing multichip packaging, additional device complexity and unit growth will drive additional demand for Semiconductor Test.

Our Robotics segment consists of Universal Robots A/S (“UR”), a leading supplier of collaborative robotic arms, and Mobile Industrial Robots A/S (“MiR”), a leading maker of AMRs for industrial automation. The market for our Robotics segment products is dependent on the adoption of new automation technologies by large manufacturers as well as small and medium enterprises (“SMEs”) throughout the world. Demand in the fourth quarter of 2023 increased, tied to introduction of new products and seasonally high demand in Robotics after market softness and the impact of our channel transformation resulted in a weaker than forecasted first half of 2023.

On November 7, 2023, Teradyne and Technoprobe S.p.A, (“Technoprobe”), a leader in the design and production of probe cards, announced establishment of a strategic partnership that will seek to accelerate growth for both companies and enable higher performance semiconductor test interfaces for customers worldwide. As part of the partnership, Teradyne will make an investment of 481.0 million Euros in exchange for a 10% equity investment in Technoprobe and Technoprobe will acquire 100% of Teradyne’s Device Interface Solutions ("DIS") business in exchange for $85.0 million. The transaction is expected to close during the first half of 2024.

In 2023, inflation had minimal effect on our results. While both our test and robotics businesses may continue to be influenced by supply constraints, which could impact our revenue and costs, We do not anticipate that supply chain constraints will have a material impact on our financial results in 2024.

Our financial statements are denominated in U.S. dollars. While the majority of our revenues are in U.S. dollars, approximately 70 percent of our Robotics revenue is denominated in foreign currencies. There was no material impact to our 2023 results due to changes in foreign exchange rates, however, in 2022, the strengthening of the U.S. dollar was a factor in lower than forecasted revenues in our Robotics segment. Continued strengthening of the U.S. dollar would adversely affect Robotics revenue growth in 2024.

Our corporate strategy continues to focus on profitably gaining market share in our test businesses through the introduction of differentiated products that target expanding segments and accelerating growth through continued investment in our Robotics businesses. We plan to continue investing in our growth while balancing capital allocations between stock repurchases and dividends and using capital for acquisitions.

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Supply Chain Constraints and Inflationary Pressures

The global supply shortage of electrical components, including semiconductor chips, impacted our supply chain in the first half of 2023. In the second half of 2023, we saw improvements related to supply constraints and, consequently, did not experience material increases in our lead times and costs for components. In addition, in the 2023, inflationary pressures contributed to increased costs for product components and wage inflation, which had a minimal impact on our cost of products, gross margin and profit for the year. Our supply chain team, and our suppliers, continue to manage numerous supply, production, and logistics obstacles. In an effort to mitigate these risks, in some cases, we have incurred higher costs due to investment in supply chain resiliency and to secure available inventory or have extended or placed non-cancellable purchase commitments with semiconductor suppliers, which introduces inventory risk if our forecasts and assumptions prove inaccurate. We have also sourced components from additional suppliers and multi-sourced and pre-ordered components and finished goods inventory in some cases in an effort to reduce the impact of the adverse supply chain conditions we have experienced. Though these mitigation efforts have not had a material impact on our financial results, our continuing efforts may not be successful. While our businesses could be impacted by supply constraints in the future, we do not anticipate supply chain constraints will have a material impact on our financial results in 2024.

Impact of the Israel-Hamas conflict on our Business

The recent Israel-Hamas conflict could have a negative impact on our future revenue and supply chain, either of which could adversely affect our business and financial results. Our customers in Israel may experience delays in product releases due to impacts to their labor force and impacts on their suppliers because of the conflict, which could materially impact demand for our products. Similarly, our suppliers in Israel may experience delays in providing us with parts due to the conflict. In addition, the global economic uncertainty following the start of the conflict could impact demand for our products.

Impact of October 7, 2022 and October 17, 2023 U.S. Department of Commerce Regulations on our Business

On October 7, 2022, the U.S. Department of Commerce published new regulations restricting the export to China of advanced semiconductors, supercomputer technology, equipment for the manufacturing of advanced semiconductors and components and technology for the manufacturing in China of certain semiconductor manufacturing equipment. As previously disclosed, the restrictions impacted Teradyne’s sales to certain companies in China and Teradyne’s manufacturing and development operations in China. Teradyne mitigated the impact of these restrictions on its business by obtaining licenses from the Department of Commerce. On October 17, 2023, the Department of Commerce released new rules updating the exporting controls issued on October 7, 2022. The new rules which took effect on November 17, 2023 significantly limit the impact of the October 7, 2022 restrictions on Teradyne’s business. However, the regulations may continue to have an adverse impact on certain actual or potential customers of Teradyne and on the global semiconductor industry. To the extent the regulations impact actual and potential customers or disrupt the global semiconductor industry, Teradyne’s business and revenues will be adversely impacted.

See Part II—Item 1A, “Risk Factors,” included herein for updates to our risk factors regarding risks associated with supply chain issues, international conflicts, and legal and regulatory compliance.

Critical Accounting Policies and Estimates

We have identified the policies and estimates discussed below as critical to understanding our business and our results of operations and financial condition. The impact and any associated risks related to these estimates on our business operations is discussed throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations where such policies affect our reported and expected financial results. For a full description of our accounting policies related to the below items refer to Note B. Accounting Policies, included in the Notes to Consolidated Financial Statements in this Annual Report.

Critical accounting estimates are complex and may require significant judgment by management. Changes to the underlying assumptions may have a material impact on our financial condition and results of operations. These estimates may change, as new events occur, and additional information is obtained. Actual results could differ significantly from these estimates under different assumptions or conditions.

Revenue Recognition

In accordance with ASC 606, “Revenue from Contracts with Customers” (“ASC 606”), we recognize revenues, when or as control is transferred to a customer. Our determination of revenue requires judgment in the determination of performance obligations and allocation of the transaction price to performance obligations. We often sell bundled orders that include both product and services or multiple different products within the same order. We evaluate each of the deliverables to determine if it meets the definition of a performance obligation, which requires that it is capable of being distinct and distinct within the context of the contract. This

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determination is based on an assessment of contractual rights of the contract and the ability of the performance obligation to perform on its own or with readily available resources. In bundled transactions we estimate the standalone selling price of each identified performance obligation and use that estimate to allocate the transaction price among said performance obligations. The estimated standalone selling price is determined using all information reasonably available to us, including standalone transactions, market information and other observable inputs.

Inventories

Inventories are stated at the lower of cost using a standard costing system which approximates cost based on a first-in, first-out basis or net realizable value. On a quarterly basis, we evaluate all inventories for net realizable value. 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 within the forecasted demand window, is written down to estimated net realizable value. Forecasted demand information is obtained from the sales and marketing groups and incorporates factors such as backlog and future revenues. The demand forecast is based on assumptions around the product life and customer and market expectations.

Retirement and Postretirement Plans

We recognize net actuarial gains and losses and the change in the fair value of the plan assets in our operating results in the year in which they occur or upon any interim remeasurement of the plans. Discount rate and expected return on assets are two assumptions which are important elements of pension plan expense and asset/liability measurement. We evaluate our discount rate and expected rate of return on assets assumptions annually on a plan and country specific basis. We evaluate other assumptions related to demographic factors, such as retirement age, mortality and turnover periodically, and update them to reflect our experience and expectations for the future.

In developing the expected return on U.S. Qualified Pension Plan (“U.S. Plan”) assets assumption, we evaluated input from our investment manager and pension consultants, including their forecast of asset class return expectations. We believe that 4.75% was an appropriate rate of return on assets to use for 2023. The December 31, 2023 asset allocation for our U.S. Plan was 94% invested in fixed income securities, 5% invested in equity securities, and 1% invested in other securities. Our investment manager regularly reviews the actual asset allocation and periodically rebalances the portfolio to ensure alignment with our target allocations.

The discount rate that we utilized for determining future pension obligations for the U.S. Plan is based on the FTSE Pension Index adjusted for the U.S. Plan’s expected cash flows and was 4.75% at December 31, 2023, down from 4.95% at December 31, 2022. We estimate that in 2024 we will recognize approximately $0.2 million of pension expense for the U.S. Plan. The U.S. Plan pension expense estimate for 2024 is based on a 4.75% discount rate and a 4.65% return on assets. Future pension expense or income will depend on future investment performance, changes in future discount rates and various other factors related to the employee population participating in our pension plans.

Goodwill, Intangible and Long-Lived Assets

We assess goodwill for impairment at least annually in the fourth quarter, as of December 31, on a reporting unit basis, or more frequently, when events and circumstances occur indicating that the recorded goodwill may be impaired. We review intangible and 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. Goodwill impairment will be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. Impairment of intangible and long-lived assets would result in the asset being written down to its estimated fair value. The calculated fair value of a reporting unit or intangible or long-lived asset is dependent upon discounted cash flow (“DCF”) models, discount rates, and market multiples. DCF models rely on our forecasted mid-term plans which are subjective based on customer or market conditions and can change materially. We utilize third party specialists when determining discount rates and selected market multiples. A change in any of these key assumptions could result in a reporting unit, intangible asset, or long-lived asset being impaired in a future period.

Convertible Debt

We adopted Accounting Standards Update (“ASU”) ASU 2020-06 – “Debt—Debt with Conversion and Other Options and Derivatives and Hedging—Contracts in Entity’s Own Equity,” on January 1, 2022 using the modified retrospective method of adoption. As a result of adoption, we recorded an increase of $1.4 million to current debt for unsettled shares, an increase of $1.8 million to deferred tax assets, an increase of $6.6 million to long-term debt for unamortized debt discount, and an increase to retained earnings of $94.6 million for the reclassification of the equity component. Mezzanine equity representing unsettled shares value was reduced to zero and additional paid-in capital was reduced by $100.8 million. In accordance with ASU 2020-06, we account for a

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convertible debt instrument as a single liability measured at its amortized cost, as long as no other features require bifurcation and recognition as derivatives. Unsettled shares are recorded in current debt, and there is no recognition of a debt discount, which was previously amortized to interest expense. Settled shares reduce the outstanding debt balance in an amount equal to the cash paid, but do not result in any gain or loss on extinguishment. We use the if-converted method in the diluted EPS calculation for convertible instruments.

Income Taxes

Deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The measurement of deferred tax assets is reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax assets will not be realized. Evaluating the positive and negative evidence regarding the realization of the net deferred tax assets in accordance with ASC 740, “Accounting for Income Taxes” is a key judgment in the valuation of income taxes. This assessment included the evaluation of scheduled reversals of deferred tax liabilities, estimates of projected future taxable income and tax-planning strategies. Although realization is not assured, based on our assessment, we concluded that it is more likely than not that such assets, net of the existing valuation allowance, will be realized.

Results of Operations

Information pertaining to fiscal year 2021 results of operations, including a year-to-year comparison against fiscal year 2022, was included in our Annual Report on Form 10-K for the year ended December 31, 2022 under Part II, Item 7, “Management’s Discussion and Analysis of Financial Position and Results of Operations,” which was filed with the SEC on February 22, 2023. This information is incorporated by reference herein.

