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Income Taxes
 12 Months Ended
Dec. 31, 2022
Income Taxes
S.
INCOME TAXES
The components of income before income taxes and the provision (benefit) for income taxes as shown in the consolidated statements of operations were as follows:
 
    
2022
     
2021
     
2020
  
    
(in thousands)
  
Income before income taxes:
                           
U.S.
    $ 385,968      $ 403,451      $ 312,153  
Non-U.S.
      454,417        757,504        588,862  
    
 
 
     
 
 
     
 
 
  
     $ 840,385      $ 1,160,955      $ 901,015  
    
 
 
     
 
 
     
 
 
  
Provision (benefit) for income taxes:
                           
Current:
                           
U.S. Federal
    $ 86,692      $ 58,218      $ 58,678  
Non-U.S.
      74,204        105,153        75,193  
State
      2,681        300        (1,315 ) 
    
 
 
     
 
 
     
 
 
  
       163,577        163,671        132,556  
    
 
 
     
 
 
     
 
 
  
Deferred:
                           
U.S. Federal
      (36,739 )       (15,106 )       (12,604 ) 
Non-U.S.
      1,232        (4,300 )       (5,127 ) 
State
      (3,186 )       2,101        2,043  
    
 
 
     
 
 
     
 
 
  
       (38,693 )       (17,305 )       (15,688 ) 
    
 
 
     
 
 
     
 
 
  
Total provision for income taxes:
    $ 124,884      $ 146,366      $ 116,868  
    
 
 
     
 
 
     
 
 
  
Income tax expense for 2022, 2021 and 2020 totaled $124.9 million, $146.4 million, and $116.9 million, respectively. The effective tax rate for 2022, 2021 and 2020 was 14.9%, 12.6% and 13.0%, respectively.
At December 31, 2022, Teradyne’s remaining tax liability resulting from the U.S. one-time transition tax on the mandatory deemed repatriation of foreign earnings amounts to $67.0 million. Teradyne will pay approximately $7.9 million related to the transition tax in 2023, $34.5 million in 1 to 3 years, and $24.6 million in 3 to 5 years.
Teradyne has made an accounting policy election to account for global intangible low-taxed income (“GILTI”) as a component of tax expense in the period in which Teradyne is subject to the rules and therefore did not provide any deferred tax impacts of GILTI in its consolidated financial statements.
On July 27, 2015, in Altera Corp. (“Altera”) v. Commissioner, the U.S. Tax Court issued an opinion invalidating the regulations relating to the treatment of stock-based compensation expense in an intercompany cost-sharing arrangement. A final decision was issued by the Tax Court in December 2015. The IRS appealed the decision in June 2016. On July 24, 2018, the U.S. Court of Appeals for the Ninth Circuit (“Ninth Circuit”) issued a decision that was subsequently withdrawn and a reconstituted panel conferred on the appeal. On June 7, 2019, the Ninth Circuit upheld the cost-sharing regulations. On November 12, 2019
,
the Ninth Circuit denied Altera’s petition for rehearing of its case. Altera’s application for certiorari to the Supreme Court was declined on June 22, 2020. In the fourth quarter of 2020 and 2021, Teradyne recognized approximately $2.3 million of tax expense and $2.5 million of tax benefit in 2020 and 2021, respectively, related to the inclusion of stock-based compensation in its intercompany cost-sharing arrangement.
The increase in the effective tax rate from 2021 to 2022 is primarily attributable to a shift in the geographic distribution of income, which increased the income subject to taxation in higher tax rate jurisdictions relative to lower tax rate jurisdictions, increases in expense from U.S. global low-taxed income and increases in expense from non-deductible officer compensation. These increases in expense were partially offset by increases in benefits from the U.S. foreign derived intangible income deduction and tax credits.
The decrease in the effective tax rate from 2020 to 2021 is primarily attributable to a decrease in the expense from U.S. global low-taxed income partially offset by a decrease in the benefit from foreign tax credits and a shift in the geographic distribution of income, which increased the income subject to taxation in higher tax rate jurisdictions relative to lower tax rate jurisdictions.
A reconciliation of the effective tax rate for the years 2022, 2021 and 2020 is as follows:
 
    
2022
    
2021
    
2020
  
U.S. statutory federal tax rate
      21.0 %      21.0 %      21.0 % 
Non-deductible officers’ compensation
      1.3       0.8       0.5  
U.S. global intangible low-taxed income
      1.2       0.6       2.1  
U.S. foreign derived intangible income
      (3.1 )      (2.3 )      (2.2 ) 
Foreign taxes
      (1.9 )      (4.5 )      (5.6 ) 
U.S. research and development credit
      (1.8 )      (1.4 )      (1.3 ) 
Equity compensation
      (1.1 )      (1.0 )      (0.8 ) 
Foreign tax credits
      (1.0 )      (0.5 )      (1.2 ) 
State income taxes, net of federal tax benefit
      (0.1 )      0.2       0.3  
Other, net
      0.4       (0.3 )      0.2  
    
 
 
    
 
 
    
 
 
  
       14.9 %      12.6 %      13.0 % 
    
 
 
    
 
 
    
 
 
  
Teradyne qualifies for a tax holiday in Singapore by fulfilling the requirements of an agreement with the Singapore Economic Development Board under which certain headcount and spending requirements must be met. The tax savings attributable to the Singapore tax holiday for the years ended December 31, 2022, 2021 and 2020 were $16.0 million or $0.09 per diluted share, $33.3 million or $0.18 per diluted share, and $29.9 million or $0.16 per diluted share, respectively. In November 2020, Teradyne entered into an agreement with the Singapore Economic Development Board which extended our Singapore tax holiday under substantially similar terms to the agreement which expired on December 31, 2020. The new tax holiday is scheduled to expire on December 31, 2025.
Significant components of Teradyne’s deferred tax assets (liabilities) as of December 31, 2022 and 2021 were as follows:
 
