Teradyne, Inc. — Q3 2019 Form 10-Q
Business context and period. Unaudited results cover the three and nine months ended September 29, 2019, compared with the periods ended September 30, 2018. Teradyne supplies semiconductor and other test systems and industrial automation products, including collaborative robots and autonomous mobile robots.
Financial performance
- Revenue: Q3 revenue was $582.0 million, up 2.7% year over year; nine-month revenue was $1.640 billion, up 3.7%. Q3 product revenue was $488.2 million and services revenue was $93.9 million.
- Profit and margins: Q3 gross profit was $345.0 million (59.3% margin, versus 58.9%); operating income was $154.9 million (26.6% margin); net income was $135.9 million, or $0.75 diluted EPS. Nine-month net income was $342.4 million, or $1.92 diluted EPS, compared with $308.0 million and $1.57.
- Cash flow: Nine-month operating cash flow was $362.4 million, versus $290.5 million. Capital expenditures were $96.0 million; operating cash flow less capex was approximately $266.4 million. Investing activities used $266.9 million and financing activities used $427.9 million.
- Liquidity and debt: Cash and cash equivalents were $593.9 million and marketable securities totaled $446.1 million, or $1.040 billion combined. Current assets were $1.655 billion and current liabilities $493.7 million. Convertible debt had a $390.9 million carrying value and $460.0 million principal, due December 2023. The company terminated its $350 million revolving credit facility in June 2019.
- Capital returns: Teradyne repurchased 8.8 million shares for $368.8 million during the first nine months, and paid $46.3 million in dividends. The quarterly dividend was $0.09 per share. Management intended to repurchase $500 million of shares in 2019 under its authorization.
Changes versus the prior comparable period
- Q3 revenue increased $15.2 million. Semiconductor Test declined 4.7%, while System Test grew 47.8%, Wireless Test 23.3%, and Industrial Automation 4.6%.
- For the first nine months, Semiconductor Test revenue fell 3.2%; Industrial Automation rose 18.7%, System Test 26.2%, and Wireless Test 22.3%.
- Gross margin improved 0.4 percentage points in Q3 and 0.7 points year to date, mainly from favorable Semiconductor Test and Storage Test product mix. Q3 net income rose from $120.0 million to $135.9 million.
- Operating cash flow increased year over year. Cash and marketable securities combined declined $164.5 million from year-end 2018, primarily reflecting share repurchases, dividends, capital spending, acquisitions and investment activity.
Outlook, commentary and risks
- Management said test-business revenue exceeded forecasts in the first nine months, supported by semiconductor test demand in China, early 5G investments and strength in System Test, but said it was difficult to predict whether positive trends would continue in 2020.
- Management expected 2019 Industrial Automation revenue growth to be below the low end of its long-term 30%–40% range, while continuing investment in the business.
- Teradyne cited cyclical customer demand and concentration among a limited number of test-equipment customers. China represented 31% of Q3 revenue, up from 21% a year earlier.
- The filing identifies U.S. export restrictions as a risk, including restrictions affecting Huawei. Teradyne said certain U.S.-manufactured products were subject to the restrictions; it had not seen significant sales impact to date but warned future effects could be material.
- Unusual items included a $16.5 million year-to-date gain from reducing the fair value of MiR contingent consideration, partly offset by severance, acquisition-related costs and a $2.1 million charge for modification of the former CFO’s equity awards. The contingent consideration valuation depends on forecasts and other unobservable assumptions.
- After quarter-end, Teradyne agreed to acquire AutoGuide for $58 million cash plus potential earn-outs of up to $107 million, subject to closing conditions and regulatory approval. Purchase commitments were $360.3 million, mostly due within one year. Management said ordinary-course legal matters were not expected to have a material adverse effect.
- The company reported a 9.2% effective tax rate for the first nine months, including a $12.0 million tax-holiday benefit. The Singapore tax holiday is scheduled to expire December 31, 2020. A possible $5 million–$11 million tax exposure related to the Altera cost-sharing matter had not been reserved.
Important facts for investors to verify
- Whether semiconductor test demand, China exposure and 5G-related strength persist, and whether export controls alter sales or customer demand.
- Whether Industrial Automation can recover toward management’s 30%–40% long-term growth range, given current below-range growth and segment losses.
- The quality and sustainability of operating cash flow, including receivables growth and the use of receivables factoring; $113.4 million of receivables were factored in the first nine months.
- The eventual MiR earn-out payments, which could reach $81 million, and the price, earn-outs and integration outcome for the proposed AutoGuide acquisition.
- The cash requirements and dilution potential of the convertible notes, warrants, share repurchases and dividends; note fair value was $867.4 million versus $390.9 million carrying value.