The following table sets forth the percentage of total net revenues included in our consolidated statements of operations:

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Revenues

Revenues for our reportable segments were as follows:

The decrease in Semiconductor Test revenues of $262.0 million, or 12.6%, was driven primarily by lower tester sales for compute and mobility applications. The decrease in Robotics revenues of $27.9 million, or 6.9%, was driven primarily by softening demand due to slowing global industrial activity and macro-economic headwinds and the impact of the transformation of Universal Robots' sales channel. The decrease in System Test revenues of $131.1 million, or 27.9%, was primarily due to lower sales in Storage Test of system level and hard disk drive testers. The decrease in Wireless Test revenues of $57.4 million, or 28.5%, was primarily due to a decrease in sales of connectivity test products.

Our reportable segments accounted for the following percentages of consolidated revenues:

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

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

The breakout of product and service revenues was as follows:

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Our product revenues decreased $495.3 million, or 19.1%, primarily due to lower tester sales in Semiconductor Test for compute and mobility applications, a decrease in sales in Storage Test of system level and hard disk drive testers, and a decrease in Wireless Test sales of connectivity test products. Our service revenues increased $16.5 million, or 2.9%, primarily in Semiconductor Test and Storage Test.

In 2023, revenues from Texas Instruments Inc., a customer of our Semiconductor Test segment, accounted for 10% of our consolidated revenues. In 2021, revenues from Taiwan Semiconductor Manufacturing Company Ltd., a customer of our Semiconductor Test segment, accounted for 12% of our consolidated revenues. In 2023 and 2022, our five largest direct customers in aggregate accounted for 32% and 26% of our consolidated revenues, respectively. We estimate consolidated revenues driven by Qualcomm, a customer of our Semiconductor Test, System Test and Wireless Test segments, combining direct and indirect sales, accounted for approximately 11% of our consolidated revenues in 2022.

Gross Profit

Gross profit as a percent of total revenues decreased by 1.8 points, primarily due to a lower volume, higher spending to strengthen our supply chain, and product mix.

The breakout of product and service gross profit was as follows:

Product revenues gross profit percentage decreased by 1.9 points, primarily due to lower volume, higher spending to strengthen our supply chain, and product mix.

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 revenues information is obtained from the sales and marketing groups and incorporates factors such as backlog and future revenues. 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 within the forecasted demand window, is written down to estimated net realizable value.

During the year ended December 31, 2023, we recorded an inventory provision of $28.4 million included in cost of revenues, primarily due to downward revisions to previously forecasted demand levels for certain products. Of the $28.4 million of total excess and obsolete provisions, $22.5 million was related to Semiconductor Test, $2.3 million was related to Robotics, $1.9 million was related to System Test, and $1.7 million was related to Wireless Test.

During the year ended December 31, 2022, we recorded an inventory provision of $31.5 million included in cost of revenues, primarily due to downward revisions to previously forecasted demand levels for certain products. Of the $31.5 million of total excess and obsolete provisions, $21.5 million was related to Semiconductor Test, $4.6 million was related to Wireless Test, $3.7 million was related to Robotics, and $1.7 million was related to System Test.

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During the years ended December 31, 2023 and 2022, we scrapped $26.4 million and $8.8 million of inventory, respectively, and sold $5.2 million and $1.8 million of previously written-down or written-off inventory, respectively. As of December 31, 2023, we had inventory related reserves for amounts which had been written-down or written-off totaling $136.0 million. We have no pre-determined timeline to scrap the remaining inventory.

Selling and Administrative

Selling and administrative expenses were as follows:

The increase of $19.2 million in selling and administrative expenses was primarily due to the charge of $5.9 million related to the modification of Teradyne’s chief executive officer’s outstanding equity awards in connection with his retirement and higher sales and marketing spending in Robotics and Semiconductor Test.

Engineering and Development

Engineering and development expenses were as follows:

The decrease of $22.5 million in engineering and development expenses was due to lower variable compensation and lower spending in Semiconductor Test, partially offset by higher spending in Robotics.

Restructuring and Other

During the year ended December 31, 2023, we recorded $14.7 million of severance charges related to headcount reductions of 215 people primarily in Semiconductor Test and Robotics, which included charges related to a voluntary early retirement program for employees meeting certain conditions, $3.1 million of acquisition and divestiture expenses related to the Technoprobe transaction, a $1.5 million contract termination charge, and a charge of $1.1 million for an increase in environmental liability.

During the year ended December 31, 2022, we recorded a charge of $14.7 million related to the arbitration claim filed against Teradyne and AutoGuide related to an earn-out dispute which was settled on March 25, 2022 for $26.7 million, $2.9 million of severance charges primarily in Robotics, and a charge of $2.7 million for an increase in environmental and legal liabilities, partially offset by a $3.4 million gain on sale of an asset.

Interest and Other

Interest income increased by $20.9 million due to higher interest rates in 2023. Other (income) expense, net decreased by $4.8 million primarily due to the change in pension actuarial gains/losses, from a $25.6 million gain in 2022 to a $2.7 million loss in 2023, partially offset by the change in unrealized gains/losses on equity securities, from a $9.7 million loss in 2022 to a $7.2 million gain in 2023, and a $7.5 million unrealized gain on our call option purchased in connection with our agreement to acquire a 10% investment in Technoprobe S.p.A.

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Income (Loss) Before Income Taxes

(1)
Included in Corporate and Eliminations are interest income, interest expense, net foreign exchange gains (losses), intercompany eliminations, employee severance, pension and postretirement plan actuarial gains (losses), legal and environmental fees, acquisition and divestiture related expenses, contract termination settlement charge, and an expense for the modification of Teradyne's former chief executive officer's outstanding equity awards.

The decrease in income before income taxes in Semiconductor Test was driven primarily by lower tester sales for compute and mobility applications. The decrease in income before income taxes in System Test was primarily due to lower sales in Storage Test of system level and hard disk drive testers. The decrease in income before income taxes in Wireless Test was driven primarily by a decrease in sales of connectivity test products. The decrease in income before income taxes in Robotics was driven primarily by softening demand due to slowing global industrial activity and macro-economic headwinds and the impact of the transformation of Universal Robots sales channel. The increase in income before income taxes in Corporate and Eliminations was primarily due to legal settlement charges in 2022 related to litigation for the earn-out dispute in connection with the AutoGuide acquisition, changes in unrealized gains/losses on equity securities and higher interest income.

Income Taxes

Income tax expense for 2023 and 2022 totaled $76.8 million and $124.9 million, respectively. The effective tax rate for 2023 and 2022 was 14.6% and 14.9%, respectively.

The decrease in the effective tax rate from 2022 to 2023 is primarily attributable to increases in benefit from tax credits and the U.S. foreign derived intangible income deduction. These decreases in expense were partially offset by a shift in the geographic distribution of income, which increased the income subject to taxation in higher tax rate jurisdictions relative to lower tax rate jurisdictions and a reduction in benefit from equity compensation.

We qualify 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 attributable to the Singapore tax holiday for the years ended December 31, 2023 and 2022 were $1.4 million or $0.01 per diluted share and $16.0 million or $0.09 per diluted share, respectively. In November 2020, we entered into an agreement with the Singapore Economic Development Board which extended our Singapore tax holiday under substantially similar terms to the agreement which expired on December 31, 2020. The new tax holiday is scheduled to expire on December 31, 2025.

Capital Resources and Material Cash Requirements

Our cash, cash equivalents and marketable securities balance decreased by $68.0 million in 2023 to $937.2 million. Cash decreased due to stock repurchases in the amount of $397.2 million, quarterly cash dividend payments in the amount of $67.9 million, and payments of convertible debt principal in the amount of $50.3 million, partially offset by cash generated by our global operations.

Operating activities during 2023 provided cash of $585.2 million. Changes in operating assets and liabilities used cash of $9.6 million. This was due to a $33.2 million decrease in operating assets and a $42.8 million decrease in operating liabilities.

The decrease in operating assets was due to a $71.0 million decrease in accounts receivable due to lower sales and a $5.3 million decrease in inventories, partially offset by a $43.1 million increase in prepayments and other assets due to prepayments to our contract manufacturers.

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The decrease in operating liabilities was due to a $57.2 million decrease in deferred revenue and customer advance payments, a $26.9 million decrease in income taxes, a $21.2 million decrease in accrued employee compensation, and $5.5 million of retirement plan contributions, partially offset by a $45.0 million increase in accounts payable, and a $23.0 million increase in other accrued liabilities.

Investing activities during 2023 used cash of $179.6 million, due to $161.9 million used for purchases of marketable securities, $159.6 million used for purchases of property, plant and equipment, and $5.0 million used for issuance of convertible loan, partially offset by $85.0 million and $61.4 million in proceeds from maturities and sales of marketable securities, respectively, and $0.5 million in proceeds from the cancellation of Teradyne owned life insurance policies related to the cash surrender value.

Financing activities during 2023 used cash of $501.9 million, due to $397.2 million used for the repurchase of 3.9 million shares of common stock at an average price of $102.47 per share, $67.9 million used for dividend payments, $50.3 million used for the payments of convertible debt principal, and $20.8 million used for payments related to net settlement of employee stock compensation awards, partially offset by $34.3 million from the issuance of common stock under employee stock purchase and stock option plans.

Operating activities during 2022 provided cash of $577.9 million. Changes in operating assets and liabilities used cash of $272.6 million. This was due to a $170.9 million increase in operating assets and a $101.7 million decrease in operating liabilities.

The increase in operating assets was due to a $140.7 million increase in prepayments and other assets due to prepayments to our contract manufacturers, and an $80.8 million increase in inventories, partially offset by a $50.6 million decrease in accounts receivable due to lower sales.

The decrease in operating liabilities was due to a $40.3 million decrease in accrued employee compensation, a $29.8 million decrease in income taxes, a $10.8 million decrease in accounts payable, a $9.3 million decrease in other accrued liabilities, a $6.2 million decrease in deferred revenue and customer advance payments, and $5.1 million of retirement plan contributions.

Investing activities during 2022 provided cash of $43.8 million, due to $268.1 million and $222.9 million in proceeds from sales and maturities of marketable securities, respectively, $3.4 million due to sale of an asset, partially offset by $287.4 million used for purchases of marketable securities and $163.2 million used for purchases of property, plant and equipment.

Financing activities during 2022 used cash of $893.0 million, due to $752.1 million used for the repurchase of 7.3 million shares of common stock at an average price of $103.69 per share, $69.7 million used for dividend payments, $66.8 million used for the payments of convertible debt principal, and $33.2 million used for payments related to net settlement of employee stock compensation awards, partially offset by $28.7 million from the issuance of common stock under employee stock purchase and stock option plans.

In January 2023, May 2023, August 2023 and November 2023, our Board of Directors declared a quarterly cash dividend of $0.11 per share. Total dividend payments in 2023 were $67.9 million. In January 2022, May 2022, August 2022 and November 2022, our Board of Directors declared a quarterly cash dividend of $0.11 per share. Total dividend payments in 2022 were $69.7 million.