    
2022
     
2021
  
    
(in thousands)
  
Deferred tax assets:
                  
Tax credits
    $ 105,503      $ 98,378  
Research and development
      47,760        —    
Accruals
      30,747        41,459  
Inventory valuations
      22,554        20,991  
Pension liabilities
      21,335        28,722  
Lease liability
      18,679        16,484  
Deferred revenue
      14,909        11,164  
Equity compensation
      6,578        6,630  
Vacation accrual
      5,856        6,050  
Investment impairment
      3,292        3,292  
Marketable securities
      2,283        —    
Net operating loss carryforwards
      1,857        1,721  
Intangible assets
      350        —    
Other
      2,520        774  
    
 
 
     
 
 
  
Gross deferred tax assets
      284,223        235,665  
Less: valuation allowance
      (103,807 )       (97,170 ) 
    
 
 
     
 
 
  
Total deferred tax assets
    $ 180,416      $ 138,495  
    
 
 
     
 
 
  
Deferred tax liabilities:
                  
Depreciation
    $ (19,078 )     $ (10,691 ) 
Right-of-use assets
      (16,607 )       (14,738 ) 
Contingent consideration
      (5,214 )       (5,214 ) 
Intangible assets
      —        (8,531 ) 
Marketable securities
      —        (3,220 ) 
    
 
 
     
 
 
  
Total deferred tax liabilities
    $ (40,899 )     $ (42,394 ) 
    
 
 
     
 
 
  
Net deferred assets
    $ 139,517      $ 96,101  
    
 
 
     
 
 
  
As of December 31, 2022 and 2021, Teradyne evaluated the likelihood that it would realize deferred income taxes to offset future taxable income and concluded that it is more likely than not that a substantial majority of its deferred tax assets will be realized through consideration of both the positive and negative evidence. At December 31, 2022 and 2021, Teradyne maintained a valuation allowance for certain deferred tax assets of $103.8 million and $97.2 million, respectively, primarily related to state net operating losses and state tax credit carryforwards, due to the uncertainty regarding their realization. Adjustments could be required in the future if Teradyne estimates that the amount of deferred tax assets to be realized is more or less than the net amount recorded.
At December 31, 2022, Teradyne had tax effected operating loss carryforwards that expire in the following years:
 
    
State

Operating Loss

Carryforwards
     
Foreign

Operating Loss

Carryforwards
  
    
(in thousands)
  
2023
    $ 222      $ —    
2024
      6        —    
2025
      4        —    
2026
      —          —    
2027
      —          —    
2028-2032
      299        676  
2033-2037
      44        3  
Beyond 2037
      24        —    
Non-expiring
      29        550  
    
 
 
     
 
 
  
Total
    $ 628      $ 1,229  
    
 
 
     
 
 
  
Teradyne has approximately $138.4 million of tax credit carryforwards including federal business tax credits of approximately $2.4 million which expire in 2028 through 2032, and state tax credits of $136.1 million, of which $72.0 million do not expire and the remainder expires in the years 2023 through 2042.
Teradyne’s gross unrecognized tax benefits for the years ended December 31, 2022, 2021 and 2020 were as follows:
 
    
2022
     
2021
     
2020
  
    
(in thousands)
  
Beginning balance as of January 1
    $ 14,465      $ 17,903      $ 21,180  
Additions:
                           
Tax positions for current year
      1,398        1,417        1,082  
Tax positions for prior years
      13        30        66  
Reductions:
                           
Tax positions for prior years
      (56 )       (1,639 )       (2,989 ) 
Expiration of statutes
      (212 )       (3,246 )       (1,436 ) 
    
 
 
     
 
 
     
 
 
  
Ending balance as of December 31
    $ 15,608      $ 14,465      $ 17,903  
    
 
 
     
 
 
     
 
 
  
Current year additions and prior year reductions relate to federal and state research credits. Prior year reductions and expirations of statute relate to foreign net operating loss carryforwards.
Of the $15.6 million of unrecognized tax benefits as of December 31, 2022, $10.1 million would impact the consolidated income tax rate if ultimately recognized. The remaining $5.5 million would impact deferred taxes if recognized.
As of December 31, 2022, Teradyne does not anticipate a material change in the balance of unrecognized tax benefits during the next twelve months.
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 at December 31, 2022 and 2021 amounted to $0.4 million and $0.3 million, respectively. For the years ended December 31, 2022, 2021 and 2020, expense of $0.1 million, benefit of $0.9 million, and expense of $0.2 million, respectively, was recorded for interest and penalties related to income tax items.
Teradyne is subject to U.S. federal income tax, as well as income tax in multiple state, local and foreign jurisdictions. As of December 31, 2022, all material state and local income tax matters have been concluded through 2017, all material federal income tax matters have been concluded through 2017 and all material foreign income tax matters have been concluded through 2016. However, in some jurisdictions, including the United States, operating losses and tax credits may be subject to adjustment until such time as they are utilized and the year of utilization is closed to adjustment.
As of December 31, 2022, Teradyne is not permanently reinvested with respect to the unremitted earnings of non-U.S. subsidiaries to the extent that those earnings exceed local statutory and operational requirements. Remittance of those earnings is not expected to result in material income tax.