Teradyne, Inc. — Q1 2011 Form 10-Q
Reporting period: Three months ended April 3, 2011; comparisons are with the three months ended April 4, 2010. Figures are in U.S. dollars unless stated otherwise.
Business context
Teradyne supplies automatic test equipment, principally semiconductor test systems and Systems Test Group products, including military/aerospace, hard disk drive and circuit-board test systems. On March 21, 2011, Teradyne sold its Diagnostic Solutions business to SPX Corporation for $40.6 million in cash, subject to a post-closing working-capital adjustment; it is reported as discontinued operations.
Financial performance
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Revenue | $377.2 million | $319.3 million |
| Gross profit / margin | $192.4 million / 51.0% | $169.9 million / 53.2% |
| Operating income | $78.5 million | $59.0 million |
| Continuing-operations income | $68.1 million | $49.1 million |
| Net income | $94.9 million | $50.1 million |
| Operating cash flow | $19.6 million | $26.1 million |
- Revenue increased 18% year over year. Semiconductor Test revenue rose 10% to $319.3 million; Systems Test Group revenue rose 96% to $57.9 million, primarily on higher hard disk drive test sales.
- Operating margin was approximately 20.8%, compared with 18.5%. Gross margin fell 2.2 percentage points, reflecting product mix and higher inventory provisions, partly offset by volume and cost absorption.
- Net income includes $1.5 million from discontinued operations and a $25.2 million after-tax gain on the sale. Continuing-operations diluted EPS was $0.29; diluted EPS including discontinued operations and the sale gain was $0.41.
- Continuing-operations cash from operations was $23.8 million, versus $24.8 million a year earlier. Working-capital movements used $82.5 million, including lower accrued compensation and customer advances, partly offset by higher accounts payable.
Balance sheet, liquidity and debt
- At April 3, 2011, cash and cash equivalents were $420.3 million; marketable securities were $680.0 million, including $244.5 million classified as long-term. Combined cash, cash equivalents and marketable securities totaled about $1.1 billion.
- Total assets were $1.875 billion; current assets were $1.251 billion and current liabilities $333.5 million. Shareholders’ equity was $1.227 billion.
- Reported debt was approximately $154.2 million carrying value: $2.4 million current and $151.7 million long-term. This includes convertible notes with $190 million principal, due March 2014, and a Japan loan. Management reported the notes became convertible under specified terms during the quarter; no holders had exercised as of May 13, 2011.
- Cash and cash equivalents increased $22.5 million during the quarter. Capital expenditures were $22.1 million. Management said available cash, cash equivalents and marketable securities should cover working-capital and expenditure needs for at least the next 12 months.
Changes, outlook and risks
- Segment book-to-bill was 1.2 overall (1.1 Semiconductor Test; 1.3 Systems Test Group), down from 1.6 overall in Q1 2010. The filing provides no specific numerical revenue or earnings guidance.
- Inventory provisions were $4.6 million, up from $1.2 million a year earlier, mainly due to downward revisions to forecast demand. Teradyne reported $125.0 million of inventory previously written down or written off.
- Management described demand as cyclical and noted that customer purchasing can shift with semiconductor-industry conditions. It cited continued investment in the business while managing costs.
- Japan’s 2011 natural disasters could disrupt customers, suppliers and component supply, increase costs or affect demand. Teradyne had purchased buffer inventory for certain Japan-sourced components and said the situation remained uncertain.
- Purchase commitments totaled $239.5 million, generally due within one year. Legal proceedings arising in the ordinary course were not expected by management to have a material adverse effect. Unrecognized tax benefits and related accrued interest were $7.1 million and $1.0 million, respectively; settlement timing was uncertain.
- The company maintained U.S. and Singapore deferred-tax valuation allowances because realization remained uncertain. Restructuring accruals totaled $3.0 million, with facility-exit payments expected through lease expirations, the latest in 2013.
Important facts for investors to verify
- Whether the lower year-over-year book-to-bill and customer demand forecasts signal a sustained slowdown, and how they affect future orders and inventory.
- How the $4.6 million inventory provision and $125.0 million of previously written-down or written-off inventory may affect margins, utilization or future write-offs.
- The sale’s final working-capital adjustment and the sustainability of results excluding the one-time disposal gain.
- Potential dilution or cash obligations if convertible-note holders exercise conversion rights, and the effect of the associated hedge and warrant transactions.
- Whether Japan-related supply-chain disruption, tax-valuation changes, legal matters or purchase commitments result in material costs or operational impacts.