In January 2023, our Board of Directors cancelled the 2021 repurchase program and approved a new repurchase program for up to $2.0 billion of common stock. In 2023, we repurchased 3.9 million shares of common stock for $397.2 million, which excludes related excise tax, at an average price of $102.47 per share. In 2022, we repurchased 7.3 million shares of common stock for $752.1 million at an average price of $103.69 per share against the 2021 repurchase program. The cumulative repurchases as of December 31, 2022, under the 2021 repurchase program, were 12.0 million shares of common stock for $1,352.1 million at an average price per share of $112.44. In 2024 we intend to repurchase up to $90.0 million.

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

On November 7, 2023, Teradyne announced a strategic partnership with Technoprobe S.p.A including Teradyne's agreement to acquire a 10% equity investment in Technoprobe for 481.0 million Euros. Teradyne will face a three year restriction on the transfer or disposition of the Technoprobe shares upon closing of the agreement, subject to certain early termination events.

On May 1, 2020, we entered into a credit agreement providing a three-year, senior secured revolving credit facility of $400 million. On December 10, 2021, the credit agreement was amended to extend the senior secured revolving credit facility to December 10, 2026. On October 5, 2022, the credit agreement was amended to increase the amount of the credit facility to $750.0 million from $400.0 million. As of February 22, 2023, we have not borrowed any funds under the credit facility.

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We expect operations to continue to be the primary source of cash to operate the business and meet material cash commitments, including any payments of convertible debt principal, our stock repurchase program, our quarterly dividends, our office lease obligations, contractual obligations related to inventory purchases and the construction of new facilities. We believe our cash, cash equivalents and marketable securities balance will be sufficient to pay our quarterly dividend and meet our working capital and expenditure needs for at least the next twelve months. Inflation has not had a significant long-term impact on earnings.

At December 31, 2023, our future contractual obligations were related to debt, leases, retirement plan liabilities, deferred tax benefits, and purchase obligations. See Note J. “Debt”, Note I. “Leases”, Note P. “Retirement Plans”, and Note S. “Income Taxes” of Notes to Consolidated Financial Statements in this Annual Report for information about those obligations, which Notes are incorporated by reference into this section. Our purchase obligations were approximately $414.4 million, with $379.1 million expected to be paid within twelve months.

Retirement Plans

ASC 715-20, “Compensation—Retirement Benefits—Defined Benefit Plans,” requires an employer with defined benefit plans or other postretirement benefit plans to recognize an asset or a liability on its balance sheet for the overfunded or underfunded status of the plans as defined by ASC 715-20. The pension asset or liability represents the difference between the fair value of the pension plans’ assets and the projected benefit obligation as of December 31. For other postretirement benefit plans, the liability is the difference between the fair value of the plan’s assets and the accumulated postretirement benefit obligation as of December 31.

For the year ended December 31, 2023, our pension expense, which includes the U.S. Qualified Pension Plan (“U.S. Plan”), certain qualified plans for non-U.S. subsidiaries, and a U.S. Supplemental Executive Defined Benefit Plan, was approximately $6.8 million. Pension expense is calculated based upon a number of actuarial assumptions. Discount rate and expected return on assets are two assumptions which are important elements of pension plan expense and asset/liability measurement. We evaluate our discount rate and expected rate of return on assets assumptions annually on a plan and country specific basis. We evaluate other assumptions related to demographic factors, such as retirement age, mortality and turnover periodically, and update them to reflect our experience and expectations for the future.

In developing the expected return on U.S. Plan assets assumption, we evaluated input from our investment manager and pension consultants, including their forecast of asset class return expectations. We believe that 4.75% was an appropriate rate of return on assets to use for 2023. The December 31, 2023 asset allocation for our U.S. Plan was 94% invested in fixed income securities, 5% invested in equity securities, and 1% invested in other securities. Our investment manager regularly reviews the actual asset allocation and periodically rebalances the portfolio to ensure alignment with our target allocations.

We recognize net actuarial gains and losses and the change in the fair value of plan assets in our operating results in the year in which they occur or upon any interim remeasurement of the plans. We calculate the expected return on plan assets using the fair value of the plan assets. Actuarial gains and losses are generally measured annually as of December 31 and, accordingly, recorded during the fourth quarter of each year or upon any interim remeasurement of the plans.

The discount rate that we utilized for determining future pension obligations for the U.S. Plan is based on the FTSE Pension Index adjusted for the U.S. Plan’s expected cash flows and was 4.75% at December 31, 2023, down from 4.95% at December 31, 2022. We estimate that in 2024, we will recognize approximately $0.2 million of pension expense for the U.S. Plan. The U.S. Plan pension expense estimate for 2024 is based on a 4.75% discount rate and a 4.65% return on assets. Future pension expense or income will depend on future investment performance, changes in future discount rates and various other factors related to the employee population participating in our pension plans.

As of December 31, 2023, our pension plans had no unrecognized pension prior service cost.

The assets of the U.S. Plan consist substantially of fixed income securities. U.S. Plan assets have increased from $111.8 million at December 31, 2022 to $112.6 million at December 31, 2023, while the U.S. Plan’s liability increased from $100.0 million at December 31, 2022 to $101.1 million at December 31, 2023.

Our funding policy is to make contributions to our pension plans in accordance with local laws and to the extent that such contributions are tax deductible. During 2023, we made contributions of $3.1 million to the U.S. supplemental executive defined benefit pension plan, and $1.0 million to certain qualified plans for non-U.S. subsidiaries. In 2024, we expect to contribute approximately $3.1 million to the U.S. supplemental executive defined benefit pension plan. Contributions to be made in 2024 to certain qualified plans for non-U.S. subsidiaries are based on local statutory requirements and are estimated at approximately $1.4 million.

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Equity Compensation Plans

In addition to our 1996 Employee Stock Purchase Plan discussed in Note Q: “Stock-Based Compensation” in Notes to Consolidated Financial Statements, we have a 2006 Equity and Cash Compensation Incentive Plan (the “2006 Equity Plan”) under which equity securities are authorized for issuance. The 2006 Equity Plan was initially approved by stockholders on May 25, 2006.

At our annual meeting of stockholders held May 21, 2013, our stockholders approved an amendment to the 2006 Equity Plan to increase the number of shares issuable thereunder by 10.0 million, for an aggregate of 32.0 million shares issuable thereunder, and our stockholders also approved an amendment to our 1996 Employee Stock Purchase Plan to increase the number of shares issuable thereunder by 5.0 million, for an aggregate of 30.4 million shares issuable thereunder. At our annual meeting of stockholders held May 12, 2015, our stockholders approved an amendment to the 2006 Equity Plan to extend its term until May 12, 2025. At our annual meeting of stockholders held May 7, 2021, our stockholders approved an amendment to our 1996 Employee Stock Purchase Plan to increase the number of shares issuable thereunder by 3.0 million, for an aggregate of 33.4 million shares issuable thereunder.

The following table presents information about these plans as of December 31, 2023 (share numbers in thousands):

(1)
Includes 1,377,662 shares of restricted stock units that are not included in the calculation of the weighted average exercise price.

(2)
Consists of 4,352,428 securities available for issuance under the 2006 Equity Plan and 3,510,784 of securities available for issuance under the Employee Stock Purchase Plan.

The purpose of the 2006 Equity Plan is to motivate employees, officers and directors by providing equity ownership and compensation opportunities in Teradyne. The aggregate number of shares available under the 2006 Equity Plan as of December 31, 2023 was 4,352,428 shares of our common stock. The 2006 Equity Plan authorizes the grant of stock-based awards in the form of (1) non-qualified and incentive stock options, (2) stock appreciation rights, (3) restricted stock awards and restricted stock unit awards, (4) phantom stock, and (5) other stock-based awards. Awards may be tied to time-based vesting schedules and/or performance-based vesting measured by reference to performance criteria chosen by the Compensation Committee of the Board of Directors, which administers the 2006 Equity Plan. Awards may be made to any employee, officer, consultant and advisor of Teradyne and our subsidiaries, as well as to our directors. The maximum number of shares of stock-based awards that may be granted to one participant during any one fiscal year is 2,000,000 shares of common stock.

As of December 31, 2023, total unrecognized compensation expense related to non-vested restricted stock units and options was $73.7 million and is expected to be recognized over a weighted average period of 2.5 years.

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Performance Graph

The following graph compares the change in our cumulative total shareholder return in our common stock with (i) the Standard & Poor’s 500 Index and (ii) the Morningstar Global Semiconductor Equipment & Materials GR USD Industry Group. The comparison assumes $100.00 was invested on December 31, 2018 in our common stock and in each of the foregoing indices and assumes reinvestment of dividends, if any. Historic stock price performance is not necessarily indicative of future price performance.

Recently Issued Accounting Pronouncements

In November 2023, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") No. 2023-07, "Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures", which will require us to disclose significant segment expenses and other segment items used by the Chief Operating Decision Maker ("CODM") on an annual and interim basis as well as provide in interim periods all disclosures about a reportable segment’s profit or loss and assets that are currently required annually. Additionally, we will be required to disclose the title and position of the CODM. The new standard is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. This ASU will have no impact on our results of operations, cash flows or financial condition. Upon adoption, we will apply the amendments in this ASU retrospectively to all prior period disclosures presented in the financial statements.

In December 2023, FASB issued ASU 2023-09 –“Income Taxes (Topic 740): Improvements to Income Tax Disclosures”, which requires expanded disclosures relating to the tax rate reconciliation, income taxes paid, income (loss) before income tax expense (benefit) and income tax expense (benefit), requiring a greater disaggregation of information for each. The provisions of ASU 2023-09 are effective for fiscal years beginning after December 15, 2024. The amendments in this update should be applied on a prospective basis, but retrospective application is permitted. We are currently evaluating the impact of this new standard.

Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

We are a leading global supplier of automated test equipment and robotics products. We design, develop, manufacture and sell automatic test systems and robotics products. Our automatic test systems are used to test semiconductors, wireless products, data storage and complex electronics systems in many industries including consumer electronics, wireless, automotive, industrial, computing, communications, and aerospace and defense industries. Our Robotics products include collaborative robotic arms and autonomous mobile robots (“AMRs”) used by global manufacturing, logistics and industrial customers to improve quality, increase manufacturing and

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material handling efficiency and decrease manufacturing and logistics costs. Our automatic test equipment and robotics products and services include:

The market for our test products is concentrated with a limited number of significant customers accounting for a substantial portion of the purchases of test equipment. A few customers drive significant demand for our 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.

In 2022, the demand in the mobility and compute segments of our Semiconductor Test business was lower due to end market slowdown in these segments as well as a slower technology transition in one of our largest end-markets. While the depth of the slowdown and the timing of the recovery are uncertain, we expect the ramp of 3 nanometer process technology starting in 2023 followed by gate-all-around process technology, increasing multichip packaging, additional device complexity and unit growth will drive additional demand for test over our four year forecast period.

