Teradyne, Inc. — Q2 2010 Form 10-Q
Business context and reporting period. Teradyne supplies automatic test equipment, principally semiconductor test systems and Systems Test products, including military/aerospace, hard disk drive, circuit-board and automotive test equipment. This unaudited quarter ended July 4, 2010; comparisons are with the quarter ended July 5, 2009. Amounts below are in millions except per-share data.
Financial performance and position
| Metric | Q2 2010 | Q2 2009 | First six months 2010 | First six months 2009 |
|---|---|---|---|---|
| Revenue | $454.8 | $169.6 | $784.4 | $290.2 |
| Gross profit | $254.3 | $47.1 | $427.8 | $80.5 |
| Gross margin | 55.9% | 27.8% | 54.5% | 27.7% |
| Operating income (loss) | $136.6 | $(62.1) | $196.6 | $(155.5) |
| Net income (loss) | $122.1 | $(66.8) | $172.2 | $(157.4) |
| Diluted EPS | $0.55 | $(0.39) | $0.79 | $(0.91) |
| Operating cash flow | — | $134.8 | $(46.8) |
- Q2 revenue rose 168%; first-half revenue rose 170%. Semiconductor Test drove the increase: Q2 segment revenue was $413.1 million, up from $102.8 million. Systems Test Group revenue fell to $41.7 million from $66.8 million.
- Management attributed the gross-margin improvement mainly to higher volume and favorable product mix, with lower inventory provisions also contributing. Q2 operating expenses included $50.4 million of engineering and development and $58.3 million of selling and administrative expenses.
- At July 4, cash and cash equivalents were $404.0 million; short- and long-term marketable securities totaled $257.3 million. Management reported combined cash, cash equivalents and marketable securities of $661.3 million, up $142.5 million from year-end 2009.
- Total assets were $1.449 billion, total liabilities $540.6 million, and shareholders’ equity $908.8 million. Current assets of $965.3 million exceeded current liabilities of $294.3 million.
- Balance-sheet debt was $147.8 million, including $2.3 million current and $145.5 million long-term. The company also had $190 million principal amount of 4.50% convertible notes due 2014; their net carrying amount was $138.6 million. The Japan loan had a 1.4% fixed rate.
- First-half investing cash outflow was $187.5 million, including $35.7 million of capital expenditures and substantial purchases of marketable securities. Financing provided $40.8 million, largely from employee stock plans. Cash and cash equivalents decreased $12.7 million during the six months.
Material changes versus the prior comparable period
- Results swung from substantial losses to profitability as the semiconductor test market recovered. Semiconductor Test sales increased sharply, while Systems Test Group sales declined.
- Gross margin increased by 28.1 percentage points in Q2 and 26.8 points for the first half. Inventory provisions fell to $1.7 million for the first half from $17.2 million a year earlier; inventory-related reserves remained $126.3 million.
- Q2 book-to-bill was 1.1, compared with 1.3 a year earlier. The company said the improvement in demand had been experienced over the prior three quarters.
- Operating cash flow improved, but working-capital movements used $106.6 million in the first half, principally reflecting a $122.8 million increase in receivables and a $63.0 million reduction in deferred revenue and customer advances.
- Restructuring and other expense was $3.0 million in the first half, versus $31.2 million in the prior-year period. Q2 2010 actions included headcount reductions and facility-exit charges.
Outlook, commentary, risks and unusual items
- Management said it expected a broader market recovery, planned to continue investing to expand addressable markets while tightly managing costs, and believed available cash and securities were sufficient for working capital and expenditures for at least the next 12 months. The filing provides no specific revenue or earnings guidance.
- Management described demand as cyclical and dependent on customers’ own markets and purchasing decisions. Semiconductor test equipment can be more volatile than broader capital equipment markets.
- The convertible notes became eligible for holder conversion under a stock-price condition during the quarter; as of August 12, 2010, no holders had converted. The notes’ initial conversion price was approximately $5.48 per share, with associated hedge and warrant transactions generally raising the effective conversion threshold to approximately $7.67. Potential dilution and settlement terms merit attention.
- Teradyne made a $20 million discretionary contribution to its U.S. qualified pension plan during the first half and an additional $15 million contribution on August 4, 2010. First-half retirement-plan contributions were $24.7 million in the cash-flow statement.
- Purchase commitments totaled $277.3 million, primarily due within one year. The company reported $56.2 million of non-cancelable lease commitments and $199.2 million of scheduled debt payments, including principal and interest as presented in its contractual-obligations table.
- The company maintained valuation allowances on U.S. and Singapore deferred tax assets, citing uncertainty about realization. Unrecognized tax benefits were $9.1 million, with $1.3 million of related accrued interest; settlement timing was not estimable.
- Management said ordinary-course legal claims were not expected to have a material adverse effect. It reported no material change in market-risk exposure and concluded disclosure controls were effective.
Important facts for investors to verify
- Whether the semiconductor-led recovery and book-to-bill trends continued after the quarter, and whether Systems Test weakness persisted.
- Receivables collection, deferred-revenue trends and operating cash conversion after the sharp first-half sales increase.
- The scale and timing of potential convertible-note conversion, dilution or cash settlement, and the effect of the hedge and warrant transactions.
- Use and liquidity of the $661.3 million cash-and-securities balance in light of purchase commitments, capital spending, debt obligations and pension funding.
- Whether inventory reserves, tax valuation allowances, restructuring obligations or legal matters require material changes in future periods.