Teradyne, Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter ended July 3, 2011; six-month results are compared with the periods ended July 4, 2010. Teradyne supplies automatic test equipment, reporting Semiconductor Test and Systems Test Group segments. Diagnostic Solutions was sold on March 21, 2011, and is presented as discontinued operations.
Financial performance and liquidity
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $410.5 million | $445.3 million | $787.7 million | $764.6 million |
| Gross profit / margin | $215.1 million / 52.4% | $250.9 million / 56.3% | $407.5 million / 51.7% | $420.8 million / 55.0% |
| Operating income | $101.6 million | $136.1 million | $180.1 million | $195.1 million |
| Continuing-operations income | $89.9 million | $122.5 million | $158.0 million | $171.6 million |
| Net income | $89.1 million | $122.1 million | $183.9 million | $172.2 million |
| Diluted EPS | $0.39 | $0.55 | $0.80 | $0.79 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $121.6 million | $134.0 million |
- Q2 revenue fell 7.8% year over year, as Semiconductor Test revenue declined 17% to $343.1 million; Systems Test Group revenue increased 109% to $67.4 million, mainly from HDD test systems. Total-company book-to-bill was 0.8, versus 1.1 a year earlier.
- First-half revenue rose 3.0%. Semiconductor Test revenue declined 6% to $662.3 million, while Systems Test Group revenue more than doubled to $125.3 million.
- Q2 gross margin declined 3.9 percentage points. Management attributed the decline primarily to product mix, including higher HDD-system sales, lower sales of previously written-down inventory, and higher inventory provisions. First-half margin fell 3.3 points for similar reasons.
- First-half net income included a $24.4 million after-tax gain on disposal of Diagnostic Solutions. Continuing-operations income declined year over year; the disposal gain lifted reported net income.
- At July 3, cash and cash equivalents were $455.4 million, current marketable securities $453.9 million, and long-term marketable securities $282.0 million—about $1.19 billion combined. Total assets were $2.00 billion and shareholders’ equity $1.33 billion.
- Total balance-sheet debt was about $157.3 million, including $2.5 million current and $154.8 million long-term. The $190 million principal convertible notes had a $149.9 million carrying amount; the Japan loan was also outstanding.
- First-half capital expenditures were $44.5 million. Cash and cash equivalents increased $57.7 million during the half; operating cash flow was below the prior-year $134.0 million.
Material changes, outlook, and risks
- Management said semiconductor test demand is cyclical and can fluctuate with customer demand and purchasing patterns. It cited increased price competition in Semiconductor Test; competitive pricing may pressure gross margins. Engineering investment is intended to reduce test costs.
- Management stated that the $1.2 billion cash, cash-equivalents and marketable-securities balance should be sufficient for working capital and expenditures for at least the next 12 months. The filing provides no specific revenue or earnings guidance.
- Inventory provisions were $6.3 million in the first half, versus $1.5 million a year earlier; inventory reserves for amounts written down or written off totaled $124.7 million. Management had no predetermined timeline for scrapping remaining reserved inventory.
- Japan’s 2011 natural disasters could affect customer demand and disrupt or raise the cost of component supply. Teradyne bought buffer inventory for certain Japan-sourced components; management did not expect significant long-term manufacturing or sales impact, but said the situation remained uncertain.
- Deferred revenue and customer advances fell to $148.8 million from $177.1 million at year-end. Purchase commitments for components and materials totaled approximately $190.7 million, generally due within one year.
- Teradyne maintained U.S. and Singapore deferred-tax valuation allowances because realization remained uncertain. It reported ordinary-course legal claims and said their disposition was not expected to have a material adverse effect.
- The convertible notes became eligible for holder conversion under specified share-price conditions. No holders had exercised the option as of August 9, 2011. After quarter-end, Teradyne repurchased 1.5 million shares for $17.8 million at an average $12.30 per share.
Investor verification priorities
- Assess whether the 0.8 total-company book-to-bill ratio and Semiconductor Test weakness indicate continued demand softening.
- Track gross-margin recovery, product mix, competitive pricing, and the effect of inventory provisions and reserved inventory.
- Separate recurring operating performance from the Diagnostic Solutions disposal gain when evaluating first-half net income.
- Review cash conversion and working-capital movements, including receivables, inventory, customer advances, and purchase commitments.
- Monitor conversion eligibility and potential dilution or cash settlement associated with the convertible notes, as well as post-quarter share repurchases.