Teradyne, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended October 3, 2021; comparable periods ended September 27, 2020. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions where shown.
Business context
Teradyne supplies automated test equipment for semiconductors, wireless products, storage and complex electronics, and industrial automation products including collaborative and mobile robots. Its four reportable segments are Semiconductor Test, System Test, Industrial Automation and Wireless Test. Management notes that test-equipment sales are concentrated among a limited number of significant customers.
Key financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $950.5 million | $819.5 million | $2,817.8 million | $2,362.5 million |
| Gross profit | $571.0 million | $458.9 million | $1,679.6 million | $1,336.0 million |
| Gross margin | 60.1% | 56.0% | 59.6% | 56.5% |
| Operating income | $322.4 million | $269.7 million | $944.3 million | $694.3 million |
| Net income | $256.7 million | $222.7 million | $790.5 million | $587.8 million |
| Diluted EPS | $1.41 | $1.21 | $4.26 | $3.23 |
| Operating cash flow | Not separately provided | Not separately provided | $767.1 million | $608.5 million |
- Q3 revenue increased 16% year over year; net income increased 15% and diluted EPS increased 17%. Nine-month revenue rose 19%, net income 34%, and diluted EPS 32%.
- Operating margin was approximately 33.9% in Q3 2021 versus 32.9% in Q3 2020. Nine-month operating margin was approximately 33.5% versus 29.4%.
- Nine-month capital expenditures were $103.2 million, implying operating cash flow less capital expenditures of approximately $663.9 million. Financing used $757.3 million, including $406.2 million of share repurchases, $302.0 million of convertible-note principal payments and $49.7 million of dividends.
- Cash and cash equivalents were $1,079.5 million; marketable securities were $370.1 million. Combined cash and securities totaled $1,449.5 million, down $104.9 million from December 31, 2020.
- Convertible debt had a $145.0 million net carrying value and $158.0 million principal outstanding at quarter-end. Total liabilities were $1,221.8 million. The $400 million revolving credit facility was undrawn as of November 5, 2021; the company reported covenant compliance.
- The effective tax rate was 13.8% for Q3 and 12.7% for the nine-month period. The Singapore tax holiday contributed $23.9 million, or $0.13 per diluted share, to nine-month tax savings.
Segment and period comparisons
- Q3 Semiconductor Test revenue increased 16% to $688.2 million, primarily on mobile application processor and industrial and automotive device testing, partly offset by lower high-performance-compute and DRAM tester sales.
- Q3 System Test revenue declined 13% to $102.6 million, mainly from lower hard-disk-drive tester sales. Industrial Automation revenue rose 33% to $91.0 million, led by collaborative robot demand; Wireless Test increased 70% to $68.7 million, including WiFi 7 and ultra-wideband demand.
- Nine-month revenue growth occurred in all four segments: Semiconductor Test +18% to $2,050.3 million; System Test +11% to $340.3 million; Industrial Automation +40% to $263.2 million; and Wireless Test +24% to $164.5 million.
- Gross-margin expansion reflected higher-margin Semiconductor Test product mix and operating leverage. Selling and administrative and engineering and development expenses rose with higher spending and variable compensation.
- Q3 2020 operating expenses benefited from a $27.2 million gain on reduced AutoGuide contingent consideration, whereas Q3 2021 recorded $1.2 million of restructuring and other expense. Q3 2021 also included a $20.2 million loss on convertible-debt conversions in other expense, making reported comparisons affected by unusual items.
Liquidity, outlook and risks
- Management said existing cash, securities and anticipated operating cash flows were expected to cover working-capital and other capital and liquidity requirements for at least the next 12 months. No numerical revenue or earnings guidance is provided in the filing.
- As of October 3, unsatisfied performance obligations were $1,293.0 million; management expected to recognize 94% within 12 months, 5% in one to three years and 1% thereafter.
- COVID-19 continued to disrupt operations, suppliers and logistics and increased costs; management could not quantify the full effect on results. A global electrical-component shortage had extended lead times, raised costs and delayed some customer orders. The company warned that further supply constraints, supplier price increases or delivery failures could impair revenue and profitability.
- Q3 revenue was geographically concentrated in Asia Pacific, which represented $769.8 million, or about 81% of total revenue. Taiwan accounted for 27% and China 19% of Q3 revenue by customer-site location. Customer concentration is also a stated risk.
- Industrial Automation LLC’s arbitration claim alleges breach of AutoGuide earn-out provisions and seeks acceleration of $106.9 million. Teradyne denied the allegations; the hearing was scheduled for March 21, 2022. The filing says the outcome cannot be predicted. The related contingent consideration liability was reduced to zero, but the arbitration could affect any ultimate amount payable.
- Teradyne repurchased 3.3 million shares for $406.2 million during the first nine months under a new authorization of up to $2.0 billion and stated an intention to repurchase at least $600 million in 2021. Future buybacks and dividends remain at the board’s discretion.
- On November 4, 2021, after quarter-end, the company elected to require cash settlement of principal on remaining convertible notes. It also noted potential dilution from related warrants and that counterparties’ hedging activity could affect the share price.
Most important facts for investors to verify
- Whether component shortages, supplier capacity and COVID-related disruptions are limiting shipments, raising costs or changing customer demand.
- How sustainable Semiconductor Test growth and elevated gross margins are, given segment and product mix and significant customer concentration.
- The outcome and potential financial exposure from the AutoGuide earn-out arbitration, including the difference between the claim amount and the contingent consideration recorded at quarter-end.
- The cash, dilution and EPS effects of convertible-note conversions, the November settlement election and the associated warrant transactions.
- Whether the $1.293 billion of performance obligations converts to revenue on the expected timetable, and whether capital returns remain consistent with cash generation and investment needs.