Edgar Filing: TERADYNE, INC

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Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended July 1, 2007

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

For the transition period from to

Commission File No. 001-06462

TERADYNE, INC.

(Exact name of registrant as specified in its charter)

Massachusetts

04-2272148

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)


600 Riverpark Drive, North Reading, Massachusetts		01864
(Address of Principal Executive Offices)		(Zip Code)

978-370-2700

(Registrant’s Telephone Number, Including Area Code)

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨

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

The number of shares outstanding of the registrant’s only class of Common Stock as of August 3, 2007 was 183,750,435 shares.

TERADYNE, INC.

INDEX


		Page No.
	PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited):

	Condensed Consolidated Balance Sheets as of July 1, 2007 and December 31, 2006	3

	Condensed Consolidated Statements of Operations for the Three and Six Months Ended July 1, 2007 and July 2, 2006	4

	Condensed Consolidated Statements of Cash Flows for the Six Months Ended July 1, 2007 and July 2, 2006	5

	Notes to Condensed Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	31

Item 4.	Controls and Procedures	31

	PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	32

Item 1A.	Risk Factors	32

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33

Item 4.	Submission of Matters to a Vote of Security Holders	33

Item 6.	Exhibits	34

PART I

Item 1: Financial Statements

TERADYNE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)


	July 1, 2007			December 31, 2006
	(in thousands, except per share data)
ASSETS
Current assets:
Cash and cash equivalents	$	393,215		$	568,025
Marketable securities		187,134			47,766
Accounts receivable, net of allowance for doubtful accounts of $4,753 and $4,962 on July 1, 2007 and December 31, 2006, respectively		211,461			155,770
Inventories:
Parts		8,733			9,008
Assemblies in process		79,310			83,805

Net inventories		88,043			92,813
Prepayments and other current assets		24,314			21,527
Current assets of discontinued operations		5,487			3,509

Total current assets		909,654			889,410
Property, plant, and equipment, at cost		845,176			862,062
Less: accumulated depreciation		487,581			496,541

Net property, plant, and equipment		357,595			365,521
Marketable securities		303,656			328,827
Goodwill		69,147			69,147
Intangible and other assets		34,610			35,819
Retirement plans assets		32,194			31,503
Long-term assets of discontinued operations		818			828

Total assets	$	1,707,674		$	1,721,055

LIABILITIES
Current liabilities:
Accounts payable	$	55,822		$	39,918
Accrued employees’ compensation and withholdings		65,594			87,811
Deferred revenue and customer advances		41,963			44,053
Other accrued liabilities		44,149			47,023
Income taxes payable		10,099			36,052
Current liabilities of discontinued operations		2,709			4,859

Total current liabilities		220,336			259,716
Retirement plans liabilities		79,644			81,121
Long-term other accrued liabilities		19,219			18,352
Long-term liabilities of discontinued operations		674			679

Total liabilities		319,873			359,868

Commitments and contingencies (Note O)

SHAREHOLDERS’ EQUITY
Common stock, $0.125 par value, 1,000,000 shares authorized, 188,586 and 188,952 shares issued and outstanding at July 1, 2007 and December 31, 2006, respectively		23,573			23,619
Additional paid-in capital		1,196,001			1,179,015
Accumulated other comprehensive loss		(59,828	)		(66,309	)
Retained earnings		228,055			224,862

Total shareholders’ equity		1,387,801			1,361,187

Total liabilities and shareholders’ equity	$	1,707,674		$	1,721,055

The accompanying notes, together with the Notes to Consolidated Financial Statements included in Teradyne’s Annual Report on Form 10-K for the year ended December 31, 2006 are an integral part of the condensed consolidated financial statements.

TERADYNE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)


	For the Three Months Ended						For the Six Months Ended
	July 1, 2007			July 2, 2006			July 1, 2007			July 2, 2006
	(in thousands, except per share amounts)
Net revenues:
Products	$	229,504		$	327,828		$	424,137		$	625,864
Services		59,206			58,991			118,266			116,984

Total net revenues		288,710			386,819			542,403			742,848
Cost of revenues:
Cost of products		112,338			158,434			212,329			308,681
Cost of services		39,152			37,810			79,457			76,458

Total cost of revenues		151,490			196,244			291,786			385,139

Gross profit		137,220			190,575			250,617			357,709
Operating expenses:
Engineering and development		52,417			51,840			101,679			102,402
Selling and administrative		62,760			73,913			125,772			144,336
In-process research and development		—			—			16,700			—
Restructuring and other, net		568			(20,596	)		2,815			(21,693	)

Operating expenses		115,745			105,157			246,966			225,045

Income from continuing operations		21,475			85,418			3,651			132,664
Interest income		9,299			11,659			19,398			21,142
Interest expense		(74	)		(3,470	)		(510	)		(6,841	)
Other income		—			—			1,832			—

Income from continuing operations before income taxes		30,700			93,607			24,371			146,965
Provision for income taxes		3,454			9,420			4,839			18,008

Income from continuing operations		27,246			84,187			19,532			128,957
Income (loss) from discontinued operations		618			(1,825	)		711			(1,715	)
Income tax provision (benefit)		210			(43	)		225			(76	)

Income (loss) from discontinued operations		408			(1,782	)		486			(1,639	)

Net income	$	27,654		$	82,405		$	20,018		$	127,318

Income from continuing operations per common share:
Basic	$	0.14		$	0.42		$	0.10		$	0.65

Diluted	$	0.14		$	0.41		$	0.10		$	0.64

Net income per common share:
Basic	$	0.15		$	0.42		$	0.11		$	0.64

Diluted	$	0.14		$	0.40		$	0.10		$	0.63

Weighted average common share—basic		189,391			198,243			189,508			198,130

Weighted average common share—diluted		191,405			210,356			191,184			210,601

TERADYNE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)


	For the Six Months Ended
	July 1, 2007			July 2, 2006
	(in thousands)
Cash flows from operating activities:
Net income	$	20,018		$	127,318
Income (loss) from discontinued operations		486			(1,639	)

Income from continuing operations		19,532			128,957
Adjustments to reconcile net income to net cash provided by (used for) operating activities:
Depreciation		30,965			34,828
Amortization		3,904			2,550
Stock-based compensation		14,068			11,752
In-process research and development charge		16,700			—
Impairment of long-lived assets		—			50
Gain on sale of land and building		—			(21,736	)
Gain on sale of product lines		(906	)		(386	)
Fire loss on spare parts		—			3,959
Provision for doubtful accounts		104			82
Provision for inventory		525			9,593
Other non-cash items, net		1,208			2,541
Changes in operating assets and liabilities, net of product lines and businesses sold:
Accounts receivable		(55,795	)		(49,497	)
Inventories		24,864			48,436
Other assets		(3,435	)		(8,100	)
Accounts payable, deferred revenue and accrued expenses		(10,016	)		47,361
Retirement plans contributions		(1,644	)		(25,300	)
Income taxes payable		(25,953	)		14,848

Net cash provided by continuing operations		14,121			199,938
Net cash (used for) provided by discontinued operations		(2,998	)		3,276

Net cash provided by operating activities		11,123			203,214

Cash flows from investing activities:
Investments in property, plant and equipment		(44,611	)		(52,330	)
Acquisition of technology		(17,600	)		—
Proceeds from sale of product lines and business		906			386
Proceeds from sale of land and building		—			36,232
Purchases of available-for-sale marketable securities		(243,352	)		(357,597	)
Proceeds from sale and maturities of available-for-sale marketable securities		132,244			171,648

Net cash used for continuing operations		(172,413	)		(201,661	)
Net cash used for discontinued operations		(189	)		(272	)

Net cash used for investing activities		(172,602	)		(201,933	)

Cash flows from financing activities:
Payments of long term debt and notes payable		—			(19,648	)
Repurchase of common stock		(27,610	)		—
Issuance of common stock under employee stock option and stock purchase plans		14,279			14,190

Net cash used for financing activities		(13,331	)		(5,458	)

Decrease in cash and cash equivalents		(174,810	)		(4,177	)
Cash and cash equivalents at beginning of period		568,025			340,699

Cash and cash equivalents at end of period	$	393,215		$	336,522

TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

A. The Company

Teradyne, Inc. is a leading supplier of automatic test equipment.

