Teradyne, Inc. — Q3 2010 Form 10-Q
Reporting period: Three and nine months ended October 3, 2010; comparative periods ended October 4, 2009. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions where useful.
Business context
Teradyne supplies automatic test equipment and services. Its reportable segments are Semiconductor Test and Systems Test Group, which includes military/aerospace, hard disk drive, commercial board test, and diagnostic systems. Results are exposed to cyclical customer demand, particularly in semiconductor equipment. Management reported recovery in Semiconductor Test beginning in Q4 2009 and said it intended to continue investing in the business while managing costs.
Financial results
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Revenue | $502.1m | $262.2m | $1,286.5m | $552.4m |
| Gross profit | $275.8m | $106.8m | $703.6m | $187.2m |
| Gross margin | 54.9% | 40.7% | 54.7% | 33.9% |
| Operating income (loss) | $158.1m | $8.8m | $354.7m | $(146.7)m |
| Net income (loss) | $147.3m | $6.7m | $319.6m | $(150.8)m |
| Diluted EPS | $0.66 | $0.04 | $1.45 | $(0.87) |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $390.0m | $56.2m |
- Q3 revenue rose 92% year over year. Semiconductor Test revenue increased 159% to $448.3m; Systems Test Group revenue fell 40% to $53.8m, mainly from lower HDD test sales.
- For the first nine months, revenue increased 133%; Semiconductor Test revenue rose 225% to $1,151.0m, while Systems Test Group declined 32% to $135.5m, reflecting lower HDD and Mil/Aero sales.
- Management attributed higher gross margins primarily to higher sales volume and product mix, partly offset by higher variable compensation. Q3 operating expenses increased, including higher variable compensation and restoration of temporary pay cuts.
- Q3 book-to-bill was 0.7 overall: 0.6 in Semiconductor Test and 1.7 in Systems Test Group, compared with 1.1, 1.3, and 0.6, respectively, a year earlier.
Cash, liquidity, debt and balance sheet
- At October 3, 2010, cash and cash equivalents were $433.9m; marketable securities were $263.9m current and $201.5m long-term. Management reported combined cash, cash equivalents and marketable securities of $899.3m, up $380.5m since year-end 2009.
- Cash from operations of $390.0m was offset by $412.5m used in investing, including $478.3m of securities purchases and $54.0m of capital expenditures. Cash and cash equivalents increased $17.2m to $433.9m.
- Total debt on the balance sheet was approximately $149.7m: $2.4m current and $147.3m long-term. The company had $190m principal amount of 4.50% convertible notes due in 2014; their carrying amount was $141.3m. The notes became convertible under specified terms after the share-price test was met; no holders had converted as of November 10, 2010.
- Current assets were $1,188.1m and current liabilities $401.3m. Total assets were $1,791.6m; shareholders’ equity was $1,067.3m.
- Receivables increased to $306.5m from $125.2m at year-end, reflecting higher sales. The company made $45.0m in discretionary U.S. pension contributions during the first nine months.
Material changes and unusual items
- Compared with 2009, the company moved from a nine-month operating and net loss to substantial profit, alongside a sharp Semiconductor Test recovery and a significant improvement in gross margin.
- Nine-month restructuring and other expense was $2.1m in 2010 versus $36.4m in 2009. 2010 activity included severance and facility actions, partly offset by a $2.4m credit from early exit of previously impaired facilities. Remaining severance accruals were expected to be paid by year-end 2010; lease-related payments extend through 2013.
- Q3 2010 restructuring and other was a net credit of $0.9m. Inventory provisions were $3.7m in the quarter and $5.4m for nine months, down from $6.0m and $23.7m in the comparable 2009 periods. Inventory reserves for written-down or written-off amounts totaled $127.8m.
- The 2010 tax provisions were $6.7m for Q3 and $21.0m for nine months, primarily foreign taxes. Valuation allowances on U.S. and Singapore deferred tax assets remained in place pending evidence of sustained profitability.
Outlook, risks and contingencies
- No specific revenue or earnings guidance for the next quarter is stated in the provided filing text. Management said the $899.3m of cash, cash equivalents and securities should cover working capital and expenditure needs for at least the next 12 months.
- Management described semiconductor test demand as cyclical and said customer purchasing can shift with industry conditions. It planned to invest to expand addressable markets while tightly managing costs, and cited acquisitions and entry into high-speed memory and HDD markets as growth opportunities.
- Purchase commitments totaled approximately $232.9m, primarily due within 2010. Total disclosed contractual obligations were $503.9m, including debt, interest, leases, pension contributions and purchase commitments.
- Legal claims arose in the ordinary course; management did not expect their disposition to materially adversely affect results, financial condition or cash flows. The filing identifies no material change in market-risk exposure from the 2009 annual report. Existing annual-report risk factors remain applicable.
- Convertible-note conversion could materially increase the diluted share count; the notes’ stated fair value exceeded their carrying amount. The filing also reports $9.1m of unrecognized tax benefits and $1.4m related accrued interest, with settlement timing uncertain.
Key facts investors should verify
- Whether Semiconductor Test demand and the low 0.6 segment book-to-bill translate into sustainable future revenue, and whether Systems Test Group’s stronger 1.7 book-to-bill continues.
- Collections and working-capital trends, particularly the sharp rise in accounts receivable and the impact on operating cash conversion.
- Convertible-note conversion status, potential dilution, and the relationship between the $190m principal obligation and reported carrying value.
- Inventory reserve adequacy and potential exposure to further demand revisions, given $127.8m of written-down or written-off inventory reserves.
- Execution and cash costs of restructuring, pension funding, purchase commitments, and uncertain tax positions.