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Management's Discussion of Results of Operations (Excerpts)

For purposes of readability, Zenith attempts to strip out all tables in excerpts from the Management Discussion. That information is contained elsewhere in our articles. The idea of this summary is simply to review how well we believe Management does its reporting. Also, this highlights what Management believes is important.

In our Decision Matrix at the end of each article, a company with 0 to 2 gets a "-1", and 3 to 5 gets a "+1."

On a scale of 0 to 5, 5 being best, Zenith rates this company's Management's Discussion as a 4.



Overview

We are a leading global supplier of automation equipment for test and 
industrial applications. We design, develop, manufacture and sell automatic 
test systems used to test semiconductors, wireless products, data storage and 
complex electronics systems in the consumer electronics, wireless, automotive, 
industrial, computing, communications, and aerospace and defense industries. 
Our industrial automation products include collaborative robots used by global 
manufacturing and light industrial customers to improve quality, increase 
manufacturing efficiency and decrease manufacturing costs. Our automatic test 
equipment and industrial automation products and services include:

• semiconductor test (“Semiconductor Test”) systems;


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


• industrial automation (“Industrial Automation”) products; and


• wireless test (“Wireless Test”) systems.


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

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

In 2015, we acquired Universal Robots A/S (“Universal Robots”), the leading 
supplier of collaborative robots which are low-cost, easy-to-deploy and 
simple-to-program robots that work side by side with production workers to 
improve quality, increase manufacturing efficiency and decrease manufacturing 
costs. Universal Robots is a separate operating and reportable segment, 
Industrial Automation. The acquisition of Universal Robots provides a growth 
engine to our business and complements our existing System Test and Wireless 
Test segments. The total purchase price for Universal Robots was approximately 
$315 million, which included cash paid of approximately $284 million and $32 
million in fair value of contingent consideration payable upon achievement of 
revenue and earnings targets through 2018. Contingent consideration paid for 
2015 was $15 million. The remaining maximum contingent consideration that could 
be paid is $50 million.

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

The sales of our products and services are dependent, to a large degree, on 
customers who are subject to cyclical trends in the demand for their products. 
These cyclical periods have had, and will continue to have, a significant 
effect on our business because our customers often delay or accelerate 
purchases in reaction to changes in their businesses and to demand fluctuations 
in the semiconductor and electronics industries. Historically, these demand 
fluctuations have resulted in significant variations in our results of 
operations. The sharp swings in the semiconductor and electronics industries 
have generally affected the semiconductor and electronics test equipment and 
services industries more significantly than the overall capital equipment 
sector.

For several years, this cyclical demand became an even/odd year trend where 
demand increased in even years and decreased in odd years due principally to 
demand swings in the mobility market of our Semiconductor Test business. We 
expect the even/odd year demand trend in the mobility market to lessen in 2017 
and future years due to slower smart phone unit growth, along with rising 
device complexity and the reduced impact of parallel test in our Semiconductor 
Test business.

In the second quarter of 2016, the Wireless Test reporting unit (which is our 
Wireless Test operating and reportable segment) reduced headcount by 11% as a 
result of a sharp decline in projected demand attributable to an estimated 
smaller future wireless test market. The decrease in projected demand was due 
to lower forecasted buying from our largest Wireless Test segment customer (who 
had previously contributed between 51% and 73% of annual Wireless Test sales 
since the LitePoint acquisition in 2011) as a result of the customer’s numerous 
operational efficiencies; slower smartphone growth rates; and a slowdown of new 
wireless technology adoption. We considered the headcount reduction and sharp 
decline in projected demand to be a triggering event for an interim goodwill 
impairment test. Following the interim goodwill impairment test, we recorded a 
goodwill impairment charge of $254.9 million, with approximately $8.0 million 
of goodwill remaining, and $83.3 million for the impairment of acquired 
intangible assets with approximately $4.0 million of acquired intangible assets 
remaining.