Our Robotics segment consists of Universal Robots A/S (“UR”), a leading supplier of collaborative robotic arms and Mobile Industrial Robots A/S (“MiR”), a leading maker of AMRs for industrial automation. In September 2022, we merged MiR and AutoGuide, LLC (“AutoGuide”), a maker of high payload AMRs, to become a single supplier of AMRs. The market for our Robotics segment products is dependent on the adoption of new automation technologies by large manufacturers as well as small and medium enterprises (“SMEs”) throughout the world. We expect Robotics sales channel expansion combined with new products to drive the growth in 2023.

Both our test and robotics businesses may continue to be influenced by supply constraints, which could impact our revenue and costs in 2023. In 2022, inflation had minimal effect on our results. In 2022, we were unable to supply approximately $20 million of revenue in our test businesses for which we had customer demand.

Our financial statements are denominated in U.S. dollars. While the majority of our revenues are in U.S. dollars, approximately 70 percent of our Robotics revenue is denominated in foreign currencies. In 2022, the strengthening of the U.S. dollar was a factor in lower than forecasted revenues in our Robotics segment. Continued strengthening of the U.S. dollar would negatively affect Robotics revenue growth in 2023.

Our corporate strategy continues to focus on profitably gaining market share in our test businesses through the introduction of differentiated products that target expanding segments and accelerating growth through continued investment in our Robotics businesses. We plan to continue investing in our growth while balancing capital allocations between returning capital to our shareholders through stock repurchases and dividends and using capital for acquisitions.

Impact of the COVID-19 Pandemic on our Business

During the novel coronavirus (COVID-19) pandemic, government authorities implemented numerous measures in an effort to contain the spread of the virus, such as travel bans and restrictions, limitations on

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gatherings or social distancing requirements, quarantines, shelter-in-place orders, vaccination and testing mandates, and business limitations and shutdowns. Additionally, we took proactive, aggressive action to protect the health and safety of our employees, customers, contract manufacturers and suppliers, and to comply with all government orders around the globe. The spread of COVID-19 caused us to modify our business practices, which included implementing social distancing protocols, limiting employee travel and requiring employees to work remotely. These measures impacted our day-to-day operations and disrupted our business, workforce and operations, as well as the operations of our customers, contract manufacturers and suppliers. Due to the COVID-19 pandemic, there has also been uncertainty and disruption in the global economy and our markets. We are not aware of any specific event or circumstance that would require an update to our estimates or judgments or a revision of the carrying value of our assets or liabilities as of February 22, 2023, the date of issuance of this Annual Report on Form 10-K.

We believe the COVID-19 pandemic, and the numerous measures implemented by authorities in response, adversely impacted our results of operations, including by increasing costs, but we cannot accurately estimate the amount of the impact to our 2022 and 2021 financial results or to our future financial results. In addition, the pandemic has disrupted our contract manufacturers and suppliers, and has resulted in some instances in short-term cost increases to meet customer demand. While a continuation of the pandemic may further impact our workforce and operations, as well as those of our customers, contract manufacturers and suppliers, we expect that our manufacturing facilities will remain operational, at sufficient capacity to support production demand. We are monitoring our operations closely in an effort to avoid any potential productivity loss caused by responses to the COVID-19 pandemic.

We experienced interruptions to our supply chain as a result of the COVID-19 pandemic. Our suppliers have faced and may continue to face difficulties maintaining operations in light of COVID-19 disruptions and government-ordered restrictions. Our supply chain team, and our suppliers, continue to manage numerous supply, production, and logistics obstacles caused by the pandemic. There is no assurance that these efforts will be successful. The COVID-19 pandemic may continue to disrupt our ability to obtain components required to manufacture our products, adversely affecting our operations and in some instances resulting in higher costs and delays, both for obtaining components and shipping finished goods to customers.

We will continue to monitor the COVID-19 pandemic. We may take further actions as may be required or recommended by government authorities or that we determine are in the best interests of our employees, customers, contract manufacturers and suppliers. In these circumstances, there may be developments outside our control requiring us to adjust our operating plan. As a result, given the uncertain nature of this situation, we are not able to accurately predict the full extent of the impact of COVID-19 on our business, financial condition, results of operations, liquidity, or cash flows in the future.

Supply Chain Constraints and Inflationary Pressures

The global supply shortage of electrical components, including semiconductor chips, continued to impact our supply chain in 2022. As a result, we experienced, and expect to continue to experience, increases in our lead times and costs for certain components for certain of our products. In addition, in 2022, inflationary pressures contributed to increased costs for product components and wage inflation, which had minimal impact on our cost of products, gross margin and profit for the year. Our supply chain team, and our suppliers, continue to manage numerous supply, production, and logistics obstacles. In an effort to mitigate these risks, in some cases, we have incurred higher costs due to investment in supply chain resiliency and to secure available inventory or have extended or placed non-cancellable purchase commitments with semiconductor suppliers, which introduces inventory risk if our forecasts and assumptions prove inaccurate. We have also sourced components from additional suppliers and multi-sourced and pre-ordered components and finished goods inventory in some cases in an effort to reduce the impact of the adverse supply chain conditions we have experienced. However, if we are unable to secure manufacturing capacities from our current or new suppliers and contract manufacturers, on

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acceptable terms or at all, or successfully manage our purchase commitments and inventory for components, our ability to deliver our products to our customers in the desired quantities, at competitive prices or in a timely manner may be negatively impacted for 2023.

Impact of Russia’s invasion of Ukraine on our Business

Russia’s invasion of Ukraine, in February 2022, did not have a significant direct impact on our business as we have minimal business in Russia and Ukraine. However, following the invasion, the U.S. and other countries imposed significant sanctions against the Russian government and many Russian companies and individuals. Although we do not have significant operations in Russia, the sanctions and Russia’s response to the sanctions, have impacted our business in other countries and could have a negative impact on our future revenue and supply chain, either of which could adversely affect our business and financial results. In addition, the global economic uncertainty following the invasion, sanctions and Russia’s response to the sanctions could impact demand for our products.

Impact of October 7, 2022 U.S. Department of Commerce Regulations on our Business

On October 7, 2022, the U.S. Department of Commerce published new regulations restricting the export to China of advanced semiconductors, supercomputer technology, equipment for the manufacturing of advanced semiconductors and components and technology for the manufacturing in China of certain semiconductor manufacturing equipment. The new restrictions are lengthy and complex. We continue to assess the impact of these regulations on our business. We have determined that restrictions on the sale of semiconductor testers in China to test certain advanced semiconductors will impact our sales to certain companies in China. Several multinational companies manufacturing these advanced semiconductors in China have obtained one-year licenses allowing suppliers such as Teradyne to continue to provide testers to the facilities operated by these companies. We expect that other companies manufacturing advanced semiconductors in China will not receive licenses, thereby restricting our ability to provide testers to the facilities operated by these companies that do not receive a license. We are also filing license requests to sell to and support certain customers in China for certain end uses that, if granted, may reduce the impact of these restrictions on our business. At this time, we do not know the impact these end user and end use restrictions will have on our business in China or on future revenues. In addition to the specific restrictions impacting our business, the regulations may have an adverse impact on certain actual or potential customers and on the global semiconductor industry. To the extent the regulations impact actual and potential customers or disrupt the global semiconductor industry, our business and revenues will be adversely impacted. We also have determined that the restrictions on the export of certain U.S. origin components and technology for use in the development and production in China of certain semiconductor manufacturing equipment impact our manufacturing and development operations in China. We have received a temporary authorization from the U.S. Department of Commerce allowing us to continue our manufacturing and development operations in China until the U.S. Department of Commerce issues a license to replace this temporary authorization. We cannot assess the likelihood or timing of receiving this license. In addition to requesting a license, we are implementing procedures for minimizing the impact of these new regulations on our operations in China, but there is no assurance that these procedures will succeed.

See Part II—Item 1A, “Risk Factors,” included herein for updates to our risk factors regarding risks associated with the COVID-19 pandemic, supply chain issues and international conflicts.

Critical Accounting Policies and Estimates

We have identified the policies and estimates discussed below as critical to understanding our business and our results of operations and financial condition. The impact and any associated risks related to these estimates on our business operations is discussed throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations where such policies affect our reported and expected financial results. For a full description of our accounting policies related to the below items refer to Note B. Accounting Policies, included in the Notes to Consolidated Financial Statements in this Annual Report.

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Critical accounting estimates are complex and may require significant judgment by management. Changes to the underlying assumptions may have a material impact on our financial condition and results of operations. These estimates may change, as new events occur, and additional information is obtained. Actual results could differ significantly from these estimates under different assumptions or conditions.

Revenue Recognition

In accordance with ASC 606, “Revenue from Contracts with Customers” (“ASC 606”), we recognize revenues, when or as control is transferred to a customer. Our determination of revenue requires judgment in the determination of performance obligations and allocation of the transaction price to performance obligations. We often sell bundled orders that include both product and services or multiple different products within the same order. We evaluate each of the deliverables to determine if it meets the definition of a performance obligation, which requires that it is capable of being distinct and distinct within the context of the contract. This determination is based on an assessment of contractual rights of the contract and the ability of the performance obligation to perform on its own or with readily available resources. In bundled transactions we estimate the standalone selling price of each identified performance obligation and use that estimate to allocate the transaction price among said performance obligations. The estimated standalone selling price is determined using all information reasonably available to us, including standalone transactions, market information and other observable inputs.

Inventories

Inventories are stated at the lower of cost using a standard costing system which approximates cost based on a first-in, first-out basis or net realizable value. On a quarterly basis, we evaluate all inventories for net realizable value. 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 within the forecasted demand window, is written down to estimated net realizable value. Forecasted demand information is obtained from the sales and marketing groups and incorporates factors such as backlog and future revenues. The demand forecast is based on assumptions around the product life and customer and market forecasts.

Retirement and Postretirement Plans

We recognize net actuarial gains and losses and the change in the fair value of the plan assets in our operating results in the year in which they occur or upon any interim remeasurement of the plans. Discount rate and expected return on assets are two assumptions which are important elements of pension plan expense and asset/liability measurement. We evaluate our discount rate and expected rate of return on assets assumptions annually on a plan and country specific basis. We evaluate other assumptions related to demographic factors, such as retirement age, mortality and turnover periodically, and update them to reflect our experience and expectations for the future.

In developing the expected return on U.S. Qualified Pension Plan (“U.S. Plan”) assets assumption, we evaluated input from our investment manager and pension consultants, including their forecast of asset class return expectations. We believe that 2.0% was an appropriate rate of return on assets to use for 2022. The December 31, 2022 asset allocation for our U.S. Plan was 94% invested in fixed income securities, 5% invested in equity securities, and 1% invested in other securities. Our investment manager regularly reviews the actual asset allocation and periodically rebalances the portfolio to ensure alignment with our target allocations.