Teradyne’s automatic test equipment products include:

•

semiconductor test systems (“Semiconductor Test Systems”);

•

circuit-board test and inspection systems and military/aerospace (“Mil/Aero”) test instrumentation and systems (“Assembly Test Systems”); and

•

automotive diagnostic and test systems (“Diagnostic Solutions”).

Statements in this Quarterly Report on Form 10-Q which are not historical facts, so called “forward looking statements,” are made pursuant to the safe harbor provisions of Section 21E of the Securities Exchange Act of 1934, as amended. Investors are cautioned that all forward looking statements involve risks and uncertainties, including those detailed in Teradyne’s filings with the Securities and Exchange Commission (the “SEC”). See also “Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations—Certain Factors That May Affect Future Results” and Teradyne’s Annual Report on Form 10-K for the year ended December 31, 2006.

B. Accounting Policies

Basis of Presentation

The condensed consolidated interim financial statements include the accounts of Teradyne and its subsidiaries. All significant intercompany balances and transactions have been eliminated. These interim financial statements are unaudited and reflect all normal recurring adjustments that are, in the opinion of management, necessary for the fair statement of such interim financial statements. Certain prior years’ amounts were reclassified to conform to the current year presentation. The December 31, 2006 condensed consolidated balance sheet data were derived from audited financial statements, but do not include all disclosures required by generally accepted accounting principles.

The accompanying financial information should be read in conjunction with the consolidated financial statements and notes thereto contained in Teradyne’s Annual Report on Form 10-K, filed with the SEC on March 1, 2007 for the year ended December 31, 2006.

On August 1, 2007, Teradyne closed the sale of Broadband Test Systems division, its voice and broadband access network test division. The results of operations of Broadband Test Systems as well as balance sheet amounts pertaining to this business have been classified as discontinued operations in the consolidated financial statements (see “Note E: Discontinued Operations”).

Preparation of Financial Statements

The preparation of consolidated financial statements requires management to make estimates and judgments that affect the amounts reported in the financial statements. Actual results may differ significantly from these estimates.

C. Recently Issued Accounting Pronouncements

TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

accounting standard is effective for financial statements issued for fiscal years beginning after November 15, 2007. Teradyne is currently evaluating the impact of adopting this standard.

D. Product Warranty

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


	For the Six Months Ended
	July 1, 2007			July 2, 2006
Balance at beginning of period	$	12,897		$	10,496
Accruals for warranties issued during the period		6,829			12,085
Accruals related to pre-existing warranties (includes changes in estimates)		(1,870	)		561
Settlements made during the period		(7,607	)		(8,509	)

Balance at end of period	$	10,249		$	14,633

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


	For the Six Months Ended
	July 1, 2007			July 2, 2006
Balance at beginning of period	$	8,350		$	5,596
Deferral of new extended warranty revenue		1,934			3,641
Recognition of extended warranty deferred revenue		(2,682	)		(1,476	)

Balance at end of period	$	7,602		$	7,761

E. Discontinued Operations

On August 1, 2007, Teradyne closed the sale of its Broadband Test Systems division to Tollgrade Communications, Inc. for $11.3 million in cash. Teradyne sold this business as its growth potential as a stand- alone business within Teradyne was not attractive. The financial information for the Broadband Test Systems division was reclassified to discontinued operations for all periods presented. Broadband Test Systems net revenues and income (loss) from discontinued operations for the three and six months ended July 1, 2007 and July 2, 2006 are as follows (in thousands):


	For the Three Months Ended					For the Six Months Ended
	July 1, 2007		July 2, 2006			July 1, 2007		July 2, 2006
Net revenues	$	5,859	$	4,816		$	10,224	$	11,701

Income (loss) from discontinued operations	$	618	$	(1,825	)	$	711	$	(1,715	)
Income tax provision (benefit)		210		(43	)		225		(76	)

Income (loss) from discontinued operations	$	408	$	(1,782	)	$	486	$	(1,639	)

TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Included in discontinued operations for the three and six months ended July 1, 2007 are $0.6 million of fees directly related to the sale transaction between Teradyne and Tollgrade Communications.

F. Stock-Based Compensation

During the six months ended July 1, 2007, Teradyne granted restricted stock units to employees, executives and directors. The total number of shares granted was 2.0 million at the weighted average grant date fair value of $15.27. Awards granted to employees and executives vest in equal installments over four years. Awards granted to non-employee directors vest after one year. A significant number of awards granted to executive officers are performance-based restricted stock units. The amount of actual performance-based restricted stock units that will be allowed to vest over four years will be determined on or near the first anniversary of the grant.

G. Other Comprehensive Income

Other comprehensive income is calculated as follows for the three months ended (in thousands):


	For the Three Months Ended
	July 1, 2007			July 2, 2006
Net income	$	27,654		$	82,405
Foreign currency translation adjustments		256			616
Change in unrealized loss on foreign exchange contracts, net of tax of $0		55			—
Change in unrealized loss on marketable securities, net of tax of $0		596			(1,207	)
Retirement plans net gain, net of tax of $22		2,582			—
Retirement plans prior service gain, net of tax of $0		154			—
Retirement plans net transition asset, net of tax of $(11)		(46	)		—
Additional minimum pension liability, net of tax of $0		—			(147	)

Other comprehensive income	$	31,251		$	81,667

Other comprehensive income is calculated as follows for the six months ended (in thousands):


	For the Six Months Ended
	July 1, 2007			July 2, 2006
Net income	$	20,018		$	127,318
Foreign currency translation adjustments		234			708
Change in unrealized loss on foreign exchange contracts, net of tax of $0		55			(31	)
Change in unrealized loss on marketable securities, net of tax of $0		2,165			(2,671	)
Retirement plans net gain, net of tax of $60		3,744			—
Retirement plans prior service gain, net of tax of $0		307			—
Retirement plans net transition asset, net of tax of $(18)		(24	)		—
Additional minimum pension liability, net of tax of $0		—			(212	)

Other comprehensive income	$	26,499		$	125,112

TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

H. Goodwill and Intangible Assets

Amortizable intangible assets consist of the following and are included in other assets on the balance sheet (in thousands):


	July 1, 2007
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Weighted Average Useful Life
Completed technology	$	19,193	$	14,564	$	4,629	7.5 years
Service and software maintenance contracts and customer relationships		4,779		3,378		1,401	8.0 years
Trade names and trademarks		3,800		2,692		1,108	8.0 years
Acquired workforce		700		44		656	4.0 years

Total intangible assets	$	28,472	$	20,678	$	7,794	7.6 years


	December 31, 2006
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Weighted Average Useful Life
Completed technology	$	19,193	$	13,281	$	5,912	7.5 years
Service and software maintenance contracts and customer relationships		4,779		3,078		1,701	8.0 years
Trade names and trademarks		3,800		2,454		1,346	8.0 years

Total intangible assets	$	27,772	$	18,813	$	8,959	7.7 years

Aggregate amortization expense was $1.0 million for the three months ended July 1, 2007 and $0.9 million for the three months ended July 2, 2006. Aggregate amortization expense for the six months ended July 1, 2007 was $1.9 million and for the six months ended July 2, 2006 was $1.8 million. Estimated amortization expense for each of the five succeeding fiscal years is as follows (in thousands):


Year	Amount
2007 (remainder)	$	1,794
2008		3,137
2009		2,644
2010		175
2011		44

TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

I. Net Income per Common Share

The following table sets forth the computation of basic and diluted net income per common share (in thousands, except per share amounts):


	For the Three Months Ended					For the Six Months Ended
	July 1, 2007		July 2, 2006			July 1, 2007		July 2, 2006
Income from continuing operations	$	27,246	$	84,187		$	19,532	$	128,957
Income (loss) from discontinued operations		408		(1,782	)		486		(1,639	)

Net income for basic net income per share		27,654		82,405			20,018		127,318
Income impact of assumed conversion of convertible debt		—		2,629			—		5,383