The increase in Semiconductor Test revenues of $74.9 million, or 23.3%, was 
driven primarily by increased sales in automotive safety, power management, 
image sensor, flash memory, and microcontroller test segments, and an increase 
in service revenue. The increase in Industrial Automation revenues of $16.6 
million, or 70.6%, was due to higher demand for collaborative robots. The 
decrease in System Test revenues of $1.4 million, or 3.8%, was primarily due to 
lower sales in Storage Test of 3.5” hard disk drive testers for cloud storage. 
The increase in Wireless Test revenues of $3.0 million, or 10.8%, was primarily 
due to higher demand for cellular test systems and increased service revenue.

Gross profit as a percent of revenue increased by 3.2 points, as a result of a 
1.9 point increase related to favorable product mix in Semiconductor Test and 
1.3 points due to higher sales primarily in Semiconductor Test and Industrial 
Automation.

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

During the three months ended October 1, 2017, we recorded an inventory 
provision of $1.9 million included in cost of revenues primarily due to 
downward revisions to previously forecasted demand levels for certain products. 
Of the $1.9 million of total excess and obsolete provisions, $0.7 million was 
related to Semiconductor Test, $0.7 million was related to Wireless Test, $0.3 
million was related to System Test, and $0.1 million was related to Industrial 
Automation.

During the three months ended October 2, 2016, we recorded an inventory 
provision of $3.0 million included in cost of revenues primarily due to 
downward revisions to previously forecasted demand levels for certain products. 
Of the $3.0 million of total excess and obsolete provisions, $2.3 million was 
related to Semiconductor Test, $0.6 million was related to Wireless Test, and 
$0.1 million was related to System Test.

During the three months ended October 1, 2017 and October 2, 2016, we scrapped 
$1.2 million and $4.6 million of inventory, respectively. During the three 
months ended October 1, 2017 and October 2, 2016, we sold $3.1 million and $1.8 
million of previously written-down or written-off inventory, respectively. As 
of October 1, 2017, we had inventory related reserves for inventory which had 
been written-down or written-off totaling $112.2 million. We have no 
pre-determined timeline to scrap the remaining inventory.

Selling and Administrative

The increase of $7.4 million in selling and administrative expenses was due 
primarily to higher variable compensation and higher spending in Industrial 
Automation.

Engineering and Development

The increase of $5.8 million in engineering and development expenses was 
primarily due to higher variable compensation and higher spending in System 
Test and Industrial Automation, partially offset by lower spending in Wireless 
Test.

Acquired Intangible Assets Amortization

Acquired intangible assets amortization expense decreased primarily in the 
Industrial Automation segment due to intangible assets that became fully 
amortized in June, 2017.

Restructuring and Other

During the three months ended October 1, 2017, we recorded $5.1 million of 
property insurance recovery related to the Japan earthquake, a $0.4 million 
credit related to previously impaired lease termination of a Wireless Test 
facility in Sunnyvale, CA, and a $0.3 million credit for the decrease in the 
fair value of the Universal Robots contingent consideration liability, 
partially offset by $0.8 million of Japan earthquake related expenses, and $0.6 
million recorded for employee severance charges, primarily in Semiconductor 
Test.

During the three months ended October 2, 2016, we recorded $8.0 million for the 
increase in the fair value of the Universal Robots contingent consideration 
liability, and $4.2 million for employee severance charges, primarily in 
Semiconductor Test and Wireless Test.

Interest and Other

Interest income increased by $1.6 million due primarily to higher cash and 
marketable securities balances and higher interest rates in the third quarter 
of 2017. Interest expense increased by $4.8 million due primarily to interest 
expense related to our convertible senior notes. Other (income) expense, net 
included net foreign exchange losses in the third quarter of 2017 and net 
foreign exchange gains in the third quarter of 2016.

The increase in income before income taxes in Semiconductor Test was driven 
primarily by increased sales and higher gross margin due to favorable product 
mix. The increase in income before income taxes in Wireless Test was primarily 
due to lower intangible assets amortization, lower operating expenses and 
higher demand for cellular test systems in the third quarter of 2017. The 
increase in income before income taxes in Industrial Automation was primarily 
due to higher demand for collaborative robots. The decrease in income before 
income taxes in System Test was primarily due to lower sales in Storage Test of 
3.5” hard disk drive testers for cloud storage and increased spending for new 
product development.

