Teradyne, Inc. — Q3 2014 Form 10-Q
Business context and reporting period. Teradyne supplies automatic test equipment for semiconductors, wireless products, and system test markets, including military/aerospace, storage, and circuit-board testing. This unaudited quarterly report covers the three and nine months ended September 28, 2014; comparisons are with the periods ended September 29, 2013. Financial amounts below are in millions of dollars unless stated otherwise.
Financial performance and position
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $478.0 | $433.4 | $1,324.6 | $1,142.6 |
| Gross profit | $261.1 | $254.3 | $718.6 | $648.9 |
| Gross margin | 54.6% | 58.7% | 54.2% | 56.8% |
| Operating income | $98.2 | $93.5 | $222.6 | $183.8 |
| Net income | $82.9 | $69.5 | $185.1 | $142.6 |
| Diluted EPS | $0.38 | $0.29 | $0.83 | $0.61 |
| Operating cash flow | Not separately presented for the quarter | $317.1 | $224.4 |
- Revenue increased about 10% year over year in Q3 and 16% for the first nine months. Semiconductor Test drove growth, while Wireless Test revenue declined.
- Gross margin fell 4.1 percentage points in Q3 and 2.6 points for the nine-month period. Management attributed the pressure mainly to product mix in Semiconductor Test and lower Wireless Test sales; higher inventory provisions also weighed on the nine-month margin.
- Cash, cash equivalents, and marketable securities totaled $1.181 billion at September 28, 2014, down $18.3 million from year-end 2013. Current assets were $1.401 billion and current liabilities $329.8 million. No current or long-term debt was reported at quarter-end.
- The $190 million convertible notes were repaid through net-share settlement in March 2014, and the Japan loan was fully repaid. Nine-month financing cash use included $191.0 million of debt payments and $24.4 million of dividends.
- Nine-month investing cash use was $254.4 million, including $146.4 million of capital spending, compared with $82.9 million of capital spending in the prior-year period. Management cited testers placed for customer leases.
Material changes and segment results
- Q3 Semiconductor Test revenue rose to $380.1 million from $304.2 million, primarily on higher system-on-a-chip volume, including application processors, and increased service revenue. Nine-month revenue grew 32% to $1.063 billion, driven by application processors and microcontrollers.
- Q3 Wireless Test revenue fell 41% to $54.8 million, and nine-month revenue fell 36% to $144.7 million, primarily due to lower cellular and connectivity product volume.
- Q3 System Test revenue rose 19% to $43.1 million; nine-month revenue increased 8% to $116.6 million. Higher Production Board Test and Storage Test sales were partly offset over nine months by lower Mil/Aero sales.
- Nine-month inventory provisions rose to $21.5 million from $9.6 million, reflecting product transition and downward demand revisions. The company reported $116.1 million of inventory-related reserves for written-down or written-off inventory at quarter-end.
- Accounts receivable increased $163.7 million from year-end, which management attributed to higher sales and higher days sales outstanding: 61 days versus 50 days at December 31, 2013.
- Teradyne began paying quarterly dividends in 2014: $0.06 per share per quarter. It reported no share repurchases during the quarter.
Outlook, commentary, risks, and unusual items
- No specific revenue or earnings guidance is provided in the filing. Management said liquidity should be sufficient for working capital and expenditures for at least the next 12 months, and forecast 2014 capital additions of $169 million.
- Following new U.S. mortality tables and updated assumptions, Teradyne estimated an approximately $50 million actuarial loss at the fourth-quarter pension remeasurement. It estimated the U.S. qualified pension plan to be about 91% funded and planned to contribute approximately $30 million in Q4 to restore full funding.
- Management identified cyclicality in semiconductor and electronics demand as a significant risk: customers may delay or accelerate equipment purchases as demand changes. Other disclosed risks include inventory obsolescence, uncertain tax positions, foreign-exchange exposure, and risks referenced in the company’s 2013 Form 10-K.
- Teradyne held approximately $460 million of cash, cash equivalents, and marketable securities outside the United States; repatriation would incur additional taxes. Purchase commitments totaled $155.2 million, $147.4 million due within one year.
- The effective tax rate was 18% in Q3 and 16% for nine months. The Singapore tax holiday reduced nine-month tax expense by $12.3 million, or $0.05 per diluted share, and was expected to expire December 31, 2015. Reserves for uncertain tax positions increased to $31.6 million from $21.2 million at year-end.
- Other notable items: a $6.6 million one-time stock-compensation charge tied to former CEO Michael Bradley’s retirement agreement; a $0.6 million gain from reducing ZTEC contingent consideration; and 21.2 million shares issued during the nine months as convertible-note warrants were exercised and net-share settled.
- After quarter-end, Teradyne acquired substantially all assets of Avionics Interface Technologies for approximately $18.9 million, plus up to $2.1 million tied to targets. The purchase-price allocation was not yet complete. Management said ordinary-course legal proceedings were not expected to have a material adverse effect.
Most important facts for investors to verify
- Whether Semiconductor Test demand and its product mix sustain growth without further gross-margin deterioration.
- Whether Wireless Test volumes recover, and whether inventory provisions and the $116.1 million inventory reserve indicate further demand or obsolescence risk.
- Whether accounts receivable and DSO normalize as sales convert to cash, given the $163.7 million receivables increase.
- The eventual pension remeasurement, the estimated $50 million actuarial loss, and the planned $30 million Q4 contribution.
- The financial contribution and completed purchase-price allocation for the post-quarter AIT acquisition, and the consequences of overseas cash repatriation and the Singapore tax-holiday expiry.