Net income for diluted net income per share	$	27,654	$	85,034		$	20,018	$	132,701

Weighted average common shares—basic		189,391		198,243			189,508		198,130
Effect of dilutive securities:
Incremental shares from assumed conversion of convertible debentures		—		10,962			—		11,126
Employee and director stock options		1,169		703			1,057		1,003
Restricted stock units		742		340			552		274
Employee stock purchase rights		103		108			67		68

Dilutive potential common shares		2,014		12,113			1,676		12,471

Weighted average common shares—diluted		191,405		210,356			191,184		210,601

Net income per common share—basic
Continued operations	$	0.14	$	0.42		$	0.10	$	0.65
Discontinued operations		0.01		—			0.01		(0.01	)

	$	0.15	$	0.42		$	0.11	$	0.64

Net income per common share—diluted
Continued operations	$	0.14	$	0.41		$	0.10	$	0.64
Discontinued operations		—		(0.01	)		—		(0.01	)

	$	0.14	$	0.40		$	0.10	$	0.63

The computation of diluted net income per common share for the three and six months ended July 1, 2007 excludes the effect of the potential exercise of options to purchase approximately 14.4 million and 14.6 million shares, respectively, because the option price was greater than the average market price of the common shares and the effect would have been anti-dilutive.

The computation of diluted net income per common share for the three and six months ended July 2, 2006 excludes the effect of the potential exercise of options to purchase approximately 15.5 million and 16.3 million shares, respectively, because the option price was greater than the average market price of the common shares and the effect would have been anti-dilutive. The effect of Teradyne’s outstanding convertible notes on diluted net income per share for the three and six months ended July 2, 2006 was calculated using the “if converted” method as required by SFAS No. 128, “Earnings per Share”. In using the “if converted” method, $2.6 million and $5.4 million of interest expense related to the convertible notes for the three and six months ended July 2, 2006, net of tax and profit sharing expenses, was added back to net income to arrive at diluted net income.

TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

J. Restructuring and Other, Net

The tables below represent activity related to restructuring and other, net, in the six months ended July 1, 2007. The accrual for severance and benefits is reflected in accrued employees’ compensation and withholdings. The accrual for lease payments on vacated facilities is reflected in other accrued liabilities and other long-term accrued liabilities and is expected to be paid out over the lease terms, the latest of which expires in 2012. Teradyne expects to pay out approximately $1.8 million against the lease accruals over the next twelve months. Teradyne’s future lease commitments are net of expected sublease income of $11.1 million as of July 1, 2007.

2007 Activities


(in thousands)	Vacated Facility Related			Severance and Benefits			Total
Balance at December 31, 2006	$	—		$	—		$	—
Charges		53			4,163			4,216
Cash payments		(53	)		(1,914	)		(1,967	)

Balance at July 1, 2007	$	—		$	2,249		$	2,249

During the six months ended July 1, 2007, Teradyne recorded the following restructuring activities:

•

$4.2 million of severance charges related to headcount reductions of 139 people across all functions and segments; and

•

$0.1 million of facility charges related to an early exit of an Assembly Test facility in Poway, California.

2006 Activities


(in thousands)	Vacated Facility Related			Severance and Benefits			Total
Balance at December 31, 2006	$	625		$	1,865		$	2,490
Credits		—			(141	)		(141	)
Cash payments		(290	)		(1,557	)		(1,847	)

Balance at July 1, 2007	$	335		$	167		$	502

Pre-2006 Activities


(in thousands)	Vacated Facility Related			Severance and Benefits			Gain on Sale of Product Lines			Total
Balance at December 31, 2006	$	9,604		$	1,183		$	—		$	10,787
Credits		(69	)		(285	)		(906	)		(1,260	)
Cash payments		(2,182	)		(498	)		906			(1,774	)

Balance at July 1, 2007	$	7,353		$	400		$	—		$	7,753

TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

During the six months ended July 1, 2007, Teradyne recorded the following pre-2006 restructuring activities:

•

$0.9 million credit for earn-out payments received in the Assembly Test Systems segment from product line divestitures; and

•

$0.3 million credit for revised estimates on severance payments.

K. Stock Repurchase Program

In July 2006, Teradyne’s Board of Directors authorized a stock repurchase program. Under the program, Teradyne may spend up to an aggregate of $400 million to repurchase shares of its common stock in open market purchases, in privately negotiated transactions or through other appropriate means over two years. Shares are to be repurchased at Teradyne’s discretion, subject to market conditions and other factors. During the three months ended July 1, 2007, Teradyne repurchased 1.4 million shares of common stock for $24.0 million at an average price of $16.70. For the six months ended July 1, 2007, Teradyne repurchased 1.7 million shares of common stock for $27.6 million at an average price of $16.47 per share. The cumulative repurchases as of July 1, 2007 total 12.3 million shares of common stock for $165.4 million at an average price of $13.46. Subsequently, Teradyne has repurchased 5.5 million shares of common stock for $87.3 million through August 3, 2007.

L. Technology Acquisition

On March 7, 2007, Teradyne purchased in-process enabling test technology and hired certain engineers from MOSAID Technologies Inc. for $17.6 million, which includes $0.6 million in fees directly related to the acquisition. Of the purchase price, $16.7 million has been allocated to in-process research and development and therefore has been immediately charged to the statement of operations. The balance of the purchase price has been allocated to acquired workforce and fixed assets.

This technology was acquired for use in the development of a new semiconductor test product. As of the acquisition date, the technology had not reached technical feasibility, had no alternative future use and its fair value was estimable with reasonable reliability, and therefore has been classified as in-process research and development. The technology is unique to the semiconductor test market and requires significant development. The estimated fair value of the in-process technology was determined based on the use of a discounted cash flow model using an income approach. Estimated cash flows were probability adjusted to take into account the stage of completion and the risks surrounding successful development and commercialization of the in-process technology. Such a valuation requires significant estimates and assumptions including but not limited to determining the timing and estimated costs to complete the in-process project as well as the estimated cash flows to be generated as a result of completing the project development.

M. Retirement Plans

Defined Benefit Pension Plans

Teradyne has defined benefit pension plans covering a portion of domestic employees and employees of certain non-U.S. subsidiaries. Benefits under these plans are based on employees’ years of service and compensation. Teradyne’s funding policy is to make contributions to the plans in accordance with local laws and to the extent that such contributions are tax deductible. The assets of the plans consist primarily of equity and fixed income securities. In addition, Teradyne has an unfunded supplemental executive defined benefit plan in the United States to provide retirement benefits in excess of levels allowed by the Employment Retirement Income Security Act and the Internal Revenue Code, as well as unfunded foreign plans.

TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Components of net periodic pension cost for all plans for the three and six months ended July 1, 2007 and July 2, 2006 are as follows (in thousands):


	For the Three Months Ended						For the Six Months Ended
	July 1, 2007			July 2, 2006			July 1, 2007			July 2, 2006
Net Periodic Benefit Cost:
Service cost	$	1,268		$	1,741		$	2,811		$	3,450
Interest cost		4,118			3,860			8,274			7,795
Expected return on plan assets		(4,879	)		(4,384	)		(9,762	)		(8,721	)
Amortization of unrecognized:
Net transition obligation		(17	)		19			(33	)		38
Prior service cost		213			211			424			422
Net loss		847			1,326			1,822			2,945

Total expense	$	1,550		$	2,773		$	3,536		$	5,929

Teradyne contributed $1.0 million to its United Kingdom Qualified Pension Plan and $0.6 million to its Japan Qualified Pension Plan, in the six months ended July 1, 2007.

Postretirement Benefit Plans

In addition to receiving pension benefits, Teradyne’s U.S. employees who meet specific retirement eligibility requirements as of their termination dates may participate in Teradyne’s Welfare Plan, which includes death benefits, and medical and dental benefits up to age 65. Death benefits provide a fixed sum to retirees’ survivors and are available to all retirees.

Substantially all of Teradyne’s current U.S. employees could become eligible for these benefits, and the existing benefit obligation relates primarily to those employees.