Income Taxes

The effective tax rate for the three months ended October 1, 2017 and October 
2, 2016 was 18.8% and (6.9%), respectively. The increase in the effective tax 
rate is primarily attributable to a shift in the geographic distribution of 
income which increased income subject to taxation in the U.S. relative to lower 
tax rate jurisdictions, the effect of a U.S. non-deductible goodwill impairment 
charge and decreases in discrete tax benefits.

Nine Months 2017 Compared to Nine Months 2016

Revenues

The increase in Semiconductor Test revenues of $248.0 million, or 22.6%, was 
driven primarily by increased sales in the microcontroller, power management, 
automotive safety and flash memory test segments and an increase in service 
revenue. The increase in Industrial Automation revenues of $50.3 million, or 
76.9%, was due to higher demand for collaborative robots. The decrease in 
System Test revenues of $27.5 million, or 19.7%, was primarily due to lower 
sales in Storage Test of 3.5” hard disk drive testers for cloud storage. The 
increase in Wireless Test revenues of $13.1 million, or 18.5%, was primarily 
due to higher demand for cellular and connectivity test systems and increased 
service revenue.

Gross Profit

Gross profit as a percent of revenue increased by 3.5 points, as a result of a 
2.3 point increase related to favorable product mix in Semiconductor Test and 
1.2 points due to higher sales primarily in Semiconductor Test and Industrial 
Automation.

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

During the nine months ended October 1, 2017, we recorded an inventory 
provision of $7.2 million included in cost of revenues primarily due to 
downward revisions to previously forecasted demand levels for certain products. 
Of the $7.2 million of total excess and obsolete provisions, $3.7 million was 
related to Semiconductor Test, $1.7 million was related to Wireless Test, $1.6 
million was related to System Test, and $0.1 million was related to Industrial 
Automation.

During the nine months ended October 2, 2016, we recorded an inventory 
provision of $15.1 million included in cost of revenues primarily due to 
downward revisions to previously forecasted demand levels for certain products. 
Of the $15.1 million of total excess and obsolete provisions, $8.3 million was 
related to Semiconductor Test, $6.4 million was related to Wireless Test, and 
$0.4 million was related to System Test.

During the nine months ended October 1, 2017 and October 2, 2016, we scrapped 
$4.1 million and $6.8 million of inventory, respectively. During the nine 
months ended October 1, 2017 and October 2, 2016, we sold $6.4 million and $8.0 
million of previously written-down or written-off inventory, respectively. As 
of October 1, 2017, we had inventory related reserves for inventory which had 
been written-down or written-off totaling $112.2 million. We have no 
pre-determined timeline to scrap the remaining inventory.

Selling and Administrative

The increase of $20.9 million in selling and administrative expenses was due 
primarily to higher variable compensation and higher spending in Industrial 
Automation, partially offset by lower spending in Wireless Test.

Engineering and Development

The increase of $14.1 million in engineering and development expenses was 
primarily due to higher variable compensation and higher spending in System 
Test and Industrial Automation, partially offset by lower spending in Wireless 
Test.

Acquired Intangible Assets Amortization

Acquired intangible assets amortization expense decreased primarily in the 
Wireless Test segment due to the impairment of acquired intangible assets in 
the second quarter of 2016 and in the Industrial Automation segment due to 
intangible assets that became fully amortized in June, 2017.

