Teradyne, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended October 2, 2016; comparison periods ended October 4, 2015. Teradyne supplies semiconductor, system and wireless test equipment and collaborative robots through its Industrial Automation segment. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Financial performance and liquidity
- Q3 revenue: $410.5 million, down 11.9% year over year. Product revenue was $334.6 million and services revenue was $75.9 million.
- Q3 profitability: Gross profit was $227.4 million, with a 55.4% gross margin (55.5% prior year). Operating income was $56.5 million versus $86.8 million; net income was $63.8 million versus $71.5 million. Diluted EPS was $0.31 versus $0.34.
- First nine months: Revenue rose 3.9% to $1.373 billion, but gross margin declined to 53.9% from 56.7%. The company reported an operating loss of $119.2 million and net loss of $109.8 million, versus operating income of $252.7 million and net income of $207.1 million a year earlier. Diluted EPS was $(0.54), versus $0.96.
- Cash flow: Nine-month operating cash flow was $408.7 million, compared with $372.6 million. Capital expenditures were $66.3 million. Cash and cash equivalents increased to $297.9 million from $264.7 million at year-end 2015.
- Liquidity and debt: Cash, cash equivalents and marketable securities totaled $1.254 billion, up from $1.008 billion at year-end. No revolving-facility borrowings were outstanding as of November 10, 2016; the committed facility is $350 million. Current assets were $1.285 billion and current liabilities $369.1 million. The filing reports no funded debt balance.
- Capital returns: Nine-month repurchases were $85.1 million, and dividend payments were $36.5 million; the quarterly dividend remained $0.06 per share. Management intended to repurchase $100–$200 million of stock during 2016, subject to Board discretion.
Material changes and segment trends
- Q3 Semiconductor Test revenue was $322.0 million, down 1.1%; System Test was $37.0 million, down 46.5%; Wireless Test was $27.9 million, down 49.6%; and Industrial Automation was $23.5 million, up 46.0%.
- For the first nine months, Semiconductor Test revenue increased 10.1% to $1.098 billion, while System Test fell 8.3% to $139.6 million and Wireless Test fell 53.6% to $70.7 million. Industrial Automation revenue was $65.4 million, reflecting the Universal Robots acquisition completed in June 2015.
- Wireless Test weakness led to second-quarter non-cash impairment charges of $254.9 million for goodwill and $83.3 million for acquired intangible assets. Wireless Test retained about $8.0 million of goodwill and $5.8 million of intangible assets. These charges drove the nine-month loss.
- Total assets declined to $2.366 billion from $2.549 billion at year-end, largely alongside reduced goodwill and intangible assets. Retained earnings fell to $235.6 million from $467.8 million.
Outlook, commentary and risks
- Management said Wireless Test demand may improve in 2018, but indicated further cost-control measures may be needed. It cited a smaller expected wireless test market, slower smartphone growth, slower adoption of new wireless technologies and reduced purchases by its largest Wireless Test customer.
- That customer represented 51%–73% of annual Wireless Test sales since the LitePoint acquisition; the company warned that segment revenue can fluctuate significantly with the customer’s orders.
- Management described semiconductor and electronics demand as cyclical and noted a historical even/odd-year mobility-market pattern, which it expects to lessen over time. The filing provides no specific company-wide revenue or earnings guidance.
- An April 2016 earthquake damaged the Kumamoto, Japan facility beyond repair. The company recorded $5.4 million of related charges, offset by $5.4 million of insurance recovery, and temporarily transferred operations. It cautioned that disruption or uninsured rebuilding costs could affect results.
- Universal Robots contingent consideration was revalued upward by $8.0 million in Q3, primarily due to higher forecast revenue and a lower discount rate. Purchase commitments totaled $181.4 million, of which $179.0 million was due within one year.
- The nine-month effective tax rate was 3.7%, affected by the non-deductible goodwill impairment and $13.3 million of discrete tax benefits. The Singapore tax holiday generated $25.2 million of tax savings for the period and is scheduled to expire December 31, 2020.
- Management believed available liquidity would cover dividends, the authorized repurchase program, working capital and expenditures for at least 12 months. It disclosed $826 million of cash, cash equivalents and marketable securities outside the U.S.; repatriation would incur additional taxes. Management expected ordinary-course legal matters not to have a material adverse effect.
Key facts for investors to verify
- Whether Wireless Test demand and its largest customer’s order levels stabilize, and whether management’s anticipated 2018 improvement materializes.
- Whether the Wireless Test impairment assumptions remain supportable and whether further restructuring or impairment charges arise.
- Underlying operating performance excluding the $338.3 million of goodwill and intangible-asset impairment charges, as well as the effects of discrete tax items and contingent-consideration remeasurement.
- Progress restoring Kumamoto operations and whether insurance proceeds cover eventual repair, rebuilding and disruption costs.
- Execution of the 2016 share-repurchase intent, future dividend decisions, and liquidity implications of overseas cash and near-term purchase commitments.