Components of net periodic postretirement cost are as follows (in thousands):


	For the Three Months Ended						For the Six Months Ended
	July 1, 2007			July 2, 2006			July 1, 2007			July 2, 2006
Net Periodic Benefit Cost:
Service cost	$	71		$	96		$	127		$	192
Interest cost		317			411			658			822
Amortization of unrecognized:
Prior service cost		(59	)		(59	)		(118	)		(118	)
Net loss		50			242			143			484

Total expense	$	379		$	690		$	810		$	1,380

N. Income Taxes

Teradyne adopted FIN 48, “Accounting for Uncertainties in Income Taxes” (“FIN 48”) effective January 1, 2007. FIN 48 applies to all income tax positions accounted for under FASB Statement No. 109, “Accounting for Income Taxes”, and addresses the determination of whether tax benefits claimed or expected to be claimed on a

TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

tax return should be recorded in the financial statements. FIN 48 also addressed other aspects of reporting and disclosing uncertain tax positions. Upon adoption, the amount of unrecognized tax benefits, if recognized, would have impacted the effective tax rate by $2.5 million. Upon adoption, it was anticipated that within the next twelve months of adoption $2.3 million of unrecognized tax benefits would no longer be considered unrecognized tax benefits due to audit settlements. Upon adoption and as of July 1, 2007, Teradyne has open tax years beginning in 2003 for major jurisdictions including U.S., Japan, Singapore and the United Kingdom. Teradyne records all interest and penalties related to income taxes as a component of income tax expense. Accrued interest and penalties related to income tax items upon adoption and recognized during the three and six months ended July 1, 2007 was not material.

Teradyne’s unrecognized tax benefits are as follows (in thousands):


	For the Six Months Ended July 1, 2007
Beginning balance, upon adoption as of January 1, 2007	$	10,584
Additions:
Tax positions for current year		126
Tax positions for prior years		2,013

Ending balance as of April 1, 2007	$	12,723
Additions:
Tax positions for current year		37
Tax positions for prior years		2,407
Reductions:
Settlements		(2,342	)

Ending balance as of July 1, 2007	$	12,825

Of the $12.8 million of unrecognized tax benefits as of July 1, 2007, $6.4 million would impact the consolidated income tax rate if ultimately recognized. The remaining $6.4 million would impact goodwill if ultimately recognized. As of July 1, 2007, it is anticipated that within the next twelve months, $2.0 million of unrecognized tax benefits will no longer be considered unrecognized tax benefits due to audit settlements.

Due to the continued uncertainty of realization, Teradyne maintained its valuation allowance at July 1, 2007 and December 31, 2006. Teradyne does not expect to significantly reduce its valuation allowance until sufficient positive evidence exists, including sustained profitability, that realization is more likely than not.

O. Commitments and Contingencies

Legal Claims

On September 5, 2001, after Teradyne’s August 2000 acquisition of Herco Technology Corp. and Perception Laminates, Inc., the former owners of those companies filed a complaint against Teradyne and two of its then executive officers in the Federal District Court in San Diego, California, asserting securities fraud and breach of contract related to the acquisition. The District Court dismissed certain of the plaintiffs’ claims, granted partial summary judgment against them with respect to their breach of contract claim and denied their motion for reconsideration. In July 2007, after an appeal by the plaintiffs, the U.S. Court of Appeals for the Ninth Circuit affirmed in part and reversed in part the District Court rulings. Teradyne has petitioned the Ninth Circuit for rehearing of the ruling it reversed and will continue to defend the claim that was sent back to the District Court.

TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

In 2001, Teradyne was designated as a Potentially Responsible Party (“PRP”) at a clean-up site in Los Angeles, California. This claim arose out of its acquisition of Perception Laminates in August 2000. Prior to that date, Perception Laminates had itself acquired certain assets of Alco Industries Inc. under an asset purchase agreement dated October 20, 1992. Neither Teradyne nor Perception Laminates has ever conducted any operations at the Los Angeles site. Teradyne has asked the State of California to drop the PRP designation, but California has not yet agreed to do so.

In July 2007, Teradyne paid an immaterial amount and entered into a settlement agreement with the U.S. Environmental Protection Agency (“EPA”) and various regulatory agencies for the State of California for claims that Teradyne was a de minimis PRP with respect to the Casmalia Disposal Site in California.

Teradyne believes that it has meritorious defenses against the above unsettled claims and intends to vigorously contest them. While it is not possible to predict or determine the outcomes of the unsettled claims or to provide possible ranges of losses that may arise, Teradyne believes the losses associated with all of these actions will not have a material adverse effect on its consolidated financial position or liquidity, but could possibly be material to its consolidated results of operations of any one period.

In addition, Teradyne is subject to legal proceedings, claims and investigations that arise in the ordinary course of business such as, but not limited to, patent, employment, commercial and environmental matters. Although there can be no assurance, there are no such matters pending that Teradyne expects to be material with respect to its business, financial position or results of operations.

P. Segment Information

Teradyne has three reportable segments. The three reportable segments are the design, manufacturing and marketing of Semiconductor Test Systems, Assembly Test Systems, and Diagnostic Solutions. These reportable segments were determined based upon the information reviewed and used by the chief operating decision maker.

TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Teradyne evaluates performance based on several factors, of which the primary financial measure is business segment income before taxes. The accounting policies of the business segments are the same as those described in Note B: “Accounting Policies” in Teradyne’s Annual Report on Form 10-K for the year ended December 31, 2006. Due to the sale on August 1, 2007 of the Broadband Test Systems business, its results have been excluded in all periods presented. Previously, Broadband Test Systems and Diagnostic Solutions had been combined to make up the Other Test Systems segment. Segment information for the three and six months ended July 1, 2007 and July 2, 2006 is as follows (in thousands):


	Semiconductor Test Systems Segment			Assembly Test Systems Segment		Diagnostic Solutions Segment		Corporate and Eliminations		Consolidated
*Three months ended July 1, 2007:*
Net sales	$	230,681		$	41,193	$	16,836	$	—	$	288,710
Income from continuing operations before taxes (1)(2)		15,279			4,775		846		9,800		30,700

*Three months ended July 2, 2006:*
Net sales	$	315,076		$	41,566	$	30,177	$	—	$	386,819
Income from continuing operations before taxes (1)(2)		79,352			1,559		4,834		7,862		93,607

*Six months ended July 1, 2007:*
Net sales	$	424,649		$	82,461	$	35,293	$	—	$	542,403
Income from continuing operations before taxes (1)(2)		(6,387	)		7,474		1,977		21,307		24,371

*Six months ended July 2, 2006:*
Net sales	$	609,508		$	80,289	$	53,051	$	—	$	742,848
Income from continuing operations before taxes (1)(2)		122,504			3,659		8,049		12,753		146,965

(1)	Net interest income is included in Corporate and Eliminations.

(2)	Included in the income (loss) from continuing operations before taxes for each of the segments are charges for the three and six months ended July 1, 2007 and July 2, 2006 that include restructuring and other, net and in-process research and development charges, as follows:

Included in the Semiconductor Test Systems segment are charges for the following (in thousands):


	For the Three Months Ended					For the Six Months Ended
	July 1, 2007		July 2, 2006			July 1, 2007		July 2, 2006
Restructuring and other, net	$	1,483	$	(20,701	)	$	2,572	$	(19,438	)
In-process research and development		—		—			16,700		—

Total	$	1,483	$	(20,701	)	$	19,272	$	(19,438	)

Also included in income from continuing operations before taxes for the six months ended July 2, 2006 is an inventory provision of $8.0 million related to non-FLEX products.

TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Included in the Assembly Test Systems segment are charges for the following (in thousands):


	For the Three Months Ended					For the Six Months Ended
	July 1, 2007			July 2, 2006		July 1, 2007			July 2, 2006
Restructuring and other, net	$	(1,098	)	$	644	$	(884	)	$	(1,746	)

Included in the Diagnostic Solutions segment are charges for the following (in thousands):


	For the Three Months Ended				For the Six Months Ended
	July 1, 2007		July 2, 2006		July 1, 2007		July 2, 2006
Restructuring and other, net	$	42	$	9	$	588	$	9

Included in the Corporate and Eliminations segment are charges for the following (in thousands):


	For the Three Months Ended					For the Six Months Ended
	July 1, 2007		July 2, 2006			July 1, 2007		July 2, 2006
Restructuring and other, net	$	141	$	(548	)	$	539	$	(518	)

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

Critical Accounting Policies and Estimates

We have identified the policies which are critical to understanding our business and our results of operations. Management believes that there have been no significant changes during the six months ended July 1, 2007 to the items disclosed as our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in its Annual Report on Form 10-K for the fiscal year ended December 31, 2006.

SELECTED RELATIONSHIPS WITHIN THE CONDENSED CONSOLIDATED

STATEMENTS OF OPERATIONS


	For the Three Months Ended				For the Six Months Ended
	July 1, 2007		July 2, 2006		July 1, 2007		July 2, 2006
Percentage of total net revenues:
Products	79	%	85	%	78	%	84	%
Services	21		15		22		16

Total net revenues	100		100		100		100
Cost of revenues:
Cost of products	39		41		39		42
Cost of services	13		10		15		10
Total cost of revenues	52		51		54		52

Gross profit	48		49		46		48
Operating expenses:
Engineering and development	18		13		18		14
Selling and administrative	22		19		23		19
In-process research and development	—		—		3		—
Restructuring and other, net	—		(5	)	1		(3	)

Operating expenses	40		27		45		30

Income from continuing operations	8		22		1		18
Interest income	3		3		3		3
Interest expense	—		(1	)	(1	)	(1	)
Other income	—		—		1		—

Income from continuing operations before income taxes	11		24		4		20
Provision for income taxes	1		2		1		2

Income from continuing operations	10		22		3		18
Income from discontinued operations	1		(1	)	1		(1	)
Income tax provision (benefit)	1		—		—		—

Income (loss) from discontinued operations	—		(1	)	1		(1	)

Net income	10	%	21	%	4	%	17	%

Provision for income taxes as a percentage of income from continuing operations before income taxes	11	%	10	%	20	%	12	%

Results of Operations

On August 1, 2007, we closed the sale of our Broadband Test Systems division to Tollgrade Communications, Inc. for $11.3 million in cash. We sold this business as its growth potential as a stand-alone business within Teradyne was not attractive.

In accordance with SFAS 144, we are reporting Broadband Test Systems as a discontinued operation in the consolidated financial statements for all periods presented throughout this Form 10-Q. Previously, Broadband Test Systems and Diagnostic Solutions had been combined to make up the Other Test Systems segment. Unless indicated otherwise, the discussion and amounts provided in this “Results of Operations” section and elsewhere in this Form 10-Q relate to continuing operations only.

Broadband Test Systems net revenues and income (loss) for the three and six months ended July 1, 2007 and July 2, 2006 are as follows (in thousands):


	For the Three Months Ended					For the Six Months Ended
	July 1, 2007		July 2, 2006			July 1, 2007		July 2, 2006
Net revenues	$	5,859	$	4,816		$	10,224	$	11,701

Income (loss) before income taxes	$	618	$	(1,825	)	$	711	$	(1,715	)
Income tax provision (benefit)		210		(43	)		225		(76	)

Income (loss) from discontinued operations	$	408	$	(1,782	)	$	486	$	(1,639	)

Included in discontinued operations for the three and six months ended July 1, 2007 are $0.6 million of fees directly related to the sale transaction between Teradyne and Tollgrade Communications.

Second Quarter 2007 Compared to Second Quarter 2006

Bookings

Net bookings for our three reportable segments were as follows (dollars in millions, except percent change):


	For the Three Months Ended
	July 1, 2007		July 2, 2006		% Change
Semiconductor Test Systems	$	259.2	$	318.5	(18.6	)%
Assembly Test Systems		34.6		47.4	(27.0	)
Diagnostic Solutions		12.8		35.4	(63.8	)

	$	306.6	$	401.3	(23.6	)%

The Semiconductor Test Systems’ orders decreased 19% driven by less demand across a wide range of end markets, applications and geographies. The Semiconductor Test Systems’ business is dependent on the current and anticipated market for test equipment, which historically has been highly cyclical.

The Assembly Test Systems decrease in orders was primarily due to reduced Mil/Aero program-related bookings.

Diagnostic Solutions’ orders are program related and have significant fluctuations. The decrease in Diagnostic Solutions bookings was primarily due to a large program rollout in 2006 for the Vehicle Measurement Module product line.

Customers may delay delivery of products or cancel orders suddenly and without significant notice, subject to possible cancellation penalties. In the second quarter of 2007 and 2006, there were no significant cancellation penalties received. Due to possible changes in delivery schedules and cancellations of orders, our backlog at any particular date is not necessarily indicative of the actual sales for any succeeding period. Delays in delivery schedules and/or cancellations of backlog during any particular period could have a material adverse effect on our business, financial condition and results of operations.

Net bookings by region as a percentage of total net bookings were as follows:


	For the Three Months Ended
	July 1, 2007		July 2, 2006
Taiwan	24	%	14	%
South East Asia	17		15
United States	15		25
Korea	13		11
Singapore	13		8
Europe	10		13
Japan	7		13
Rest of World	1		1

	100	%	100	%

Backlog of unfilled orders for our three reportable segments was as follows (dollars in millions):


	For the Three Months Ended
	July 1, 2007		July 2, 2006
Semiconductor Test Systems	$	250.6	$	307.8
Assembly Test Systems		65.1		72.3
Diagnostic Solutions		28.0		44.8

	$	343.7	$	424.9

Revenue

Net revenues for our three reportable segments were as follows (dollars in millions, except percent changes):


	For the Three Months Ended				% Change
	July 1, 2007		July 2, 2006		% Change
Semiconductor Test Systems	$	230.7	$	315.1	(26.8	)%
Assembly Test Systems		41.2		41.6	(1.0	)
Diagnostic Solutions		16.8		30.1	(44.2	)

	$	288.7	$	386.8	(25.4	)%

Semiconductor Test Systems’ revenue decrease can be attributed primarily to decreased demand across a wide range of end markets, applications and geographies.

The decrease in Diagnostic Solutions’ revenue was due primarily to the large program rollout in 2006 for the Vehicle Measurement Module product line.

Our sales by region as a percentage of total net sales were as follows:


	For the Three Months Ended
	July 1, 2007		July 2, 2006
United States	21	%	20	%
Taiwan	19		12
South East Asia	16		20
Singapore	15		12
Japan	11		11
Europe	10		15
Korea	6		9
Rest of the World	2		1

	100	%	100	%

Gross Profit

Our gross profit was as follows (dollars in millions):


	For the Three Months Ended						Period Change
	July 1, 2007			July 2, 2006			Period Change
Gross Profit	$	137.2		$	190.6		$	(53.4	)
Percent of Total Revenue		47.5	%		49.3	%

Gross profit as a percentage of revenue decreased from the second quarter of 2006 to 2007 by 1.8 percentage points. Of the decrease, 3.6 points can be attributed to lower volume in Semiconductor Test Systems offset in part by lower fixed costs and greater manufacturing efficiencies.

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 provisions. Forecasted revenue information is obtained from the 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 four quarters, is written down to estimated net realizable value.

During the three months ended July 1, 2007 and July 2, 2006, we scrapped $3.9 million and $4.4 million of inventory, respectively, and sold $0.6 million and $2.0 million of previously written-down or written-off inventory, respectively. As of July 1, 2007, we have inventory related reserves for amounts which had been written-down or written-off totaling $129.7 million. We have no pre-determined timeline to scrap the remaining inventory.

Engineering and Development

Engineering and development expenses were as follows (dollars in millions):


	For the Three Months Ended						Period Change
	July 1, 2007			July 2, 2006			Period Change
Engineering and Development	$	52.4		$	51.8		$	0.6
Percent of Total Revenue		18.2	%		13.4	%

The increase of $0.6 million in engineering and development expenses is due to an increase in Semiconductor Test Systems spending related to entry into an adjacent market offset in part by a reduction in variable employee compensation expense across all segments.