The discount rate that we utilized for determining future pension obligations for the U.S. Plan is based on the FTSE Pension Index adjusted for the U.S. Plan’s expected cash flows and was 4.95% at December 31, 2022, up from 2.65% at December 31, 2021. We estimate that in 2023 we will recognize approximately $0.4 million of pension expense for the U.S. Plan. The U.S. Plan pension expense estimate for 2023 is based on a 4.95%

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discount rate and a 4.75% return on assets. Future pension expense or income will depend on future investment performance, changes in future discount rates and various other factors related to the employee population participating in our pension plans.

Goodwill, Intangible and Long-Lived Assets

We assess goodwill for impairment at least annually in the fourth quarter, as of December 31, on a reporting unit basis, or more frequently, when events and circumstances occur indicating that the recorded goodwill may be impaired. We review intangible and 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. Goodwill impairment will be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. Impairment of intangible and long-lived assets would result in the asset being written down to its estimated fair value. The calculated fair value of a reporting unit or intangible or long-lived asset is dependent upon discounted cash flow (“DCF”) models, discount rates, and market multiples. DCF models rely on our forecasted mid-term plans which are subjective based on customer or market conditions and can change materially. We utilize third party specialists when determining discount rates and selected market multiples. A change in any of these key assumptions could result in a reporting unit, intangible asset, or long-lived asset being impaired in a future period.

Convertible Debt

We adopted Accounting Standards Update (“ASU”) ASU 2020-06 – “Debt—Debt with Conversion and Other Options and Derivatives and Hedging—Contracts in Entity’s Own Equity,” on January 1, 2022 using the modified retrospective method of adoption. As a result of adoption, we recorded an increase of $1.4 million to current debt for unsettled shares, an increase of $1.8 million to deferred tax assets, an increase of $6.6 million to long-term debt for unamortized debt discount, and an increase to retained earnings of $94.6 million for the reclassification of the equity component. Mezzanine equity representing unsettled shares value was reduced to zero and additional paid-in capital was reduced by $100.8 million. In accordance with ASU 2020-06, we account for a convertible debt instrument as a single liability measured at its amortized cost, as long as no other features require bifurcation and recognition as derivatives. Unsettled shares are recorded in current debt, and there is no recognition of a debt discount, which was previously amortized to interest expense. Settled shares reduce the outstanding debt balance in an amount equal to the cash paid, but do not result in any gain or loss on extinguishment. We use the if-converted method in the diluted EPS calculation for convertible instruments.

Income Taxes

Deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The measurement of deferred tax assets is reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax assets will not be realized. Evaluating the positive and negative evidence regarding the realization of the net deferred tax assets in accordance with ASC 740, “Accounting for Income Taxes” is a key judgment in the valuation of income taxes. This assessment included the evaluation of scheduled reversals of deferred tax liabilities, estimates of projected future taxable income and tax-planning strategies. Although realization is not assured, based on our assessment, we concluded that it is more likely than not that such assets, net of the existing valuation allowance, will be realized.

Results of Operations

Information pertaining to fiscal year 2020 results of operations, including a year-to-year comparison against fiscal year 2021, was included in our Annual Report on Form 10-K for the year ended December 31, 2021 under Part II, Item 7, “Management’s Discussion and Analysis of Financial Position and Results of Operations,” which was filed with the SEC on February 23, 2022. This information is incorporated by reference herein.

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The following table sets forth the percentage of total net revenues included in our consolidated statements of operations:

Revenues

Revenues for our reportable segments were as follows:

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The decrease in Semiconductor Test revenues of $561.7 million, or 21.3%, was driven primarily by lower tester sales in mobile and high performance compute processor applications, partially offset by an increase in advance driver assistance systems (“ADAS”) tester sales. The increase in System Test revenues of $1.6 million, or 0.3%, was primarily due to higher sales in Defense/Aerospace and in Production Board Test, partially offset by a decline in Storage Test sales of system level testers. The rise in Robotics revenues of $27.2 million, or 7.2%, was driven primarily by higher demand for UR’s collaborative robotic arms and MiR’s autonomous mobile robots, partially offset by changes in foreign exchange rates. The decrease in Wireless Test revenues of $15.2 million, or 7.0%, was primarily due to a decrease in cellular test product sales, partially offset by an increase in ultra-wide band test product sales.

Our reportable segments accounted for the following percentages of consolidated revenues:

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

The breakout of product and service revenues was as follows:

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Our product revenues decreased $605.0 million, or 18.9%, primarily due to lower tester sales in Semiconductor Test for mobile and high performance compute processor applications, and a decrease in cellular test product sales in Wireless Test, partially offset by the rise in Robotics revenues driven primarily by elevated demand for collaborative robotic arms and autonomous mobile robots. Our service revenues increased $57.2 million or 11.3% primarily in Semiconductor Test and Storage Test.

In 2021, revenues from Taiwan Semiconductor Manufacturing Company Ltd., a customer of our Semiconductor Test segment, accounted for 12% of our consolidated revenues. In 2022 and 2021, our five largest direct customers in aggregate accounted for 26% and 33% of our consolidated revenues, respectively. We estimate consolidated revenues driven by Qualcomm, a customer of our Semiconductor Test, System Test and Wireless Test segments, combining direct and indirect sales, accounted for approximately 11% of our consolidated revenues in 2022 and less than 10% in 2021. We estimate consolidated revenues driven by one OEM customer, of our Semiconductor Test and Wireless Test segments, combining direct sales to that customer with sales to the customer’s OSATs, accounted for less than 10% of our consolidated revenues in 2022 and 19% of our consolidated revenues in 2021.

Gross Profit

Gross profit as a percent of total revenues decreased by 0.4 points, primarily due to higher service costs partially offset by favorable product mix and lower variable compensation.

The breakout of product and service gross profit was as follows:

Service revenues gross profit percentage decreased 4.8% primarily due to lower margins in Semiconductor Test driven by an increase in headcount.

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 revenues information is obtained from the sales and marketing groups and incorporates factors such as backlog and future revenues. 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 within the forecasted demand window, is written down to estimated net realizable value.

During the year ended December 31, 2022, we recorded an inventory provision of $31.5 million included in cost of revenues, primarily due to downward revisions to previously forecasted demand levels for certain products. Of the $31.5 million of total excess and obsolete provisions, $21.5 million was related to Semiconductor Test, $4.6 million was related to Wireless Test, $3.7 million was related to Robotics, and $1.7 million was related to System Test.

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During the year ended December 31, 2021, we recorded an inventory provision of $15.5 million included in cost of revenues, primarily due to downward revisions to previously forecasted demand levels for certain products. Of the $15.5 million of total excess and obsolete provisions, $6.7 million was related to Semiconductor Test, $6.4 million was related to Robotics, $1.8 million was related to Wireless Test, and $0.6 million was related to System Test.

During the years ended December 31, 2022 and 2021, we scrapped $8.8 million and $10.9 million of inventory, respectively, and sold $1.8 million and $2.5 million of previously written-down or written-off inventory, respectively. As of December 31, 2022, we had inventory related reserves for amounts which had been written-down or written-off totaling $136.8 million. We have no pre-determined timeline to scrap the remaining inventory.

Selling and Administrative

Selling and administrative expenses were as follows:

The increase of $10.5 million in selling and administrative expenses was primarily driven by increase in headcount and greater spending in Robotics, partially offset by lower variable compensation.

Engineering and Development

Engineering and development expenses were as follows:

The increase of $13.0 million in engineering and development expenses was primarily driven by increase in headcount and greater spending in Robotics and Semiconductor Test, partially offset by lower variable compensation.

Restructuring and Other

During the year ended December 31, 2022, we recorded a charge of $14.7 million related to the arbitration claim filed against Teradyne and AutoGuide related to an earn-out dispute, which was settled on March 25, 2022 for $26.7 million, $2.9 million of severance charges primarily in Robotics, and a charge of $2.7 million for an increase in environmental and legal liabilities, partially offset by a $3.4 million gain on sale of an asset.

During the year ended December 31, 2021, we recorded a charge of $12.0 million related to the arbitration claim filed against Teradyne and AutoGuide related to an earn-out dispute, $1.5 million of severance charges primarily in Robotics, $0.5 million of acquisition related compensation and expenses and $2.5 million for an increase in environmental and legal liabilities, offset by a $7.2 million gain for the decrease in the fair value of the AutoGuide contingent consideration liability.

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Interest and Other

Interest income increased $3.8 million due to higher interest rates. Interest expense decreased $14.1 million primarily due to the January 1, 2022 adoption of ASU 2020-06 which eliminated the amortization of the debt discount which was $10.3 million in 2021. Other (income) expense, net decreased by $30.4 million primarily due to $28.8 million losses on convertible debt conversions recognized in 2021 and an increase in pension actuarial gains, from $2.2 million gain in 2021 to $25.6 million gain in 2022, partially offset by changes in gains/losses on equity securities, from a $7.2 million gain in 2021 to a $9.0 million loss in 2022, and a $4 million increase in foreign exchange losses.

Income (Loss) Before Income Taxes

The decrease in income before income taxes in Semiconductor Test was driven primarily by lower revenues in mobile and high performance compute processor applications, partially offset by lower variable compensation. The increase in income before income taxes in System Test was primarily due to higher sales in Defense/Aerospace and in Production Board Test, partially offset by a decline in Storage Test sales of system level testers. The decrease in income before income taxes in Wireless Test was driven primarily by lower sales in cellular test products partially offset by elevated sales in ultra-wide band test products. The decrease in income before income taxes in Robotics, was driven primarily by an increase in headcount and greater spending, partially offset by higher revenue for collaborative robotic arms and autonomous mobile robots. The change in income before income taxes in Corporate and Eliminations of $42.9 million was due primarily to $28.8 million of losses on convertible debt conversions recognized in 2021 and an increase of $23.4 million in pension actuarial gains in 2022.

Income Taxes

Income tax expense for 2022 and 2021, totaled $124.9 million and $146.4 million, respectively. The effective tax rate for 2022 and 2021 was 14.9% and 12.6%, respectively.

The increase in the effective tax rate from 2021 to 2022 is primarily attributable to a shift in the geographic distribution of income, which increased the income subject to taxation in higher tax rate jurisdictions relative to lower tax rate jurisdictions, increases in expense from U.S. global low-taxed income and increases in expense

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from non-deductible officer compensation. These increases in expense were partially offset by increases in benefits from the U.S. foreign derived intangible income deduction and tax credits.

We qualify 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 attributable to the Singapore tax holiday for the years ended December 31, 2022 and 2021 were $16.0 million or $0.09 per diluted share and $33.3 million or $0.18 per diluted share, respectively. In November 2020, we entered into an agreement with the Singapore Economic Development Board which extended our Singapore tax holiday under substantially similar terms to the agreement which expired on December 31, 2020. The new tax holiday is scheduled to expire on December 31, 2025.

Capital Resources and Material Cash Requirements

Our cash, cash equivalents and marketable securities balance decreased by $495 million in 2022 to $1,005 million. Cash decreased due to stock repurchases in the amount of $752 million, quarterly cash dividend payments in the amount of $70 million, payments of convertible debt principal in the amount of $67 million partially offset by cash generated by our global operations.