Goodwill Impairment

We assess goodwill for impairment at least annually, in the fourth quarter, as 
of December 31, or on an interim basis between annual tests when events or 
circumstances indicate that it is more-likely-than-not that the fair value of a 
reporting unit is less than its carrying value. In the second quarter of 2016, 
the Wireless Test reporting unit (which is our Wireless Test operating and 
reportable segment) reduced headcount by 11% as a result of a sharp decline in 
projected demand attributable to an estimated smaller future wireless test 
market. The decrease in projected demand was due to lower forecasted buying 
from our largest Wireless Test segment customer (who had previously contributed 
between 51% and 73% of annual Wireless Test sales since the LitePoint 
acquisition in 2011) as a result of the customer’s numerous operational 
efficiencies; slower smartphone growth rates; and a slowdown of new wireless 
technology adoption. We considered the headcount reduction and sharp decline in 
projected demand to be a triggering event for an interim goodwill impairment 
test. Following the interim goodwill impairment test, we recorded a goodwill 
impairment charge of $254.9 million in the second quarter of 2016.

Acquired Intangible Assets Impairment

We review 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. As a result of the Wireless Test segment goodwill impairment 
review in the second quarter of 2016, we performed an impairment test of the 
Wireless Test segment’s intangible and long-lived assets based on a comparison 
of the estimated undiscounted cash flows to the recorded value of the assets. 
If undiscounted cash flows for the asset are less than the carrying amount, the 
asset is written down to its estimated fair value based on a discounted cash 
flow analysis. The cash flow estimates used to determine the impairment contain 
management’s best estimates using appropriate assumptions and projections at 
that time. As a result of the analysis, we recorded an $83.3 million impairment 
charge in the second quarter of 2016.

Restructuring and Other

During the nine months ended October 1, 2017, we recorded $2.0 million for 
employee severance charges, primarily in Industrial Automation and Corporate, 
$1.8 million for the increase in the fair value of the Universal Robots 
contingent consideration liability, $0.9 million for a lease impairment of a 
Wireless Test facility in Sunnyvale, CA, which was terminated in September 
2017, and $0.8 million of Japan earthquake related expenses, partially offset 
by $5.1 million of property insurance recovery related to the Japan earthquake.

During the nine months ended October 2, 2016, we recorded $10.5 million for the 
increase in the fair value of contingent consideration liability, of which $9.9 
million was related to Universal Robots and $0.6 million was related to AIT, 
$5.9 million for employee severance charges, primarily in Semiconductor Test 
and Wireless Test, $4.2 million for an impairment of fixed assets, and $0.9 
million for Japan earthquake related expenses, partially offset by $5.1 million 
of property insurance recovery related to the Japan earthquake.


Interest income increased by $5.1 million due primarily to higher cash and 
marketable securities balances and higher interest rates in 2017. Interest 
expense increased by $14.3 million due primarily to interest expense related to 
our convertible senior notes. Other (income) expense, net included net foreign 
exchange losses in the nine months ended October 1, 2017 and net foreign 
exchange gains in the nine months ended October 2, 2016.

Income (Loss) Before Income Taxes

The increase in income before income taxes in Semiconductor Test was driven 
primarily by increased sales and higher gross margin due to favorable product 
mix. The increase in income before income taxes in Wireless Test was primarily 
due to goodwill and intangible assets impairment charges in 2016 and lower 
intangible assets amortization, lower operating expenses and higher demand for 
cellular and connectivity test systems in 2017. The increase in income before 
income taxes in Industrial Automation was due to higher demand for 
collaborative robots. The decrease in income before income taxes in System Test 
was primarily due to lower sales in Storage Test of 3.5” hard disk drive 
testers for cloud storage and increased spending for new product development.

Income Taxes

The effective tax rate for the nine months ended October 1, 2017 and October 2, 
2016 was 14.7% and 3.7%, respectively. The increase in the effective tax rate 
is primarily attributable to a shift in the geographic distribution of income 
which increased income subject to taxation in the U.S. relative to lower tax 
rate jurisdictions, the effect of a U.S. non-deductible goodwill impairment 
charge and decreases in discrete tax benefits.


Liquidity and Capital Resources

Our cash, cash equivalents and marketable securities balances increased by 
$235.7 million in the nine months ended October 1, 2017 to $1,848 million.

In the nine months ended October 1, 2017, changes in operating assets and 
liabilities provided cash of $6.3 million. This was due to a $44.5 million 
increase in operating assets partially offset by a $50.8 million increase in 
operating liabilities.