Selling and Administrative

Selling and administrative expenses were as follows (dollars in millions):


	For the Three Months Ended						Period Change
	July 1, 2007			July 2, 2006			Period Change
Selling and Administrative	$	62.8		$	73.9		$	(11.1	)
Percent of Total Revenue		21.7	%		19.1	%

The decrease of $11.1 million from the second quarter of 2006 to 2007 is primarily the result of:

•

a decrease of $6.7 million in variable employee compensation; and

•

a decrease of $4.4 million in transition expenses, including the consolidation of facilities in Massachusetts and costs associated with the outsourcing of certain information technology functions.

Restructuring and Other, Net

The tables below represent activity related to restructuring and other, net, in the three months ended July 1, 2007. The accrual for severance and benefits is reflected in accrued employees’ compensation and withholdings. The accrual for lease payments on vacated facilities is reflected in other accrued liabilities and other long-term accrued liabilities and is expected to be paid out over the lease terms, the latest of which expires in 2012. We expect to pay out approximately $1.8 million against the lease accruals over the next twelve months. Our future lease commitments are net of expected sublease income of $11.1 million as of July 1, 2007.

2007 Activities


(in thousands)	Vacated Facility Related		Severance and Benefits			Total
Balance at April 1, 2007	$	—	$	1,956		$	1,956
Charges		—		1,697			1,697
Cash payments		—		(1,404	)		(1,404	)

Balance at July 1, 2007	$	—	$	2,249		$	2,249

During the three months ended July 1, 2007, we recorded the following 2007 restructuring activities:

•

$1.7 million of severance charges related to headcount reductions of 101 people across all functions and segments;

The restructuring actions taken during the three months ended July 1, 2007, are expected to generate quarterly cost savings of approximately $1.3 million.

2006 Activities


(in thousands)	Vacated Facility Related			Severance and Benefits			Total
Balance at April 1, 2007	$	480		$	425		$	905
Charges		—			55			55
Cash payments		(145	)		(313	)		(458	)

Balance at July 1, 2007	$	335		$	167		$	502

Pre-2006 Activities


(in thousands)	Vacated Facility Related			Severance and Benefits			Gain on Sale of Product Lines			Total
Balance at April 1, 2007	$	8,079		$	868		$	—		$	8,947
Credits		(52	)		(226	)		(906	)		(1,184	)
Cash payments		(674	)		(242	)		906			(10	)

Balance at July 1, 2007	$	7,353		$	400			—		$	7,753

During the three months ended July 1, 2007, we recorded the following pre-2006 restructuring activities:

•

$0.9 million credit for earn-out payments received in the Assembly Test Systems segment from product line divestitures; and

•

$0.2 million credit for revised estimates on severance payments.

Interest Income and Expense

Interest income decreased to $9.3 million for the second quarter of 2007 from $11.7 million in the second quarter of 2006, due to lower cash balances primarily from the repayment of our 3.75% Convertible Notes (the “Notes”) in the fourth quarter of 2006 and stock repurchases made beginning in the second half of 2006. Interest expense decreased to $0.1 million in the second quarter of 2007 from $3.5 million in the second quarter of 2006, due primarily to the repayment of the Notes.

Income Taxes

The tax expense of $3.5 million and $9.4 million for the second quarter of 2007 and 2006, respectively consists primarily of foreign taxes. As a result of incurring significant operating losses from 2001 through 2003, we determined that it is more likely than not that our deferred tax assets may not be realized, and since the fourth quarter of 2002 we have established a full valuation allowance for our net deferred tax assets. If we generate sustained future taxable income against which these tax attributes may be applied, some portion or all of the valuation allowance would be reversed. If the valuation allowance were reversed, a portion would be recorded as an increase to additional paid in capital, and the remainder would be recorded as a reduction to income tax expense.

Six Months of 2007 Compared to Six Months of 2006

Bookings

Net bookings for our three reportable segments were as follows (in millions, except percent change):


	For the Six Months Ended				Percent Change
	July 1, 2007		July 2, 2006		Percent Change
Semiconductor Test Systems	$	461.9	$	627.9	(26.4	)%
Assembly Test Systems		66.1		82.4	(19.8	)
Diagnostic Solutions		24.5		50.9	(51.9	)

	$	552.5	$	761.2	(27.4	)%

The Semiconductor Test Systems’ orders decreased 26% driven by less demand across a wide range of end markets, applications and geographies. The Semiconductor Test Systems’ business is dependent on the current and anticipated market for test equipment, which historically has been highly cyclical.

The Assembly Test Systems decrease in orders was primarily due to reduced Mil/Aero program-related bookings.

Customers may delay delivery of products or cancel orders suddenly and without significant notice, subject to possible cancellation penalties. In the first half of 2007 and 2006, there were no significant cancellation penalties received. Due to possible changes in delivery schedules and cancellations of orders, our backlog at any particular date is not necessarily indicative of the actual sales for any succeeding period. Delays in delivery schedules and/or cancellations of backlog during any particular period could have a material adverse effect on our business, financial condition and results of operations.

Net bookings by region as a percentage of total net bookings were as follows:


	For the Six Months Ended
	July 1, 2007		July 2, 2006
United States	19	%	23	%
Taiwan	18		14
Singapore	16		13
South East Asia	15		17
Japan	12		13
Europe	11		12
Korea	8		7
Rest of the World	1		1

	100	%	100	%

Revenue

Net revenues for our three reportable segments were as follows (in millions, except percent changes):


	For the Six Months Ended				% Change
	July 1, 2007		July 2, 2006		% Change
Semiconductor Test Systems	$	424.6	$	609.5	(30.3	)%
Assembly Test Systems		82.5		80.3	2.7
Diagnostic Solutions		35.3		53.1	(33.5	)

	$	542.4	$	742.9	(27.0	)%

Semiconductor Test Systems’ revenue decrease can be attributed primarily to decreased demand across a wide range of end markets, applications and geographies.

The decrease in Diagnostic Solutions’ revenue was due primarily to the large program rollout in 2006 for the Vehicle Measurement Module product line.

Our sales by region as a percentage of total net sales were as follows:


	For the Six Months Ended
	July 1, 2007		July 2, 2006
United States	24	%	21	%
Singapore	15		13
South East Asia	14		20
Taiwan	13		15
Europe	12		15
Japan	12		9
Korea	7		6
Rest of the World	3		1

	100	%	100	%

Gross Profit

Our gross profit was as follows (dollars in millions):


	For the Six Months Ended						Period Change
	July 1, 2007			July 2, 2006			Period Change
Gross Profit	$	250.6		$	357.7		$	(107.1	)
Percent of Total Revenue		46.2	%		48.2	%

The decrease in gross profit as a percentage of revenue from the first six months of 2006 to 2007 was primarily the result of lower volume in Semiconductor Test Systems, which accounted for 5.6 points of the decrease. This decrease was partially offset by 1.7 points resulting from the charge in non-FLEX inventory writedowns in Semiconductor Test Systems as well as lower fixed manufacturing costs in the first six months of 2007 compared to the first six months of 2006.

Included in gross profit for the six months ended July 2, 2006 is an inventory provision of $8.0 million related to non-FLEX products. During the six months ended July 1, 2007 and July 2, 2006, we scrapped $9.2 million and $11.8 million of inventory, respectively, and sold $0.6 million and $2.0 million of previously written-down or written-off inventory, respectively. As of July 1, 2007, we have inventory related reserves for amounts which had been written-down or written-off of $129.7 million. We have no pre-determined timeline to scrap the remaining inventory.

Engineering and Development

Engineering and development expenses were as follows (dollars in millions):


	For the Six Months Ended						Period Change
	July 1, 2007			July 2, 2006			Period Change
Engineering and Development	$	101.7		$	102.4		$	(0.7	)
Percent of Total Revenue		18.7	%		13.8	%

The decrease of $0.7 million in engineering and development expenses is due to a reduction in variable employee compensation expense across all segments offset in part by an increase in Semiconductor Test Systems spending related to entry into an adjacent market.

