Business context and reporting period
Teradyne, Inc. filed this unaudited Form 10-Q for the quarter ended July 1, 2012. The company supplies automatic test equipment and related services through Semiconductor Test, Systems Test Group, and Wireless Test. Comparisons are with the quarter and six months ended July 3, 2011, unless noted.
Financial performance and position
Amounts below are in millions of dollars, except per-share data and margins.
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Revenue | $548.3 | $410.5 | $945.0 | $787.7 |
| Gross profit / margin | $309.5 / 56.4% | $214.7 / 52.3% | $500.4 / 53.0% | $407.6 / 51.7% |
| Operating income | $157.4 | $99.8 | $203.9 | $180.1 |
| Income from continuing operations | $111.4 | $88.1 | $145.0 | $158.0 |
| Net income | $111.4 | $87.3 | $145.0 | $184.1 |
| Diluted EPS | $0.49 | $0.38 | $0.63 | $0.68 |
- Q2 revenue rose 33.6%; the filing attributes $111.9 million of Q2 revenue to LitePoint, acquired in October 2011. First-half revenue increased 20.0%.
- Q2 gross margin rose 4.1 percentage points, partly because of LitePoint; higher inventory provisions partly offset the improvement. First-half gross margin increased 1.3 points.
- Q2 operating income improved, while first-half operating income declined modestly. First-half continuing income fell 8.3%; net income fell more, in part because the comparable 2011 period included a $24.4 million after-tax gain on disposal of discontinued operations.
- Income tax provision was $40.6 million in Q2 and $48.3 million in the first half, versus $7.8 million and $13.3 million, respectively, in 2011. Management attributed 2012 provisions to foreign taxes and U.S. deferred taxes.
- Operating cash flow was $113.3 million for the first half, versus $121.6 million a year earlier. A $216.8 million increase in receivables, mainly from higher sales, was a significant use of cash.
- Cash and cash equivalents were $589.1 million at July 1. Cash, cash equivalents and marketable securities totaled $828.8 million, up $74.1 million from year-end 2011. Capital expenditures were $57.8 million; investing activities used $115.5 million.
- Total balance-sheet debt was $167.8 million, including $2.5 million current and $165.3 million long-term. The convertible notes have $190 million principal and mature in March 2014; the Japan loan was also outstanding. Management said available cash and securities should fund working capital and expenditures for at least 12 months.
- Current assets were $1,316.8 million and current liabilities $425.9 million. Accounts receivable increased to $346.1 million from $129.3 million at year-end 2011.
Material changes versus the prior comparable period
- Q2 Semiconductor Test revenue increased 6% to $365.1 million; first-half revenue decreased 4% to $632.6 million, reflecting lower memory revenue partly offset by System-on-a-Chip products.
- Systems Test Group revenue increased 6% in Q2 to $71.3 million and 35% in the first half to $169.1 million, with first-half growth primarily from Storage Test systems.
- Wireless Test contributed $111.9 million in Q2 and $143.3 million in the first half, following the LitePoint acquisition; there was no Wireless Test revenue in the 2011 comparison.
- Company book-to-bill was 1.1 in Q2 versus 0.8 a year earlier. By segment, it was 1.0 for Semiconductor Test, 0.6 for Systems Test Group, and 1.7 for Wireless Test.
- Research and development expense increased to $66.5 million in Q2 and $126.7 million in the first half, primarily due to LitePoint and increased engineering investment. Selling and administrative expense also rose, primarily due to LitePoint.
Outlook, commentary, risks and unusual items
- The filing gives no specific revenue or earnings guidance. Management described demand as cyclical and subject to customers delaying or accelerating purchases; it also cited price competition and the potential for competitive pricing to pressure gross margins. The company intends to invest in engineering and expand addressable markets while managing costs.
- Teradyne recorded $9.4 million of Q2 inventory provisions, including charges associated with lower demand and product transitions. First-half provisions totaled $10.9 million; inventory-related reserves for written-down or written-off amounts were $128.2 million.
- A change effective January 1, 2012, requires immediate recognition of pension and post-retirement actuarial gains and losses and uses fair value of plan assets to calculate expected return. Prior periods were retrospectively adjusted. Teradyne said 2012 net income would have been $110.4 million for Q2 and $140.3 million for the first half absent the change, versus reported $111.4 million and $145.0 million.
- Lower expected LitePoint earn-out revenue led to an $8.4 million first-half reduction in contingent consideration fair value, including a $6.5 million Q2 credit. The July 1 liability was $54.7 million; the estimated undiscounted outcome range was $56 million to $58 million.
- Purchase commitments totaled $281.4 million, of which $280.0 million was due within one year. Contractual obligations totaled $733.9 million, including contingent acquisition payments of $54.7 million.
- During Q2, the stock-price condition allowing holders to convert the notes before December 15, 2013 was met; no holders had exercised the option as of August 10, 2012. The notes’ if-converted value was $487.9 million. Conversion could create dilution, partly mitigated by the company’s note hedge and warrant structure.
- Management said routine legal proceedings were not expected to materially adversely affect results, financial condition or cash flows. The filing identifies demand fluctuations, competition and risks described in the company’s 2011 Form 10-K as relevant risks.
Important facts for investors to verify
- How much of reported revenue and growth reflects LitePoint, and how the acquired business performs relative to its earn-out assumptions.
- Whether the sharp receivables increase converts to cash, and whether operating cash flow improves after the first-half working-capital outflow.
- Whether inventory provisions and reserves indicate continuing demand or product-transition issues, particularly in Semiconductor Test and Systems Test Group.
- How the higher 2012 tax provision affects future effective tax rates and the realization of deferred tax assets.
- The potential dilution, timing and cash implications of the $190 million convertible notes due in 2014, including the hedge and warrant offsets.
- Execution against $281.4 million of purchase commitments and the company’s stated liquidity outlook.