Operating activities during 2022 provided cash of $577.9 million. Changes in operating assets and liabilities used cash of $272.6 million. This was due to a $170.9 million increase in operating assets and a $101.7 million decrease in operating liabilities.

The increase in operating assets was due to a $140.7 million increase in prepayments and other assets due to prepayments to our contract manufacturers, an $80.8 million increase in inventories, partially offset by a $50.6 million decrease in accounts receivable due to lower sales.

The decrease in operating liabilities was due to a $40.3 million decrease in accrued employee compensation, a $29.8 million decrease in income taxes, a $10.8 million decrease in accounts payable, a $9.3 million decrease in other accrued liabilities, a $6.2 million decrease in deferred revenue and customer advance payments, and $5.1 million of retirement plan contributions.

Investing activities during 2022 provided cash of $43.8 million, due to $268.1 million and $222.9 million in proceeds from sales and maturities of marketable securities, respectively, $3.4 million due to sale of an asset, partially offset by $287.4 million used for purchases of marketable securities, and $163.2 million used for purchases of property, plant and equipment.

Financing activities during 2022 used cash of $893.0 million, due to $752.1 million used for the repurchase of 7.3 million shares of common stock at an average price of $103.69 per share, $69.7 million used for dividend payments, $66.8 million used for the payments of convertible debt principal, and $33.2 million used for payments related to net settlement of employee stock compensation awards, partially offset by $28.7 million from the issuance of common stock under employee stock purchase and stock option plans.

Operating activities during 2021 provided cash of $1,098.4 million. Changes in operating assets and liabilities used cash of $98.8 million. This was due to a $227.1 million increase in operating assets and a $128.4 million increase in operating liabilities.

The increase in operating assets was due to a $175.8 million increase in prepayments and other assets due to prepayments to our contract manufacturers, a $57.8 million increase in accounts receivable due to greater sales, partially offset by a $6.5 million decrease in inventories.

The increase in operating liabilities was due to a $63.5 million increase in other accrued liabilities, a $35.1 million increase in accrued employee compensation, a $22.9 million increase in accounts payable, and a $9.9 million increase in deferred revenue and customer advance payments, partially offset by a $5.6 million decrease in income taxes, and $5.4 million of retirement plan contributions.

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Investing activities during 2021 provided cash of $120.4 million, due to $660.1 million and $266.5 million in proceeds from maturities and sales of marketable securities, respectively, partially offset by $661.8 million used for purchases of marketable securities, $132.5 million used for purchases of property, plant and equipment, and $12.0 million used for an investment in MachineMetrics, Inc. (“MachineMetrics”).

Financing activities during 2021 used cash of $1,008.6 million, due to $600.0 million used for the repurchase of 4.8 million shares of common stock at an average price of $125.74 per share, $343.0 million used for the payments of convertible debt principal, $66.0 million used for dividend payments, and $32.3 million used for payments related to net settlement of employee stock compensation awards, partially offset by $32.7 million from the issuance of common stock under employee stock purchase and stock option plans.

In January 2022, May 2022, August 2022 and November 2022, our Board of Directors declared a quarterly cash dividend of $0.11 per share. Total dividend payments in 2022 were $69.7 million.

In January 2021, May 2021, August 2021 and November 2021, our Board of Directors declared a quarterly cash dividend of $0.10 per share. Total dividend payments in 2021 were $66.0 million.

In January 2021, our Board of Directors approved a repurchase program for up to $2.0 billion of common stock. In 2022, we repurchased 7.3 million shares of common stock for $752.1 million at an average price of $103.69 per share. In 2021, we repurchased 4.8 million shares of common stock for $600.0 million at an average price of $125.74 per share. The cumulative repurchases as of December 31, 2022, under this repurchase program were 12.0 million shares of common stock for $1,352.1 million at an average price per share of $112.44.

In January 2023, our Board of Directors cancelled the 2021 repurchase program and approved a new repurchase program for up to $2.0 billion of common stock. We intend to repurchase up to $500.0 million of common stock in 2023 subject to market conditions.

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

On May 1, 2020, we entered into a credit agreement providing a three-year, senior secured revolving credit facility of $400 million. On December 10, 2021, the credit agreement was amended to extend the senior secured revolving credit facility to December 10, 2026. On October 5, 2022, the credit agreement was amended to increase the amount of the credit facility to $750.0 million from $400.0 million. As of February 22, 2023, we have not borrowed any funds under the credit facility.

We expect operations to continue to be the primary source of cash to operate the business and meet material cash commitments, including any payments of convertible debt principal, our stock repurchase program, our quarterly dividends, our office lease obligations, contractual obligations related to inventory purchases and the construction of new facilities. We believe our cash, cash equivalents and marketable securities balance will be sufficient to pay our quarterly dividend and meet our working capital and expenditure needs for at least the next twelve months. Inflation has not had a significant long-term impact on earnings. At this time, the COVID-19 pandemic has not had an impact on our liquidity, but there is no assurance that continued impacts resulting from the pandemic will not have an adverse effect in the future.

At December 31, 2022, our future contractual obligations were related to debt, leases, retirement plan liabilities, deferred tax benefits, and purchase obligations. See Note J. “Debt”, Note I. “Leases”, Note P. “Retirement Plans”, and Note S. “Income Taxes” of Notes to Consolidated Financial Statements in this Annual Report for information about those obligations, which Notes are incorporated by reference into this section. Our purchase obligations were approximately $654.8 million, with $570.3 million expected to be paid within twelve months.

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Retirement Plans

ASC 715-20, “Compensation—Retirement Benefits—Defined Benefit Plans,” requires an employer with defined benefit plans or other postretirement benefit plans to recognize an asset or a liability on its balance sheet for the overfunded or underfunded status of the plans as defined by ASC 715-20. The pension asset or liability represents the difference between the fair value of the pension plans’ assets and the projected benefit obligation as of December 31. For other postretirement benefit plans, the liability is the difference between the fair value of the plan’s assets and the accumulated postretirement benefit obligation as of December 31.

For the year ended December 31, 2022, our pension income, which includes the U.S. Qualified Pension Plan (“U.S. Plan”), certain qualified plans for non-U.S. subsidiaries, and a U.S. Supplemental Executive Defined Benefit Plan, was approximately $19.7 million. Pension income/expense is calculated based upon a number of actuarial assumptions. Discount rate and expected return on assets are two assumptions which are important elements of pension plan expense and asset/liability measurement. We evaluate our discount rate and expected rate of return on assets assumptions annually on a plan and country specific basis. We evaluate other assumptions related to demographic factors, such as retirement age, mortality and turnover periodically, and update them to reflect our experience and expectations for the future.

In developing the expected return on U.S. Plan assets assumption, we evaluated input from our investment manager and pension consultants, including their forecast of asset class return expectations. We believe that 2.0% was an appropriate rate of return on assets to use for 2022. The December 31, 2022 asset allocation for our U.S. Plan was 94% invested in fixed income securities, 5% invested in equity securities, and 1% invested in other securities. Our investment manager regularly reviews the actual asset allocation and periodically rebalances the portfolio to ensure alignment with our target allocations.

We recognize net actuarial gains and losses and the change in the fair value of plan assets in our operating results in the year in which they occur or upon any interim remeasurement of the plans. We calculate the expected return on plan assets using the fair value of the plan assets. Actuarial gains and losses are generally measured annually as of December 31 and, accordingly, recorded during the fourth quarter of each year or upon any interim remeasurement of the plans.

The discount rate that we utilized for determining future pension obligations for the U.S. Plan is based on the FTSE Pension Index adjusted for the U.S. Plan’s expected cash flows and was 4.95% at December 31, 2022, up from 2.65% at December 31, 2021. We estimate that in 2023, we will recognize approximately $0.4 million of pension expense for the U.S. Plan. The U.S. Plan pension expense estimate for 2023 is based on a 4.95% discount rate and a 4.75% return on assets. Future pension expense or income will depend on future investment performance, changes in future discount rates and various other factors related to the employee population participating in our pension plans.

As of December 31, 2022, our pension plans had no unrecognized pension prior service cost.

The assets of the U.S. Plan consist substantially of fixed income securities. U.S. Plan assets have decreased from $149.6 million at December 31, 2021 to $111.8 million at December 31, 2022, while the U.S. Plan’s liability decreased from $134.5 million at December 31, 2021 to $100.0 million at December 31, 2022. In 2022, the decrease in plan assets and plan liability was due to an increase in interest rates. In 2020, the accrued pension obligations for approximately 115 retiree participants were transferred to an insurance company and resulted in a $24.4 million reduction in the pension benefit obligation and pension assets. We recorded $2.2 million of pension actuarial loss and a settlement loss of $0.5 million related to the retiree group annuity transaction.

Our funding policy is to make contributions to our pension plans in accordance with local laws and to the extent that such contributions are tax deductible. During 2022, we made contributions of $3.2 million to the U.S. supplemental executive defined benefit pension plan, and $0.9 million to certain qualified plans for non-U.S.

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subsidiaries. In 2023, we expect to contribute approximately $3.1 million to the U.S. supplemental executive defined benefit pension plan. Contributions to be made in 2023 to certain qualified plans for non-U.S. subsidiaries are based on local statutory requirements and are estimated at approximately $1.3 million.

Equity Compensation Plans

In addition to our 1996 Employee Stock Purchase Plan discussed in Note Q: “Stock-Based Compensation” in Notes to Consolidated Financial Statements, we have a 2006 Equity and Cash Compensation Incentive Plan (the “2006 Equity Plan”) under which equity securities are authorized for issuance. The 2006 Equity Plan was initially approved by stockholders on May 25, 2006.

At our annual meeting of stockholders held May 21, 2013, our stockholders approved an amendment to the 2006 Equity Plan to increase the number of shares issuable thereunder by 10.0 million, for an aggregate of 32.0 million shares issuable thereunder, and our stockholders also approved an amendment to our 1996 Employee Stock Purchase Plan to increase the number of shares issuable thereunder by 5.0 million, for an aggregate of 30.4 million shares issuable thereunder. At our annual meeting of stockholders held May 12, 2015, our stockholders approved an amendment to the 2006 Equity Plan to extend its term until May 12, 2025. At our annual meeting of stockholders held May 7, 2021, our stockholders approved an amendment to our 1996 Employee Stock Purchase Plan to increase the number of shares issuable thereunder by 3.0 million, for an aggregate of 33.4 million shares issuable thereunder.

The following table presents information about these plans as of December 31, 2022 (share numbers in thousands):

The purpose of the 2006 Equity Plan is to motivate employees, officers and directors by providing equity ownership and compensation opportunities in Teradyne. The aggregate number of shares available under the 2006 Equity Plan as of December 31, 2022 was 5,060,445 shares of our common stock. The 2006 Equity Plan authorizes the grant of stock-based awards in the form of (1) non-qualified and incentive stock options, (2) stock appreciation rights, (3) restricted stock awards and restricted stock unit awards, (4) phantom stock, and (5) other stock-based awards. Awards may be tied to time-based vesting schedules and/or performance-based vesting measured by reference to performance criteria chosen by the Compensation Committee of the Board of Directors, which administers the 2006 Equity Plan. Awards may be made to any employee, officer, consultant and advisor of Teradyne and our subsidiaries, as well as, to our directors. The maximum number of shares of stock-based awards that may be granted to one participant during any one fiscal year is 2,000,000 shares of common stock.