Selling and Administrative

Selling and administrative expenses were as follows (dollars in millions):


	For the Six Months Ended						Period Change
	July 1, 2007			July 2, 2006			Period Change
Selling and Administrative	$	125.8		$	144.3		$	(18.5	)
Percent of Total Revenue		23.2	%		19.4	%

The decrease of $18.5 million from the second quarter of 2006 to 2007 is primarily the result of:

•

a decrease of $12.8 million in variable employee compensation; and

•

a decrease of $8.0 million in transition expenses, including the consolidation of facilities in Massachusetts and costs associated with the outsourcing of certain information technology functions.

These decreases were offset in part by a $2.3 million net loss in spare parts due to a fire at a third party site in Taiwan in the second quarter of 2006.

Restructuring and Other, Net

The tables below represent activity related to restructuring and other, net, in the six months ended July 1, 2007. The accrual for severance and benefits is reflected in accrued employees’ compensation and withholdings. The accrual for lease payments on vacated facilities is reflected in other accrued liabilities and other long-term accrued liabilities and is expected to be paid out over the lease terms, the latest of which expires in 2012. We expect to pay out approximately $1.8 million against the lease accruals over the next twelve months. Our future lease commitments are net of expected sublease income of $11.1 million as of July 1, 2007.

2007 Activities


(in thousands)	Vacated Facility Related			Severance and Benefits			Total
Balance at December 31, 2006	$	—		$	—		$	—
Charges		53			4,163			4,216
Cash payments		(53	)		(1,914	)		(1,967	)

Balance at July 1, 2007	$	—		$	2,249		$	2,249

During the six months ended July 1, 2007, we recorded the following 2007 restructuring activities:

•

$4.2 million of severance charges related to headcount reductions of 139 people across all functions and segments; and

•

$0.1 million of facility charges related to an early exit of an Assembly Test facility in Poway, California.

The restructuring actions taken during the six months ended July 1, 2007, are expected to generate quarterly cost savings of approximately $2.2 million.

2006 Activities


(in thousands)	Vacated Facility Related			Severance and Benefits			Total
Balance at December 31, 2006	$	625		$	1,865		$	2,490
Credits		—			(141	)		(141	)
Cash payments		(290	)		(1,557	)		(1,847	)

Balance at July 1, 2007	$	335		$	167		$	502

Pre-2006 Activities


(in thousands)	Vacated Facility Related			Severance and Benefits			Gain on Sale of Product Lines			Total
Balance at December 31, 2006	$	9,604		$	1,183		$	—		$	10,787
Credits		(69	)		(285	)		(906	)		(1,260	)
Cash payments		(2,182	)		(498	)		906			(1,774	)

Balance at July 1, 2007	$	7,353		$	400		$	—		$	7,753

During the six months ended July 1, 2007, Teradyne recorded the following pre-2006 restructuring activities:

•

$0.9 million credit for earn-out payments received in the Assembly Test Systems segment from product line divestitures; and

•

$0.3 million credit for revised estimates on severance payments.

In-process Research and Development

On March 7, 2007, we purchased in-process enabling test technology and hired certain engineers from MOSAID Technologies Inc. for $17.6 million, which includes $0.6 million in fees directly related to the acquisition. Of the purchase price, $16.7 million has been allocated to in-process research and development and therefore has been immediately charged to the statement of operations. The balance of the purchase price has been allocated to acquired workforce and fixed assets.

model using an income approach. Estimated cash flows were probability adjusted to take into account the stage of completion and the risks surrounding successful development and commercialization of the in-process technology. Such a valuation requires significant estimates and assumptions including but not limited to determining the timing and estimated costs to complete the in-process project as well as the estimated cash flows to be generated as a result of completing the project development.

Interest Income and Expense

Interest income decreased to $19.4 million for the first six months of 2007 from $21.1 million in the first six months of 2006 due to lower cash balances from the repayment of our 3.75% Senior Convertible Notes (the “Notes”) in the fourth quarter of 2006 and stock repurchases made beginning in the second half of 2006. Interest expense decreased to $0.5 million in the first six months of 2007 from $6.8 million in the first six months of 2006 due primarily to the repayment of the Notes.

Income Taxes

The tax expense of $4.8 million and $18.0 million for the first six months of 2007 and 2006, respectively, consists primarily of foreign taxes. As a result of incurring significant operating losses from 2001 through 2003, we determined that it is more likely than not that our deferred tax assets may not be realized, and since the fourth quarter of 2002 we have established a full valuation allowance for our net deferred tax assets. If we generate sustained future taxable income against which these tax attributes may be applied, some portion or all of the valuation allowance would be reversed. If the valuation allowance were reversed, a portion would be recorded as an increase to additional paid in capital, and the remainder would be recorded as a reduction to income tax expense.

Contractual Obligations

As of July 1, 2007, our purchase obligations with vendors totaled $136.3 million.

Liquidity and Capital Resources

Our cash, cash equivalents and marketable securities balance decreased $60.6 million in the first six months of 2007, to $0.9 billion. Cash and cash equivalents activity for the first six months of 2007 and 2006 was as follows (in millions):


	For the Six Months Ended
	July 1, 2007			July 2, 2006
Cash provided by (used for) operating activities:
Net income from continuing operations, adjusted for non-cash items	$	86.1		$	172.2
Changes in operating assets and liabilities, net of product lines and businesses sold		(72.0	)		27.7
Cash (used for) provided by discontinued operations		(3.0	)		3.3

Total cash provided by operating activities		11.1			203.2
Cash used for investing activities from continuing operations		(172.4	)		(201.6	)
Cash used for investing activities from discontinued operations		(0.2	)		(0.3	)

Total cash used for investing activities		(172.6	)		(201.9	)
Total cash used for financing activities		(13.3	)		(5.5	)

Decrease in cash and cash equivalents	$	(174.8	)	$	(4.2	)

Changes in operating assets and liabilities used cash of $72.0 million in the first six months of 2007 due primarily to an increase in accounts receivable of $55.8 million and a decrease in accrued income taxes of $26.0 million for taxes paid primarily in foreign jurisdictions. Accounts receivable increased $55.8 million, primarily in the Semiconductor Test Systems segment, partially due to increased volume since the end of the year and partially due to an increase in days sales outstanding from 55 days as of December 31, 2006 to 67 days as of July 1, 2007 due to increased shipments in the last month of the quarter. Inventory decreased $24.9 million in the first six months of 2007 primarily in our Semiconductor Test Systems segment and to a lesser extent in the Assembly Test Systems segment. Changes in operating assets and liabilities provided cash of $27.7 million in the first six months of 2006 due primarily to a $48.4 million decrease in inventory as a result of shorter final configuration and test cycle time with our Flex products. Accounts receivable balances increased $49.5 million, primarily in the Semiconductor Test Systems segment, due to an increase in volume. We contributed $20 million to the U.S. Qualified Pension Plan and $5.3 million to the U.K. Qualified Pension Plan during the six months ended July 2, 2006.

Investing activities consist of purchases of capital assets, the acquisition of technology for $17.6 million in the first quarter of 2007, proceeds from sales of buildings or product lines as well as the purchase, sale and maturity of marketable securities. Capital expenditures decreased by $7.7 million in the first six months of 2007 compared to the first six months of 2006 primarily in the Semiconductor Test Systems segment due to a decrease in spending on internally manufactured test systems.

Financing activities represent the sale of our common stock, repurchases of our common stock and payments on our convertible senior notes and other debt. During the six months ended July 1, 2007, we repurchased 1.7 million shares of our common stock for $27.6 million at an average price of $16.47. During the six months ended July 2, 2006, we repurchased $15 million of our 3.75% Convertible Senior Notes.

We believe our cash, cash equivalents and marketable securities balance of $0.9 billion will be sufficient to meet working capital and expenditure needs for at least the foreseeable future. Inflation has not had a significant long-term impact on earnings.

Equity Compensation Plans

In addition to our 1996 Employee Stock Purchase Plan discussed in “Note O: Stock Based Compensation” in our 2006 Form 10-K, we have a 2006 Equity and Cash Compensation Incentive Plan (the “2006 Equity Plan”), a cash and equity compensation incentive plan.

