Teradyne, Inc. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended October 2, 2011; comparisons are to periods ended October 3, 2010. Teradyne supplies automatic test equipment, principally through Semiconductor Test and Systems Test Group. Amounts below are U.S. dollars.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $344.4 million | $491.4 million | $1,132.1 million | $1,256.0 million |
| Gross profit / margin | $169.8 million / 49.3% | $271.8 million / 55.3% | $577.3 million / 51.0% | $692.6 million / 55.1% |
| Operating income | $59.5 million | $156.9 million | $239.7 million | $352.0 million |
| Continuing-operations income | $54.7 million | $145.7 million | $212.8 million | $317.4 million |
| Net income | $54.7 million | $147.3 million | $238.7 million | $319.6 million |
| Diluted EPS, continuing operations | $0.25 | $0.65 | $0.93 | $1.44 |
- Revenue mix and segment trends: Q3 Semiconductor Test revenue fell 46% to $241.4 million, as System-on-Chip and memory product sales declined. Systems Test Group revenue rose 139% to $103.0 million, primarily on higher hard-disk-drive test system sales. For nine months, Semiconductor Test revenue declined 21% to $903.8 million, while Systems Test Group rose 117% to $228.3 million.
- Margins and costs: Q3 gross margin fell 6.0 percentage points year over year, mainly due to product mix—especially higher HDD system sales—and lower volume, partly offset by lower variable compensation. Nine-month gross margin fell 4.1 points, reflecting mix, higher inventory provisions and lower volume. Q3 operating margin was approximately 17.3%, versus 31.9% a year earlier.
- Cash flow: Nine-month operating cash flow was $214.6 million, down from $389.8 million. Investing activities provided $492.0 million, largely reflecting net marketable-security maturities and sales; capital spending was $66.6 million. Financing activities used $9.2 million. Cash and equivalents were $1.095 billion at October 2.
- Liquidity and debt: Cash, cash equivalents and marketable securities totaled approximately $1.232 billion at October 2, up $176.9 million from year-end 2010. Balance-sheet debt was about $159.4 million on a carrying-value basis; the convertible notes have $190 million principal outstanding, bear 4.5% interest and mature in March 2014. Management said liquidity after the subsequent LitePoint acquisition would be sufficient for working capital and expenditures for at least 12 months.
Material changes and unusual items
- On October 5, 2011, after quarter-end, Teradyne acquired LitePoint, a wireless test-solutions company, for approximately $510 million net of acquired cash and tax benefits, plus up to $70 million contingent on performance targets through 2012. The cash purchase price was paid in cash; the contingent amount may be paid in cash or stock. The purchase-price allocation was not complete at filing.
- Teradyne sold Diagnostic Solutions on March 21, 2011, for $40.2 million cash. Nine-month results include a $24.4 million after-tax disposal gain and $1.5 million income from discontinued operations; these items lifted reported net income above continuing-operations income.
- Q3 inventory provisions were $4.4 million, primarily in Semiconductor Test; nine-month provisions were $10.8 million, versus $5.2 million a year earlier. Inventory reserves for written-down or written-off amounts totaled $125.1 million at October 2.
- Teradyne repurchased 2.0 million shares for $23.9 million during the first nine months under its $200 million authorization. Nine-month results also included $1.3 million of acquisition costs and a $0.9 million non-U.S. pension-settlement charge.
Outlook, commentary and risks
- The filing provides no specific numerical revenue or earnings guidance. Management described the business as cyclical and sensitive to customer purchasing patterns and semiconductor-industry demand. It noted increased price competition in Semiconductor Test, which could pressure gross margins, and said engineering investment is intended to help lower test costs.
- Q3 total-company book-to-bill was 0.7; Semiconductor Test was 0.8 and Systems Test Group 0.4. Management cautioned that customer demand can fluctuate and historically has caused significant variation in results.
- Management maintained valuation allowances on U.S. and Singapore deferred tax assets due to uncertainty over realization. A future reduction could create a significant non-cash tax benefit, but timing and amount are uncertain.
- Risks include acquisition integration and realization of LitePoint benefits; semiconductor cyclicality and competitive pricing; and potential disruption from natural disasters, including Japan-related supply-chain and customer impacts. Purchase commitments totaled $132.2 million, of which $127.3 million was due within one year. Management stated that ordinary-course legal matters were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether Semiconductor Test demand and the 0.7 company book-to-bill recover, and whether product mix and pricing continue to weigh on margins.
- Post-LitePoint cash, securities and debt levels, acquisition funding effects, integration costs, contingent consideration and realized strategic benefits.
- Inventory reserve adequacy and future provisions, given downward demand revisions and $125.1 million of previously written-down or written-off inventory.
- The treatment and potential dilution associated with the $190 million convertible notes; holders became eligible to convert under specified conditions, although none had converted as of November 14, 2011.
- Changes to U.S. and Singapore deferred-tax valuation allowances and the timing of contractual, purchase and retirement-plan obligations.