As of December 31, 2022, total unrecognized compensation expense related to non-vested restricted stock units and options was $61.1 million and is expected to be recognized over a weighted average period of 2.5 years.

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Performance Graph

The following graph compares the change in our cumulative total shareholder return in our common stock with (i) the Standard & Poor’s 500 Index and (ii) the Morningstar Global Semiconductor Equipment & Materials GR USD Industry Group. The comparison assumes $100.00 was invested on December 31, 2017 in our common stock and in each of the foregoing indices and assumes reinvestment of dividends, if any. Historic stock price performance is not necessarily indicative of future price performance.

Recently Issued Accounting Pronouncements

For the year ended December 31, 2022, there were no recently issued accounting pronouncements that had, or are expected to have, a material impact to our consolidated financial statements.

Results of Operations

Information pertaining to fiscal year 2019 results of operations, including a

year-to-year

comparison against fiscal year 2020, was included in our Annual Report on Form
10-K
for the year ended December 31, 2020 under Part II, Item 7, “Management’s Discussion and Analysis of Financial Position and Results of Operations,” which was filed with the SEC on February 22, 2021. This information is incorporated by reference herein.

The following table sets forth the percentage of total net revenues included in our consolidated statements of operations:

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Revenues

Revenues for our reportable segments were as follows:

The increase in Semiconductor Test revenues of $382.7 million, or 16.9%, was primarily due to greater tester sales driven by testing high performance compute processors and industrial and automotive devices, partially offset by lower tester sales for mobile application processors. The rise in System Test revenues of $58.0 million, or 14.2%, was driven primarily by elevated sales in Storage Test for system level test demand, and greater sales in Production Board Test. The increase in Industrial Automation revenues of $96.2 million, or 34.4%, was driven by demand for collaborative robotic arms and collaborative autonomous mobile robots. The rise in Wireless Test revenues of $43.9 million, or 25.4%, was primarily due to an increase in WiFi tester sales and higher demand in ultra-wide band wireless test.

Our reportable segments accounted for the following percentages of consolidated revenues:

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

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The breakout of product and service revenues was as follows:

Our product revenues increased $505.7 million, or 18.8%, primarily due to greater tester sales in Semiconductor Test driven by testing high performance compute processors and industrial and automotive devices, partially offset by lower tester sales for mobile application processors, the rise in System Test revenues primarily due to elevated sales in Storage Test for system level test demand, and greater sales in Production Board Test, increase in Industrial Automation revenues driven by demand for collaborative robotic arms and collaborative autonomous mobile robots, the rise in Wireless Test revenues due to an increase in WiFi tester sales and higher demand in ultra-wide band wireless test.

In 2021 and 2020, revenues from Taiwan Semiconductor Manufacturing Company Ltd., a customer of our Semiconductor Test segment, accounted for 12% and 15%, respectively, of our consolidated revenues. In 2021 and 2020, our five largest direct customers in aggregate accounted for 33% and 36% of our consolidated revenues, respectively.

We estimate consolidated revenues driven by one OEM customer, combining direct sales to that customer with sales to the customer’s OSATs, accounted for approximately 19% and 25% of our consolidated revenues in 2021 and 2020, respectively.

Gross Profit

Gross profit as a percent of total revenues increased by 2.4 points, primarily due to product mix of higher margin products in Semiconductor Test, increase in service margins and operating leverage due to higher revenues.

The breakout of product and service gross profit was as follows:

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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 revenues information is obtained from the sales and marketing groups and incorporates factors such as backlog and future consolidated revenues. 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 within the forecasted demand window, is written down to estimated net realizable value.

During the year ended December 31, 2021, we recorded an inventory provision of $15.5 million included in cost of revenues, primarily due to downward revisions to previously forecasted demand levels for certain products. Of the $15.5 million of total excess and obsolete provisions, $6.7 million was related to Semiconductor Test, $6.4 million was related to Industrial Automation, $1.8 million was related to Wireless Test, and $0.6 million was related to System Test.

During the year ended December 31, 2020, we recorded an inventory provision of $17.5 million included in cost of revenues, primarily due to downward revisions to previously forecasted demand levels for certain products. Of the $17.5 million of total excess and obsolete provisions, $11.0 million was related to Semiconductor Test, $4.8 million was related to Wireless Test, $0.9 million was related to System Test, and $0.8 million was related to Industrial Automation.

During the years ended December 31, 2021 and 2020, we scrapped $10.9 million and $7.7 million of inventory, respectively, and sold $2.5 million and $2.3 million of previously written-down or
written-off
inventory, respectively. As of December 31, 2021, we had inventory related reserves for amounts which had been written-down or
written-off
totaling $114.1 million. We have no
pre-determined
timeline to scrap the remaining inventory.

Selling and Administrative

Selling and administrative expenses were as follows:

The increase of $82.8 million in selling and administrative expenses was primarily due to higher variable compensation and greater selling and administrative spending across all segments.

Engineering and Development

Engineering and development expenses were as follows:

The increase of $52.6 million in engineering and development expenses was primarily due to higher spending in Semiconductor Test, System Test and Industrial Automation segments and higher variable compensation.

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Restructuring and Other

During the year ended December 31, 2021, we recorded $1.5 million of severance charges primarily in Industrial Automation, $0.5 million of acquisition related compensation and expenses and $14.5 million for other expenses, offset by a $7.2 million gain for the decrease in the fair value of the AutoGuide contingent consideration liability.

During the year ended December 31, 2020, we recorded a $19.7 million gain for the decrease in the fair value of the AutoGuide contingent consideration liability, and a $3.5 million gain for the decrease in the fair value of the MiR contingent consideration liability, partially offset by a $4.0 million contract termination settlement charge, $2.5 million of acquisition related compensation and expenses, $2.3 million of severance charges primarily in Industrial Automation, and $1.2 million of other expenses.

Interest and Other

Interest income decreased by $3.4 million primarily due to lower interest rates and a lower marketable securities balance in 2021 compared to 2020. Interest expense decreased by $6.4 million primarily due to lower convertible debt interest expense due to early conversions in 2021. Other (income) expense, net increased by $15.4 million primarily due to $28.8 million of losses on convertible debt conversions in 2021, partially offset by the change in pension actuarial gains/losses, from a $10.3 million loss in 2020 to a $2.2 million gain in 2021.

Income (Loss) Before Income Taxes

The increase in income before income taxes in Semiconductor Test was primarily due to greater tester sales driven by testing high performance compute processors and industrial and automotive devices, partially offset by lower tester sales for mobile application processors. The decrease in loss before income taxes in Industrial Automation was primarily due to demand for collaborative robotic arms and collaborative autonomous mobile robots and lower intangible assets amortization expense. The increase in income before income taxes in System Test was driven primarily by elevated sales in Storage Test for system level test demand, and greater sales in

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Production Board Test. The increase in income before income taxes in Wireless Test was primarily due to an increase in WiFi tester sales and higher demand in ultra-wide band wireless test. The loss before income taxes in Corporate and Other was primarily due to losses on convertible debt conversions in 2021.

Income Taxes

Income tax expense for 2021and 2020, totaled $146.4 million and $116.9 million, respectively. The effective tax rate for 2021 and 2020 was 12.6% and 13.0%, respectively.

The decrease in the effective tax rate from 2020 to 2021 is primarily attributable to a decrease in the expense from U.S. global
low-taxed
income partially offset by a decrease in the benefit from foreign tax credits and a shift in the geographic distribution of income, which increased the income subject to taxation in higher tax rate jurisdictions relative to lower tax rate jurisdictions.

We qualify 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 attributable to the Singapore tax holiday for the years ended December 31, 2021and 2020 were $33.3 million or $0.18 per diluted share and $29.9 million or $0.16 per diluted share, respectively. In November 2020, we entered into an agreement with the Singapore Economic Development Board which extended our Singapore tax holiday under substantially similar terms to the agreement which expired on December 31, 2020. The new tax holiday is scheduled to expire on December 31, 2025.

Capital Resources and Material Cash Requirements

Our cash, cash equivalents and marketable securities balance decreased by $54 million in 2021 to $1,500 million. Cash decreased due to stock repurchases in the amount of $600 million, payments of convertible debt principal in the amount of $343 million, quarterly cash dividend payments in the amount of $66 million offset by cash generated by our global operations.

Operating activities during 2021 provided cash of $1,098.4 million. Changes in operating assets and liabilities used cash of $98.8 million. This was due to a $227.1 million increase in operating assets and a $128.4 million increase in operating liabilities.

The increase in operating assets was due to a $175.8 million increase in prepayments and other assets due to prepayments to our contract manufacturers, a $57.8 million increase in accounts receivable due to greater sales, partially offset by a $6.5 million decrease in inventories.

The increase in operating liabilities was due to a $63.5 million increase in other accrued liabilities, a $35.1 million increase in accrued employee compensation, a $22.9 million increase in accounts payable, and a $9.9 million increase in deferred revenue and customer advance payments, partially offset by a $5.6 million decrease in income taxes, and $5.4 million of retirement plan contributions.

Investing activities during 2021 provided cash of $120.4 million, due to $660.1 million and $266.5 million in proceeds from maturities and sales of marketable securities, respectively, partially offset by $661.8 million used for purchases of marketable securities, $132.5 million used for purchases of property, plant and equipment, and $12.0 million used for an investment in MachineMetrics, Inc. (“MachineMetrics”).

Financing activities during 2021 used cash of $1,008.6 million, due to $600.0 million used for the repurchase of 4.8 million shares of common stock at an average price of $125.74 per share, $343.0 million used for the payments of convertible debt principal, $66.0 million used for dividend payments, and $32.3 million used for payments related to net settlement of employee stock compensation awards, partially offset by $32.7 million from the issuance of common stock under employee stock purchase and stock option plans.

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Operating activities during 2020 provided cash of $868.9 million. Changes in operating assets and liabilities used cash of $69.4 million. This was due to a $202.3 million increase in operating assets and a $132.9 million increase in operating liabilities.

The increase in operating assets was due to a $129.5 million increase in accounts receivable due to increased sales, an $8.4 million increase in inventories, and a $64.4 million increase in prepayments and other assets.

The increase in operating liabilities was due to a $54.7 million increase in accrued employee compensation, a $40.0 million increase in deferred revenue and customer advance payments, a $25.2 million increase in income taxes, a $12.8 million increase in other accrued liabilities, and a $5.7 million increase in accounts payable, partially offset by $5.4 million of retirement plan contributions.