The increase in operating assets was primarily due to a $75.6 million increase 
in accounts receivable due to higher sales, partially offset by a $23.8 million 
decrease in inventories and a $7.4 million decrease in prepayments and other 
assets.

The increase in operating liabilities was due to a $20.5 million increase in 
other accrued liabilities, a $15.8 million increase in income taxes, a $3.0 
million increase in accrued employee compensation due primarily to variable 
compensation, and a $34.5 million increase in deferred revenue and customer 
advance payments, partially offset by an $18.1 million decrease in accounts 
payable and $4.9 million of retirement plan contributions.

Investing activities during the nine months ended October 1, 2017, used cash of 
$188.3 million, due to $1,036.5 million used for purchases of marketable 
securities and $73.2 million used for purchases of property, plant and 
equipment, partially offset by $473.3 million and $443.2 million in proceeds 
from maturities and sales of marketable securities, respectively, and proceeds 
from property insurance of $5.1 million related to the Japan earthquake.

Financing activities during the nine months ended October 1, 2017, used cash of 
$182.7 million, due to $151.8 million used for the repurchase of 4.6 million 
shares of common stock at an average price of $32.66 per share, $41.7 million 
used for dividend payments, $12.6 million used for payment related to net 
settlement of employee stock compensation awards and $1.1 million used for a 
payment related to AIT acquisition contingent consideration, partially offset 
by $24.5 million from the issuance of common stock under employee stock 
purchase and stock option plans.

In the nine months ended October 2, 2016, changes in operating assets and 
liabilities provided cash of $93.1 million. This was due to an $81.0 million 
decrease in operating assets and a $12.1 million increase in operating 
liabilities.

The decrease in operating assets was due to a $45.7 million decrease in 
accounts receivable due to increased collections and a $48.6 million decrease 
in inventories, partially offset by a $13.3 million increase in prepayments and 
other assets. The increase in operating liabilities was due to a $53.4 million 
increase in deferred revenue and customer advance payments, a $15.4 million 
increase in other accrued liabilities and a $4.2 million increase in accrued 
income taxes, partially offset by a $24.2 million decrease in accrued employee 
compensation due primarily to variable compensation, a $30.8 million decrease 
in accounts payable, and $5.9 million of retirement plan contributions.

Investing activities during the nine months ended October 2, 2016 used cash of 
$268.1 million, due to $875.8 million used for purchases of marketable 
securities and $66.3 million used for purchases of property, plant and 
equipment, partially offset by $466.7 million and $202.2 million in proceeds 
from sales and maturities of marketable securities, respectively, and proceeds 
from property insurance of $5.1 million related to the Japan earthquake.

Financing activities during the nine months ended October 2, 2016 used cash of 
$119.1 million, due to $85.1 million used for the repurchase of 4.3 million 
shares of common stock at an average price of $19.69 per share, $36.5 million 
used for dividend payments, $11.7 million used for a payment related to the 
Universal Robots acquisition contingent consideration, and $9.2 million used 
for payment related to net settlement of employee stock compensation awards 
partially offset by $20.1 million from the issuance of common stock under 
employee stock purchase and stock option plans and $3.4 million from the tax 
benefit related to employee stock compensation awards.

In January 2017, May 2017 and August 2017, our Board of Directors declared a 
quarterly cash dividend of $0.07 per share. In the nine months ended October 1, 
2017, dividend payments were $41.7 million.

In January 2016, May 2016, and August 2016, our Board of Directors declared a 
quarterly cash dividend of $0.06 per share. In the nine months ended October 2, 
2016, dividend payments were $36.5 million.

In December 2016, the Board of Directors approved a $500 million share 
repurchase authorization which commenced on January 1, 2017. We intend to 
repurchase at least $200 million in 2017. During the nine months ended October 
1, 2017, we repurchased 4.6 million shares of common stock at an average price 
of $32.66 per share, for a total price of $151.8 million. The total price 
includes commissions and is recorded as a reduction to retained earnings.

