Teradyne, Inc. — Q3 2018 Form 10-Q
Business context and reporting period. Teradyne supplies semiconductor and other electronic test equipment, plus collaborative and autonomous industrial robots. This unaudited report covers the quarter and nine months ended September 30, 2018; comparisons are with the periods ended October 1, 2017. Amounts below are U.S. dollars. Teradyne adopted ASC 606 on January 1, 2018, so reported 2018 and 2017 revenue and earnings are not fully comparable.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $566.8 million | $503.4 million | $1,581.2 million | $1,657.2 million |
| Gross profit / margin | $333.7 million / 58.9% | $294.9 million / 58.6% | $910.9 million / 57.6% | $950.5 million / 57.4% |
| Operating income / margin | $143.6 million / 25.3% | $129.1 million / 25.7% | $361.5 million / 22.9% | $430.7 million / 26.0% |
| Net income / diluted EPS | $120.0 million / $0.63 | $103.4 million / $0.52 | $308.0 million / $1.57 | $363.6 million / $1.81 |
| Operating cash flow | Not separately provided | Not separately provided | $290.5 million | $479.0 million |
- Q3 revenue increased 12.6% year over year as reported; net income increased about 16%. For the first nine months, revenue declined about 4.6% and net income about 15%.
- Q3 segment revenue rose in Semiconductor Test ($417.3 million, +5%), Industrial Automation ($65.9 million, +64%), System Test ($49.6 million, +39%), and Wireless Test ($34.3 million, +11%). Nine-month Semiconductor Test revenue fell 14.5% to $1.151 billion; growth in the other three segments only partly offset the decline.
- Cash, cash equivalents and marketable securities totaled $1.324 billion at September 30, 2018, versus $1.904 billion at year-end 2017. Cash and equivalents were $814.0 million; marketable securities were $510.4 million.
- Current assets were $1.879 billion and current liabilities $458.4 million. Long-term debt carrying value was $376.4 million; the convertible notes have $460 million principal and mature in 2023. The $350 million revolving credit facility was undrawn as of November 9, 2018, and the company reported covenant compliance.
- Nine-month capital expenditures were $88.3 million. Cash used for share repurchases was $562.3 million and dividends were $51.3 million. The declared quarterly dividend was $0.09 per share.
Changes, outlook and risks
- Comparability: 2018 results reflect ASC 606; 2017 results use ASC 605. The filing’s illustrative legacy-GAAP reconciliation changes Q3 2018 revenue by +$59.7 million and net income by +$33.3 million; for the nine months, it changes revenue by −$32.7 million and net income by −$16.8 million. ASC 606 adoption increased opening retained earnings by $12.7 million.
- Demand and mix: Management said mobile-device test demand outlook weakened sharply in Q1 2018 and reduced its 2018 revenue outlook. Nine-month semiconductor-test weakness reflected lower mobility, image-sensor and microcontroller sales, partly offset by memory test growth. Q3 gains included memory test, storage test, and next-generation wireless demand.
- Acquisitions: Teradyne acquired Energid for about $27.6 million and Mobile Industrial Robots (MiR) for a preliminary total purchase price of $196.6 million, including contingent consideration. MiR contributed $6.5 million of Q3 revenue and $11.1 million since acquisition, but reported a pretax operating loss of $3.8 million in Q3. The purchase-price allocation was preliminary; MiR contingent payments could reach $118.9 million.
- Cash flow and capital allocation: Operating cash flow fell to $290.5 million from $479.0 million, with working-capital changes using $151.1 million, including increases in receivables, inventories and prepayments. Management believed available cash and securities would fund dividends, the authorized repurchase program, working capital and expenditures for at least 12 months. The company intended to repurchase $750 million of stock in 2018 under a $1.5 billion authorization; future repurchases and dividends remain at the board’s discretion.
- Other notable items: Nine-month results included $9.5 million of inventory provisions, $7.9 million of severance charges and $4.1 million of acquisition-related expenses, partly offset by a $9.2 million gain from remeasurement of Universal Robots contingent consideration. Teradyne purchased a group annuity contract transferring approximately $151.3 million of U.S. retiree pension obligations.
- Risks and contingencies: Management highlighted customer concentration and cyclical demand. U.S. tariffs on certain China-made imports and possible additional export controls or restrictions on sales to listed Chinese companies could affect products, customers and supply chains; management did not expect the specified tariffs to have a material impact at that time, but said export-control effects could be material. Legal proceedings were described as ordinary-course matters not expected to have a material adverse effect. Purchase commitments were $275.6 million, mostly due within one year. Tax audits in the U.S. and Singapore remain unresolved; the company could not estimate the range of possible changes in uncertain tax benefits.
- Guidance: The filing contains no numerical current-quarter or full-year forecast. It notes the earlier 2018 outlook reduction following weaker mobile-device test demand. Management expected adoption of the new lease standard to materially increase balance-sheet assets and liabilities, with an immaterial effect on operating results.
Important facts for investors to verify
- Use the ASC 606 reconciliation when comparing reported 2018 results with 2017; assess whether revenue timing, particularly customer acceptance and software transactions, affected period-to-period trends.
- Track semiconductor-test demand, customer concentration and any further mobility-related weakness, alongside memory-test performance.
- Evaluate Industrial Automation growth and profitability excluding acquisition effects; monitor MiR integration, preliminary purchase accounting and contingent earn-out exposure.
- Assess the sustainability of operating cash flow given working-capital needs, planned capital spending, buybacks and dividends.
- Review tariff and export-control developments, tax-audit outcomes, the transition-tax payment schedule and the eventual balance-sheet effects of lease accounting.