Teradyne, Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012; comparisons are to the quarter and nine months ended October 2, 2011. Unless otherwise stated, financial amounts are in millions of dollars. Teradyne supplies automatic test equipment through Semiconductor Test, Systems Test Group, and Wireless Test.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $463.4 | $344.4 | $1,408.3 | $1,132.1 |
| Gross profit / margin | $260.2 / 56.2% | $170.4 / 49.5% | $760.6 / 54.0% | $577.9 / 51.1% |
| Operating income | $108.1 | $61.5 | $312.0 | $241.6 |
| Continuing-operations income | $88.6 | $56.7 | $233.6 | $214.7 |
| Net income | $88.6 | $56.7 | $233.6 | $240.8 |
| Diluted EPS | $0.39 | $0.26 | $1.02 | $1.06 |
- Q3 revenue rose about 35%; nine-month revenue rose about 24%. Product revenue drove most of the increase; services revenue was comparatively steady.
- Q3 gross margin improved 6.7 percentage points; nine-month gross margin improved 2.9 points. Management attributed much of the improvement to LitePoint, acquired in October 2011, which recorded its highest quarterly and nine-month revenue to date.
- Nine-month continuing-operations income increased, but net income declined versus 2011 because the prior-year period included income and a $24.4 million after-tax gain from selling Diagnostic Solutions.
- Q3 segment revenue: Semiconductor Test $311.0 million, Systems Test Group $33.8 million, and Wireless Test $118.6 million. Semiconductor Test increased 29% year over year; Systems Test Group declined 67%, primarily on lower Storage Test sales. Wireless Test was added through the LitePoint acquisition.
- Nine-month revenue by segment was $943.6 million for Semiconductor Test, $202.9 million for Systems Test Group, and $261.8 million for Wireless Test. Semiconductor Test increased 4%; Systems Test Group declined 11%.
Cash flow, balance sheet, and debt
- Nine-month operating cash flow was $362.2 million, versus $214.6 million in the prior-year period. Capital expenditures were $91.1 million, implying approximately $271.1 million of operating cash flow less capital expenditures.
- Cash and cash equivalents were $485.7 million. Marketable securities totaled $523.1 million, bringing cash and securities to approximately $1.009 billion, up $254.2 million from year-end 2011. Cash alone decreased $88.0 million during the nine months, in part as funds were invested in marketable securities.
- Total debt carrying value was approximately $171.4 million: $166.3 million for convertible notes and about $5.2 million for the Japan loan. The notes have $190 million principal and mature March 15, 2014. Holders gained a conversion right under specified share-price conditions; no holders had converted as of November 9, 2012.
- Current assets were $1.311 billion and current liabilities $349.3 million. Total liabilities were $678.0 million and shareholders’ equity $1.785 billion.
- Investing activities used $430.6 million, including $513.1 million of security purchases and $91.1 million of capital spending, partly offset by security sales and maturities. Financing activities used $19.7 million, including $44.0 million of contingent-consideration payments.
Material changes, outlook, and risks
- Bookings were below shipments: total-company book-to-bill was 0.5 in Q3, compared with 0.7 a year earlier. Semiconductor Test was 0.5, Systems Test Group 0.7, and Wireless Test 0.4. No numerical forward revenue or earnings guidance is provided in the supplied filing text.
- Effective January 1, 2012, Teradyne retrospectively changed pension accounting to recognize actuarial gains and losses and plan-asset fair-value changes more immediately. Management said this improves transparency. Without the change, 2012 net income would have been $73.2 million for Q3 and $213.4 million for nine months, versus reported $88.6 million and $233.6 million; diluted EPS would have been $0.32 and $0.93 rather than $0.39 and $1.02.
- The tax provision included an approximately $13 million deferred tax benefit related to planned repatriation of Japanese subsidiary earnings. Effective tax rates were 14.0% for Q3 and 21.15% for the nine months; approximately $300 million of cash was held outside the United States and would incur additional tax if repatriated.
- Inventory provisions were $5.5 million in Q3 and $16.4 million year to date, reflecting product transitions and weaker or revised demand forecasts. Inventory previously written down or written off totaled $132.4 million; the filing gives no predetermined timeline for scrapping the remainder.
- Teradyne recorded an $8.4 million reduction in LitePoint contingent consideration due to lower specified new-product revenue expectations. The September 30 balance was $16.5 million; Teradyne paid a further $14.4 million on October 24, 2012. Separately, approximately $52.0 million of pension lump-sum payments were expected, with $39.5 million paid in Q3 and the remainder expected before year-end.
- Management notes that customer demand is cyclical and seasonal and that customers may delay or accelerate purchases. Purchase commitments totaled $217.6 million, mostly due within one year. Management did not expect ordinary-course legal proceedings to have a material adverse effect. The filing reports no material change in market-risk exposure and says disclosure controls were effective.
Key facts for investors to verify
- How much of revenue growth and margin expansion reflects LitePoint acquisition contributions versus organic trends, especially in Wireless Test.
- Whether the 0.5 book-to-bill ratio and Systems Test Group weakness signal continued pressure on future shipments.
- The earnings and cash effects of the pension accounting change, planned earnings repatriation, and expected pension lump-sum payments.
- The timing and final amount of contingent consideration, including the post-quarter $14.4 million payment, and the remaining convertible-note obligation due in 2014.
- Whether inventory reserves, purchase commitments, and overseas cash-related taxes materially affect future results or liquidity.