During the nine months ended October 2, 2016, we repurchased 4.3 million shares 
of common stock at an average price of $19.69, for a total cost of $85.1 
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.

We believe our cash, cash equivalents and marketable securities balance will be 
sufficient to pay our quarterly dividend, execute our authorized share 
repurchase program and meet our working capital and expenditure needs for at 
least the next twelve months. The amount of cash, cash equivalents and 
marketable securities in the U.S. and our operations in the U.S. provide 
sufficient liquidity to fund our business activities in the U.S. We have $1,106 
million of cash, cash equivalents and marketable securities outside the U.S. 
that if repatriated would incur additional taxes. Determination of the 
additional taxes that would be incurred is not practicable due to uncertainty 
regarding the remittance structure, the mix of earnings and earnings and profit 
pools in the year of remittance, and overall complexity of the calculation. 
Inflation has not had a significant long-term impact on earnings.

Equity Compensation Plans

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

Recently Issued Accounting Pronouncements

On March 10, 2017, the FASB issued ASU 2017-07, “Compensation—Retirement 
Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost 
and Net Periodic Postretirement Benefit Cost.” This ASU provides guidance on 
presentation of net periodic pension cost and net periodic postretirement 
benefit cost. The new standard requires the service cost component to be 
presented in the same line item as other employee compensation costs arising 
from services rendered during the period. The other components of net benefit 
cost such as interest cost, amortization of prior service cost, and actuarial 
gains or losses, are required to be presented separately outside of income or 
loss from operations. The presentation of service cost should be applied 
retrospectively. The guidance is effective for fiscal years beginning after 
December 15, 2017. Early adoption is permitted. This guidance will impact the 
presentation of our consolidated financial statements. Upon adoption of the new 
standard, we will present interest cost, amortization of prior service cost, 
and actuarial gains or losses within other (income) expense, net.

On January 26, 2017, the FASB issued ASU 2017-04, “Intangibles—Goodwill and 
Other (Topic 350): Simplifying the Accounting for Goodwill Impairment.” The new 
guidance removes Step 2 of the goodwill impairment test, which requires a 
hypothetical purchase price allocation. Goodwill impairment will now be the 
amount by which a reporting unit’s carrying value exceeds its fair value, not 
to exceed the carrying amount of goodwill. All other goodwill impairment 
guidance will remain largely unchanged. Entities will continue to have the 
option to perform a qualitative assessment to determine if a quantitative 
impairment test is necessary. The same one-step impairment test will be applied 
to goodwill at all reporting units, even those with zero or negative carrying 
amounts. Entities will be required to disclose the amount of goodwill at 
reporting units with zero or negative carrying amounts. The revised guidance 
will be applied prospectively, and is effective in 2020. Early adoption is 
permitted for any impairment tests performed after January 1, 2017. We are 
currently evaluating the impact of this ASU on our financial position, results 
of operations and statements of cash flows.

In October 2016, the FASB issued ASU 2016-16, “Accounting for Income Taxes: 
Intra-Entity Asset Transfers of Assets Other than Inventory.” Under current 
Generally Accepted Accounting Principles (“GAAP”), the tax effects of 
intra-entity asset transfers are deferred until the transferred asset is sold 
to a third party or otherwise recovered through use. The new guidance requires 
recognition of the tax expense from the sale of the asset in the seller’s tax 
jurisdiction when the transfer occurs, even though the pre-tax effects of that 
transaction are eliminated in consolidation. Any deferred tax asset that arises 
in the buyer’s jurisdiction would also be recognized at the time of the 
transfer. The new guidance does not apply to intra-entity transfers of 
inventory. The income tax consequences from the sale of inventory from one 
member of a consolidated entity to another will continue to be deferred until 
the inventory is sold to a third party. The new guidance will be effective in 
fiscal years beginning after December 15, 2017. Early adoption is permitted. 
The modified retrospective approach will be required for transition to the new 
guidance, with a cumulative-effect adjustment recorded in retained earnings as 
of the beginning of the period of adoption. We do not expect this ASU to have a 
material impact on our financial position, results of operations and statements 
of cash flows.

