Business context and reporting period
Teradyne, Inc. filed this unaudited Form 10-Q for the quarter ended October 4, 2015. It supplies semiconductor, wireless and system test equipment, and collaborative robots. Comparisons are with the quarter and nine months ended September 28, 2014; amounts below are USD unless stated otherwise.
Key financial metrics
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $466.0 million | $478.0 million | $1,321.1 million | $1,324.6 million |
| Gross profit | $258.6 million | $261.1 million | $749.6 million | $718.6 million |
| Gross margin | 55.5% | 54.6% | 56.7% | 54.2% |
| Operating income | $86.8 million | $98.2 million | $252.7 million | $222.6 million |
| Net income | $71.5 million | $82.9 million | $207.1 million | $185.1 million |
| Diluted EPS | $0.34 | $0.38 | $0.96 | $0.83 |
| Operating cash flow | Not separately provided for quarter | Not separately provided for quarter | $372.6 million | $317.1 million |
Q3 revenue fell 2.5% year over year and net income fell 13.9%; nine-month revenue was nearly flat while net income rose 11.9%. Q3 operating margin was approximately 18.6%, versus 20.6% a year earlier; nine-month operating margin was approximately 19.1%, versus 16.8%.
- At October 4, cash and cash equivalents were $294.2 million and marketable securities were $782.9 million, totaling $1.077 billion, down $221.7 million from December 31, 2014. Current assets were $1.337 billion and current liabilities $395.7 million.
- Operating cash flow of $372.6 million was partly offset by $126.5 million of investing outflows and $246.2 million of financing outflows. Financing included $226.8 million of share repurchases and $38.4 million of dividends.
- Teradyne reported no borrowings under its $350 million five-year secured revolving facility; it was in compliance with facility covenants at quarter-end. The filing reports no outstanding long-term debt at October 4.
- The board authorized up to $500 million of repurchases, including an intended $300 million in 2015. By October 4, the company had repurchased 11.9 million shares for $226.8 million at an average $19.09 per share. Quarterly dividends were $0.06 per share.
Material changes versus comparable periods
- Q3 Semiconductor Test revenue declined $54.6 million to $325.5 million, primarily on lower system-on-chip volume in application processor and microcontroller markets. System Test revenue rose $26.0 million to $69.1 million, mainly on higher sales of 3.5-inch hard-disk-drive testers for cloud storage. Wireless Test was broadly stable at $55.4 million.
- Nine-month Semiconductor Test revenue fell $66.6 million, while Wireless Test rose $7.6 million and System Test rose $35.7 million. Industrial Automation contributed $19.8 million for the nine-month period following the acquisition of Universal Robots.
- Teradyne acquired Universal Robots on June 11, 2015 for a total preliminary purchase price of $317.7 million, including $33.8 million of contingent consideration; up to an additional $65 million may be payable based on performance targets through 2018. In Q3, Universal Robots contributed $16.1 million of revenue and a $4.8 million pretax operating loss.
- Gross margin improved year to date, which management attributed mainly to product mix and sales of previously leased testers in Semiconductor Test. Q3 gross margin also improved despite lower revenue, primarily due to lower variable compensation and other spending.
- Engineering and development expense increased year to date by $8.8 million to $221.3 million. Selling and administrative expense decreased $2.0 million to $226.6 million, partly because the prior-year period included a $6.6 million one-time retirement-related stock compensation charge.
Outlook, commentary, risks and unusual items
- No quantified forward guidance for future revenue or earnings is provided in the filing. Management said available cash, cash equivalents and marketable securities should fund dividends, the authorized repurchase program, working capital and expenditures for at least the next 12 months.
- Total-company book-to-bill was 0.7 in Q3, compared with 0.6 in the prior-year quarter; Semiconductor Test was 0.6, Wireless Test 0.7, System Test 0.7 and Industrial Automation 1.0.
- Management emphasized the cyclical nature of customer demand in semiconductor and electronics markets. It noted that additional weakness in Wireless Test could lead to further goodwill impairment, excess inventory, asset write-offs or restructuring. A $98.9 million Wireless Test goodwill impairment had been recorded in Q4 2014.
- Inventory provisions were $18.9 million for the first nine months, including charges related to lower expected demand for 2.5-inch storage testers and Semiconductor Test product transitions. Inventory already written down or written off totaled $121.1 million; the company gave no fixed timetable for scrapping the remaining inventory.
- The effective tax rate was 18.3% for Q3 and 20.9% for the first nine months. The lower-than-statutory rates primarily reflected income earned in lower-tax foreign jurisdictions. The Singapore tax holiday was expected to expire December 31, 2015; extension discussions were ongoing. Nine-month tax savings from the holiday were $9.9 million.
- Approximately $550 million of cash, cash equivalents and marketable securities was held outside the U.S.; repatriation would incur additional taxes, which the company said it could not practicably estimate. Purchase commitments totaled $219.6 million, of which $214.2 million was due within one year.
- Universal Robots’ purchase price allocation remained preliminary, including $227.0 million allocated to nondeductible goodwill. The company identified integration, acquisition-benefit and contingent-payment uncertainty as risks. Management considered ordinary-course legal matters not expected to have a material adverse effect.
Important facts for investors to verify
- Whether Semiconductor Test demand stabilizes and whether the 0.7 total-company book-to-bill translates into future sales.
- Universal Robots’ subsequent revenue, profitability, integration progress and likelihood of contingent consideration payments.
- Cash generation and liquidity after repurchases, dividends, acquisition spending and any potential repatriation taxes.
- Inventory levels, future provisions or write-offs, and any further Wireless Test goodwill impairment or restructuring.
- Whether the Singapore tax holiday is extended and how the resulting tax rate affects earnings.