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

Recently Issued Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (SFAS No. 157). SFAS No. 157 which establishes a framework for measuring fair value and requires expanded disclosures regarding fair value measurements. This accounting standard is effective for financial statements issued for fiscal years beginning after November 15, 2007. We are currently evaluating the impact of adopting this standard.

Certain Factors That May Affect Future Results

From time to time, information we provide, statements made by our employees or information included in our filings with the SEC (including this Form 10-Q) contain statements that are not purely historical, but are

forward looking statements, made under Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which involve risks and uncertainties. In particular, forward looking statements made herein include projections, plans and objectives for our business, financial condition, operating results, future operations, or future economic performance, statements relating to the sufficiency of capital to meet working capital requirements, capital expenditures, including future lease payments and commitments and contributions to our pension plan, expectations as to customer orders and demand for our products and statements relating to backlog, bookings and cancellations, gross margins and pricing considerations. These statements are neither promises nor guarantees but involve risks and uncertainties, both known and unknown, which could cause our actual future results to differ materially from those stated in any forward looking statements. Factors that may cause such differences include, but are not limited to the following:

•

we are subject to intense competition;

•

our business is dependent on the current and anticipated market for electronics, which historically has been highly cyclical;

•

our operating results are likely to fluctuate significantly;

•

we are subject to risks of operating internationally;

•

if we fail to develop new technologies to adapt to our customers’ needs and if our customers fail to accept our new products, our revenues will be adversely affected;

•

if our suppliers do not meet product or delivery requirements, we could have reduced revenues and earnings;

•

our operations may be adversely impacted if our outsourced service providers fail to perform;

•

we have significant guarantees and indemnification obligations;

•

we have taken measures to ensure that we are prepared to address slowdowns in the market for our products, which could have long-term negative effects on our business or impact our ability to adequately address a rapid increase in customer demand;

•

we may incur significant liabilities if we fail to comply with environmental regulations;

•

we currently are and in the future may be subject to litigation that could have an adverse effect on our business;

•

if we are unable to protect our intellectual property, we may lose a valuable asset or may incur costly litigation to protect our rights;

•

our business may suffer if we are unable to attract and retain key employees;

•

we may incur higher tax rates than we expect;

•

our business is impacted by worldwide economic cycles, which are difficult to predict;

•

acts of war, terrorist attacks and the threat of domestic and international terrorist attacks may adversely impact our business;

•

provisions of our charter and by-laws and Massachusetts law make a takeover of Teradyne more difficult; and

•

we may acquire new businesses or form strategic alliances in the future, and we may not realize the benefits of such acquisitions.

These factors, and others, are discussed from time to time in our filings with the SEC, including our Annual Report on Form 10-K filed with the SEC on March 1, 2007 for the year ended December 31, 2006.

Item 3: Quantitative and Qualitative Disclosures about Market Risk

For “Quantitative and Qualitative Disclosures about Market Risk” affecting Teradyne, see Item 7a. “Quantitative and Qualitative Disclosures About Market Risks,” in our Annual Report on Form 10-K filed with the SEC on March 1, 2007. There were no material changes in our exposure to market risk from those set forth in our Annual Report for the fiscal year ended December 31, 2006.

Item 4: Controls and Procedures

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

During the period covered by this report, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.

PART II. OTHER INFORMATION

Item 1: Legal Proceedings

On September 5, 2001, after our August 2000 acquisition of Herco Technology Corp. and Perception Laminates, Inc., the former owners of those companies filed a complaint against Teradyne and two of our then executive officers in the Federal District Court in San Diego, California, asserting securities fraud and breach of contract related to the acquisition. The District Court dismissed certain of the plaintiffs’ claims, granted partial summary judgment against them with respect to their breach of contract claim and denied their motion for reconsideration. In July 2007, after an appeal by the plaintiffs, the U.S. Court of Appeals for the Ninth Circuit affirmed in part and reversed in part the District Court rulings. We have petitioned the Ninth Circuit for rehearing of the ruling that it reversed and will continue to defend the claim that was sent back to the District Court.

In 2001, we were designated as a Potentially Responsible Party (“PRP”) at a clean-up site in Los Angeles, California. This claim arose out of our acquisition of Perception Laminates in August 2000. Prior to that date, Perception Laminates had itself acquired certain assets of Alco Industries Inc. under an asset purchase agreement dated October 20, 1992. Neither Teradyne nor Perception Laminates has ever conducted any operations at the Los Angeles site. We have asked the State of California to drop the PRP designation, but California has not yet agreed to do so.

In July 2007, we paid an immaterial amount and entered into a settlement agreement with the EPA and various regulatory agencies for the State of California for claims that we were a de minimis PRP with respect to the Casmalia Disposal Site in California.

We believe that we have meritorious defenses against the above unsettled claims and intend to vigorously contest them. While it is not possible to predict or determine the outcomes of the unsettled claims or to provide possible ranges of losses that may arise, we believe the losses associated with all of these actions will not have a material adverse effect on our consolidated financial position or liquidity, but could possibly be material to our consolidated results of operations of any one period.

In addition, we are subject to legal proceedings, claims and investigations that arise in the ordinary course of business such as, but not limited to, patent, employment, commercial and environmental matters. Although there can be no assurance, there are no such matters pending that we expect to be material with respect to our business, financial position or results of operations.

Item 1A: Risk Factors

In addition to the other information set forth in this Form 10-Q, you should carefully consider the factors discussed in Part I, “Item 1A: Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2006, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

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

(c) The following table includes information with respect to repurchases we made of our common stock during the three-month period ended July 1, 2007 (in thousands except per share price):


Period	(a) Total Number of Shares (or units) Purchased (1)	(b) Average Price Paid per Share (or Unit)		(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs (1)	(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that may Yet Be Purchased Under the Plans or Programs (1)
April 2, 2007–April 29, 2007	—	$	—	10,847	$	258,870
April 30, 2007–May 27, 2007	159	$	16.48	11,006	$	256,250
May 28, 2007–July 1, 2007	1,281	$	16.73	12,287	$	234,832

(1)

In July 2006, our Board of Directors authorized a stock repurchase program. Under the program, we may spend up to an aggregate of $400 million to repurchase shares of our common stock in open market repurchases, in privately negotiated transactions or through other appropriate means over the next two years.

Item 4: Submission of Matters to a Vote of Security Holders

(a)	Our annual meeting of shareholders was held on May 24, 2007.

(b)	The following were elected as Class III directors to serve until the 2008 annual meeting of shareholders:


Nominee	Total For Votes of Each Nominee	Total Withheld Votes of Each Nominee

Edwin J. Gillis	172,859,855	2,551,540

Paul J. Tufano	156,423,551	18,987,844

Patricia S. Wolpert	172,293,876	3,117,519

All of our other directors will also continue to serve until the 2008 annual meeting of shareholders. The other directors are: James W. Bagley, Michael A. Bradley, Albert Carnesale, Vincent M. O’Reilly, and Roy A. Vallee.

(c)	The other proposals voted upon at the annual meeting were:

1. To approve an amendment to the 1996 Employee Stock Purchase Plan to increase the aggregate number of shares of common stock that may be issued pursuant to the plan by 5,000,000 shares.

2. To approve an amendment to our Amended and Restated By-Laws to adopt majority voting in uncontested director elections.

3. To ratify the selection of PricewaterhouseCoopers LLP as independent auditors for fiscal year ending December 31, 2007.

Item 6: Exhibits


Exhibit Number		Description
31.1		Certification of Principal Executive Officer, pursuant to Rule 13a-14(a) of Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)

31.2		Certification of Principal Financial Officer, pursuant to Rule 13a-14(a) of Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)

32.1		Certification pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)

32.2		Certification pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)

SIGNATURES

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

TERADYNE, INC.

Registrant

/s/ GREGORY R. BEECHER

Gregory R. Beecher

Vice President,
Chief Financial Officer and Treasurer

(Duly Authorized Officer
and Principal Financial Officer)

August 10, 2007

Total Votes

For

Total Votes

Against

Total Votes

Abstaining

Total Broker

Non-Votes