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

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments—Overall 
(Subtopic 825-10): Recognition and Measurement of Financial Assets and 
Financial Liabilities.” This ASU provides guidance for the recognition, 
measurement, presentation, and disclosure of financial instruments. The new 
pronouncement revises accounting related to equity investments and the 
presentation of certain fair value changes for financial liabilities measured 
at fair value. Among other things, it amends the presentation and disclosure 
requirements of equity securities that do not result in consolidation and are 
not accounted for under the equity method. Changes in the fair value of these 
equity securities will be recognized directly in net income. This pronouncement 
is effective for fiscal years beginning after December 15, 2017. We are 
currently evaluating the impact of this ASU on our financial position and 
results of operations.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with 
Customers (Topic 606),” which will replace numerous requirements in U.S. GAAP, 
including industry-specific requirements, and provide companies with a single 
revenue recognition model for recognizing revenue from contracts with 
customers. The core principle of the new standard is that a company should 
recognize revenue to show the transfer of promised goods or services to 
customers in an amount that reflects the consideration to which the company 
expects to be entitled to in exchange for those goods or services. In August 
2015, FASB issued ASU 2015-14, which deferred the effective date of the new 
revenue standard by one year. For us, the standard will be effective in the 
first quarter of 2018. The two permitted transition methods under the new 
standard are the full retrospective method, in which case the standard would be 
applied to each prior reporting period presented, or the modified retrospective 
method, in which case the cumulative effect of applying the standard would be 
recognized at the date of initial application. We have selected the modified 
retrospective transition method.

We have completed our preliminary assessment of the financial statement impact 
of the new standard and do not expect this ASU to have a material impact on our 
financial position or results of operations. This preliminary assessment is 
based on a review of the types and number of revenue arrangements currently in 
place including the review of individual customer contracts related to these 
revenue streams. The exact impact of the new standard will be dependent on 
facts and circumstances at adoption and could vary from quarter to quarter. 
Based on our preliminary assessment we do not expect any major changes to be 
made to existing accounting systems or internal controls. We will be required 
to record cumulative effect adjustments to retained earnings upon adopting the 
new standard in the first quarter of 2018.

Quantitative and Qualitative Disclosures about Market Risks

In addition to market risks described in our Annual Report on Form 10-K, we 
have an equity price risk related to the fair value of our convertible senior 
unsecured notes issued in December 2016. In December 2016, Teradyne issued $460 
million aggregate principal amount of 1.25% convertible senior unsecured notes 
(the “Notes”) due December 15, 2023. As of October 1, 2017, the Notes had a 
fair value of $613.2 million. The table below provides a sensitivity analysis 
of hypothetical 10% changes of Teradyne’s stock price as of the end of the 
third quarter of 2017 and the estimated impact on the fair value of the Notes. 
The selected scenarios are not predictions of future events, but rather are 
intended to illustrate the effect such event may have on the fair value of the 
Notes. The fair value of the Notes is subject to equity price risk due to the 
convertible feature. The fair value of the Notes will generally increase as 
Teradyne’s common stock price increases and will generally decrease as the 
common stock price declines in value. The change in stock price affects the 
fair value of the convertible senior notes, but does not impact Teradyne’s 
financial position, cash flows or results of operations due to the fixed nature 
of the debt obligation. Additionally, we carry the Notes at face value less 
unamortized discount on our balance sheet, and we present the fair value for 
required disclosure purposes only. In connection with the offering of the Notes 
we also sold warrants to the option counterparties. These transactions have 
been accounted for as an adjustment to our shareholders’ equity. The 
convertible note hedge transactions are expected to reduce the potential equity 
dilution upon conversion of the Notes. The warrants along with any shares 
issuable upon conversion of the Notes will have a dilutive effect on our 
earnings per share to the extent that the average market price of our common 
stock for a given reporting period exceeds the applicable strike price or 
conversion price of the warrants or Notes, respectively.