Investing activities during 2020 used cash of $569.8 million, due to $900.2 million used for purchases of marketable securities, and $185.0 million used for purchases of property, plant and equipment, partially offset by $480.0 million and $35.0 million in proceeds from maturities and sales of marketable securities, respectively, and proceeds from life insurance of $0.5 million related to the cash surrender value from the cancellation of Teradyne owned life insurance policy.

Financing activities during 2020 used cash of $158.3 million, due to $88.5 million used for the repurchase of 1.5 million shares of common stock at an average price of $58.33 per share, $66.5 million used for dividend payments, $23.0 million used for payments related to net settlement of employee stock compensation awards, and $8.9 million used for payment related to MiR acquisition contingent consideration, partially offset by $28.5 million from the issuance of common stock under employee stock purchase and stock option plans.

In January 2021, May 2021, August 2021 and November 2021, our Board of Directors declared a quarterly cash dividend of $0.10 per share. Total dividend payments in 2021 were $66.0 million.

In January 2020, May 2020, August 2020 and November 2020, our Board of Directors declared a quarterly cash dividend of $0.10 per share. Total dividend payments in 2020 were $66.5 million.

In January 2020, our Board of Directors cancelled the January 2018 stock repurchase program and approved a new stock repurchase program for up to $1.0 billion in common stock. On April 1, 2020, we suspended the share repurchase program. In 2020, we repurchased 1.5 million shares of common stock for $88.5 million at an average price per share of $58.33.

In January 2021, our Board of Directors approved a new repurchase program for up to $2.0 billion of common stock. Unless terminated by resolution of our Board of Directors, the repurchase program will expire when we have repurchased all shares authorized for repurchase under the share repurchase program. In 2021, we repurchased 4.8 million shares of common stock for $600.0 million at an average price of $125.74 per share. We intend to repurchase a minimum of $750.0 million in 2022.

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

On May 1, 2020, we entered into a credit agreement providing a three-year, senior secured revolving credit facility of $400 million. On December 10, 2021, the credit agreement was amended to extend the senior secured revolving credit facility to December 10, 2026. As of February 23, 2022, we have not borrowed any funds under the credit facility.

We expect operations to continue to be the primary source of cash to operate the business and meet material cash commitments, including any payments of convertible debt principal, our stock repurchase program, our

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quarterly dividends, our office lease obligations, contractual obligations related to inventory purchases and the construction of new facilities. We believe our cash, cash equivalents and marketable securities balance will be sufficient to pay our quarterly dividend and meet our working capital and expenditure needs for at least the next twelve months. Inflation has not had a significant long-term impact on earnings. At this time, the
COVID-19
pandemic has not had an impact on our liquidity, but there is no assurance that continued impacts resulting from the pandemic will not have an adverse effect in the future.

At December 31, 2021, our future contractual obligations were related to debt, leases, retirement plan liabilities, deferred tax benefits, and purchase obligations. See Note J. “Debt”, Note I. “Leases”, Note P. “Retirement Plans”, and Note S. “Income Taxes” of Notes to Consolidated Financial Statements in this Annual Report for information about those obligations, which Notes are incorporated by reference into this section. Our purchase obligations were approximately $884.3 million, with $839.2 million expected to be paid within 12 months.

Retirement Plans

ASC
715-20,
“

Compensation—Retirement Benefits—Defined Benefit Plans,

” requires an employer with defined benefit plans or other postretirement benefit plans to recognize an asset or a liability on its balance sheet for the overfunded or underfunded status of the plans as defined by ASC
715-20.
The pension asset or liability represents the difference between the fair value of the pension plans’ assets and the projected benefit obligation as of December 31. For other postretirement benefit plans, the liability is the difference between the fair value of the plan’s assets and the accumulated postretirement benefit obligation as of December 31.

For the year ended December 31, 2021, our pension expense, which includes the U.S. Qualified Pension Plan (“U.S. Plan”), certain qualified plans for
non-U.S.
subsidiaries, and a U.S. Supplemental Executive Defined Benefit Plan, was approximately $1.8 million. Pension expense is calculated based upon a number of actuarial assumptions. Discount rate and expected return on assets are two assumptions which are important elements of pension plan expense and asset/liability measurement. We evaluate our discount rate and expected rate of return on assets assumptions annually on a plan and country specific basis. We evaluate other assumptions related to demographic factors, such as retirement age, mortality and turnover periodically, and update them to reflect our experience and expectations for the future.

In developing the expected return on U.S. Plan assets assumption, we evaluated input from our investment manager and pension consultants, including their forecast of asset class return expectations. We believe that 2.4% was an appropriate rate of return on assets to use for 2021. The December 31, 2021 asset allocation for our U.S. Plan was 94% invested in fixed income securities, 5% invested in equity securities, and 1% invested in other securities. Our investment manager regularly reviews the actual asset allocation and periodically rebalances the portfolio to ensure alignment with our target allocations.

We recognize net actuarial gains and losses and the change in the fair value of plan assets in our operating results in the year in which they occur or upon any interim remeasurement of the plans. We calculate the expected return on plan assets using the fair value of the plan assets. Actuarial gains and losses are generally measured annually as of December 31 and, accordingly, recorded during the fourth quarter of each year or upon any interim remeasurement of the plans.

The discount rate that we utilized for determining future pension obligations for the U.S. Plan is based on the FTSE Pension Index adjusted for the U.S. Plan’s expected cash flows and was 2.65% at December 31, 2021, up from 2.3% at December 31, 2020. We estimate that in 2022 we will recognize approximately $1.8 million of pension expense for the U.S. Plan. The U.S. Plan pension expense estimate for 2022 is based on a 2.65% discount rate and a 2.0% return on assets. Future pension expense or income will depend on future investment performance, changes in future discount rates and various other factors related to the employee population participating in our pension plans.

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As of December 31, 2021, our pension plans had no unrecognized pension prior service cost.

The assets of the U.S. Plan consist substantially of fixed income securities. U.S. Plan assets have decreased from $158.9 million at December 31, 2020 to $149.6 million at December 31, 2021, while the U.S. Plan’s liability decreased from $141.4 million at December 31, 2020 to $134.5 million at December 31, 2021. In 2021, the decrease in plan assets and plan liability was due to an increase in interest rates. In 2020, the accrued pension obligations for approximately 115 retiree participants were transferred to an insurance company and resulted in a $24.4 million reduction in the pension benefit obligation and pension assets. We recorded $2.2 million of pension actuarial loss and a settlement loss of $0.5 million related to the retiree group annuity transaction.

Our funding policy is to make contributions to our pension plans in accordance with local laws and to the extent that such contributions are tax deductible. During 2021, we made contributions of $3.3 million to the U.S. supplemental executive defined benefit pension plan, and $1.0 million to certain qualified plans for
non-U.S.
subsidiaries. In 2022, we expect to contribute approximately $3.3 million to the U.S. supplemental executive defined benefit pension plan. Contributions to be made in 2022 to certain qualified plans for
non-U.S.
subsidiaries are based on local statutory requirements and are estimated at approximately $1.0 million.

Equity Compensation Plans

In addition to our 1996 Employee Stock Purchase Plan discussed in Note Q: “Stock-Based Compensation” in Notes to Consolidated Financial Statements, we have a 2006 Equity and Cash Compensation Incentive Plan (the “2006 Equity Plan”) under which equity securities are authorized for issuance. The 2006 Equity Plan was initially approved by stockholders on May 25, 2006.

At our annual meeting of stockholders held May 21, 2013, our stockholders approved an amendment to the 2006 Equity Plan to increase the number of shares issuable thereunder by 10.0 million, for an aggregate of 32.0 million shares issuable thereunder, and our stockholders also approved an amendment to our 1996 Employee Stock Purchase Plan to increase the number of shares issuable thereunder by 5.0 million, for an aggregate of 30.4 million shares issuable thereunder. At our annual meeting of stockholders held May 12, 2015, our stockholders approved an amendment to the 2006 Equity Plan to extend its term until May 12, 2025. At our annual meeting of stockholders held May 7, 2021, our stockholders approved an amendment to our 1996 Employee Stock Purchase Plan to increase the number of shares issuable thereunder by 3.0 million, for an aggregate of 33.4 million shares issuable thereunder.

The following table presents information about these plans as of December 31, 2021 (share numbers in thousands):

The purpose of the 2006 Equity Plan is to motivate employees, officers and directors by providing equity ownership and compensation opportunities in Teradyne. The aggregate number of shares available under the 2006 Equity Plan as of December 31, 2021 was 5,711,709 shares of our common stock. The 2006 Equity Plan authorizes the grant of stock-based awards in the form of
(1) non-qualified
and incentive stock options, (2) stock

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appreciation rights, (3) restricted stock awards and restricted stock unit awards, (4) phantom stock, and (5) other stock-based awards. Awards may be tied to time-based vesting schedules and/or performance-based vesting measured by reference to performance criteria chosen by the Compensation Committee of the Board of Directors, which administers the 2006 Equity Plan. Awards may be made to any employee, officer, consultant and advisor of Teradyne and our subsidiaries, as well as, to our directors. The maximum number of shares of stock-based awards that may be granted to one participant during any one fiscal year is 2,000,000 shares of common stock.

As of December 31, 2021, total unrecognized compensation expense related to
non-vested
restricted stock units and options was $50.6 million and is expected to be recognized over a weighted average period of 2.4 years.

Performance Graph

The following graph compares the change in our cumulative total shareholder return in our common stock with (i) the Standard & Poor’s 500 Index and (ii) the Morningstar Global Semiconductor Equipment & Materials GR USD Industry Group. The comparison assumes $100.00 was invested on December 31, 2016 in our common stock and in each of the foregoing indices and assumes reinvestment of dividends, if any. Historic stock price performance is not necessarily indicative of future price performance.

Recently Issued Accounting Pronouncements

In August 2020, the FASB issued ASU
2020-06
– “Debt—Debt with Conversion and Other Options and Derivatives and Hedging—Contracts in Entity’s Own Equity,” which simplifies the accounting for convertible debt instruments by reducing the number of accounting models and the number of embedded conversion features that could be recognized separately from the primary contract. This ASU requires a convertible debt instrument to be accounted for as a single liability measured at its amortized cost, as long as no other features require bifurcation and recognition as derivatives. This ASU requires an entity to use the
if-converted
method in the diluted earnings per share calculation for convertible instruments. This ASU permits the use of either the modified retrospective or fully retrospective method of transition.

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On November 4, 2021, we made an irrevocable election under the indenture to require the principal portion of the remaining Notes to be settled in cash. Upon adoption of ASU
2020-06
only the amounts settled in excess of the principal will be considered in diluted earnings per share under the
if-converted
method. We have adopted the standard effective January 1, 2022 using the modified retrospective method of transition. As a result of adoption, we expect to record an entry to increase current debt, debt, and retained earnings by $1.5 million, $6.5 million, and $92.8 million, respectively. Mezzanine equity and additional
paid-in
capital are expected to be reduced by $100.8 million combined. The adoption of ASU
2020-06
will have an immaterial impact on our results of operations, statement of cash flows, and earnings per share (“EPS”).