Teradyne, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 27, 2020; comparisons are with the periods ended September 29, 2019. Amounts are U.S. dollars; financial statement amounts below are in millions unless otherwise noted.
Business context
Teradyne supplies semiconductor, system and wireless test equipment, as well as collaborative robots and autonomous mobile robots. Its four reportable segments are Semiconductor Test, System Test, Industrial Automation and Wireless Test. Sales are cyclical and concentrated among a limited number of significant test-equipment customers.
Financial results and liquidity
| Metric | Q3 2020 | Q3 2019 | First nine months 2020 | First nine months 2019 |
|---|---|---|---|---|
| Revenue | $819.5 | $582.0 | $2,362.5 | $1,640.3 |
| Gross profit | $458.9 | $345.0 | $1,336.0 | $956.6 |
| Gross margin | 56.0% | 59.3% | 56.5% | 58.3% |
| Operating income | $269.7 | $154.9 | $694.3 | $382.0 |
| Net income | $222.7 | $135.9 | $587.8 | $342.4 |
| Diluted EPS | $1.21 | $0.75 | $3.23 | $1.92 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $608.5 | $362.4 |
- Q3 revenue rose 40.8% year over year and net income rose 63.9%. Nine-month revenue rose 44.0% and net income rose 71.7%.
- Q3 gross margin declined 3.3 percentage points, primarily due to Semiconductor Test product mix and higher logistics and operating costs associated with COVID-19. Nine-month gross margin declined 1.8 points, primarily due to product mix.
- Nine-month operating cash flow was $608.5 million. Capital expenditures were $146.9 million, implying cash flow after capital expenditures of approximately $461.6 million. Investing activities used $292.6 million and financing activities used $143.4 million.
- At September 27, cash and cash equivalents were $945.2 million; marketable securities totaled $396.0 million. Current assets were $2,243.6 million and current liabilities $671.8 million.
- Convertible debt had a $406.2 million net carrying value and $460.0 million principal, with maturity in December 2023. The $400 million secured revolving facility was undrawn as of November 2, 2020. The filing reports no short-term debt.
Material changes and segment performance
- Q3 Semiconductor Test revenue increased 48.9% to $592.1 million, led by mobility and flash/DRAM memory testing. System Test revenue increased 61.3% to $118.2 million, driven by Storage Test and Defense/Aerospace. Industrial Automation revenue was nearly flat at $68.7 million; Wireless Test declined 4.3% to $40.5 million.
- For the first nine months, Semiconductor Test revenue increased 55.9% to $1,735.8 million and System Test increased 49.4% to $306.1 million. Wireless Test increased 18.4% to $133.2 million, reflecting 5G and WiFi 6 tester sales. Industrial Automation revenue declined 10.5% to $187.8 million amid weaker collaborative-robot demand.
- Industrial Automation recorded a $32.0 million pretax loss for the first nine months, versus a $10.7 million loss in the comparable period; management cited lower demand and higher engineering and development spending.
- Accounts receivable increased to $587.2 million from $362.4 million at year-end 2019, primarily reflecting higher sales. Share repurchases were suspended effective April 1; the company repurchased $88.5 million of shares in the first nine months, versus $368.8 million in the prior-year period.
Outlook, risks and unusual items
- Management said test demand was strong through Q3 and into Q4, with strengthening demand in mobility, 5G and memory testing; it noted incremental automotive-sector softening. Industrial Automation demand recovered in Q3 from its Q2 low. The filing gives no quantified earnings or revenue guidance and emphasizes uncertainty about near-term demand.
- COVID-19 increased costs and reduced Industrial Automation demand. Management warned that renewed shutdowns, workforce or facility restrictions, supplier disruption, transport delays and broader economic weakness could affect production, customer demand and results. It said the supply chain had not yet experienced significant pandemic-related interruptions.
- Q3 operating expenses included a $27.2 million gain from a lower estimated AutoGuide contingent-consideration liability, mainly due to lower forecasted results, and a $1.1 million gain on an acquisition-related compensation liability. The AutoGuide sellers have alleged non-compliance with earn-out provisions; Teradyne disputes the allegation, and the dispute could affect the ultimate payment. The maximum AutoGuide contingent consideration is $106.9 million.
- The Singapore tax holiday contributed $24.9 million, or $0.14 per diluted share, of tax savings in the first nine months. It was scheduled to expire December 31, 2020; Teradyne was discussing an extension. The nine-month effective tax rate was 13.3%, versus 9.2%.
- Other items include $13.1 million of inventory provisions for the first nine months and a $4.0 million contract-termination settlement charge. Purchase commitments totaled $669.3 million, of which $663.0 million was due within one year. The company also disclosed potential export-control exposure, including expanded U.S. restrictions affecting Huawei and certain China-related sales or supply chains.
- Management stated that cash and anticipated operating cash flows were expected to cover working-capital and other capital and liquidity needs for at least 12 months. Ordinary-course legal claims were considered unlikely to have a material adverse effect; outcomes and possible loss ranges were not quantified.
Most important facts for investors to verify
- Whether strong test demand continued after Q3, and how customer concentration and semiconductor-market cyclicality affect subsequent results.
- Underlying gross-margin trends excluding product mix, pandemic-related costs and the Q3 contingent-consideration gain.
- Industrial Automation recovery, operating losses and the assumptions behind contingent earn-outs, including the AutoGuide seller dispute.
- Cash conversion and working-capital needs, particularly the sharp rise in receivables, alongside capital spending and purchase commitments.
- Conversion dilution and debt economics: the notes’ principal, carrying value, maturity and conversion terms, plus facility covenant compliance and availability.
- Whether the Singapore tax holiday was extended and the eventual impact of export-control changes on sales, support and supply chains.