Teradyne, Inc. — Q3 2013 Form 10-Q
Business context and reporting period. Teradyne supplies automatic test equipment, with reportable segments in Semiconductor Test, Wireless Test and System Test. The quarter ended September 29, 2013; comparisons are with the quarter ended September 30, 2012. Nine-month results cover the periods ended on those dates. Amounts below are in millions of dollars unless noted.
Financial performance and liquidity
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $433.4 | $463.4 | $1,142.6 | $1,408.3 |
| Gross profit / margin | $254.3 / 58.7% | $260.2 / 56.2% | $648.9 / 56.8% | $760.6 / 54.0% |
| Operating income / margin | $93.5 / 21.6% | $108.1 / 23.3% | $183.8 / 16.1% | $312.0 / 22.2% |
| Net income / diluted EPS | $69.5 / $0.29 | $88.6 / $0.39 | $142.6 / $0.61 | $233.6 / $1.02 |
| Operating cash flow | Not provided quarterly | Not provided quarterly | $223.4 | $362.2 |
- Q3 revenue declined 6.5% year over year; nine-month revenue declined 18.9%. Product revenue was $365.8 million and service revenue $67.6 million in Q3.
- Q3 gross margin improved 2.5 percentage points, despite lower revenue. The company attributed the improvement mainly to lower warranty and material costs, reduced inventory provisions and sales of previously reserved inventory. Operating income nevertheless fell as operating expenses increased.
- Nine-month capital expenditures were $82.9 million, implying approximate operating cash flow less capex of $140.5 million, versus $271.1 million in the prior-year period.
- At September 29, cash and cash equivalents were $572.9 million and marketable securities were $586.4 million, totaling $1,159.3 million. Current assets were $1,494.4 million and current liabilities $487.7 million. Total liabilities were $660.1 million.
- Debt principal was approximately $192.0 million, primarily $190.0 million of 4.50% convertible notes due March 15, 2014, plus about $2.0 million of Japanese subsidiary debt. The notes were classified as current; their net carrying value was $181.6 million.
Material changes and operating trends
- Q3 Semiconductor Test revenue decreased 2% to $304.1 million, Wireless Test decreased 22% to $93.1 million, and System Test increased 7% to $36.1 million.
- For the first nine months, Semiconductor Test revenue fell 14% to $808.1 million, Wireless Test fell 14% to $226.1 million, and System Test fell 47% to $108.4 million. The company cited lower application-processor demand, lower wireless volume, and weaker Storage Test sales amid lower hard-disk-drive demand and PC shipments.
- Q3 total-company book-to-bill was 0.6; Semiconductor Test was 0.7, Wireless Test 0.4 and System Test 0.7.
- Nine-month engineering and development costs rose $6.4 million to $199.4 million, while selling and administrative costs rose $2.3 million to $210.0 million. Both represented a larger share of revenue.
- Operating cash flow declined from $362.2 million to $223.4 million year over year, reflecting lower earnings and a $47.2 million use of cash from changes in operating assets and liabilities. Cash and cash equivalents increased $233.9 million during the period; cash plus marketable securities rose $153.0 million.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided in the filing. Management says demand is cyclical and that customer purchasing can shift with semiconductor-industry conditions. It expects lower Storage Test demand tied to reduced hard-disk-drive and PC shipments to continue.
- Management believes cash, cash equivalents and marketable securities will meet working-capital and expenditure needs for at least 12 months. About $360 million of cash was held outside the United States and could incur additional tax if repatriated.
- Purchase commitments totaled $243.3 million, of which $231.5 million was due within one year. Contractual obligations totaled $617.2 million, including debt obligations of $192.0 million.
- Inventory reserves for written-down or written-off items were $127.4 million. The company scrapped $16.8 million of inventory in the first nine months of 2013 and reported $3.8 million of Q3 inventory provisions.
- In Q3, Teradyne reduced headcount by 40, recording $1.3 million of severance charges; a $0.4 million credit related to estimated facility exit costs partly offset restructuring expense. The remaining $0.5 million severance accrual was expected to be paid by June 2014.
- After quarter-end, Teradyne acquired ZTEC Instruments for about $15 million, with up to $5 million additional consideration tied to performance. It also sold its Empirix equity interest for $34.2 million and expected to recognize a $34.2 million gain in Q4; another $5.2 million was placed in escrow for 15 months.
- A Boston Semi Equipment antitrust and unfair-business-practices case was settled October 18, 2013, with no monetary consideration and no material expected financial impact. The filing also highlights risks from market slowdowns, excess inventory, customer collections, cybersecurity or operational-system breaches, and guarantees, indemnifications and confidentiality obligations.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the 0.6 Q3 book-to-bill ratio and weak Wireless Test bookings translate into future revenue and cash flow.
- The timing and cash-versus-share settlement implications of the $190 million convertible notes due March 2014; the notes were convertible under specified conditions and their September 29 if-converted value was about $579.9 million.
- Whether Storage Test demand continues to weaken, and the effect on inventory reserves, scrap levels and future margins.
- The final purchase accounting and performance-based consideration for ZTEC, and the realization and timing of Empirix sale proceeds, including escrow.
- The effect of taxes if foreign-held cash is repatriated, and whether deferred tax assets remain recoverable.