Business context and reporting period
Teradyne, Inc. supplies semiconductor and other automated test equipment and collaborative robots. This unaudited Form 10-Q covers the quarter ended October 1, 2017, and the first nine months of fiscal 2017; comparisons are with the periods ended October 2, 2016.
Financial performance and position
Amounts are in U.S. dollars; financial figures below are in millions except per-share data.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $503.4 | $410.5 | $1,657.2 | $1,373.3 |
| Gross profit / margin | $294.8 / 58.6% | $227.4 / 55.4% | $950.9 / 57.4% | $740.6 / 53.9% |
| Operating income (loss) | $128.7 | $56.5 | $432.0 | $(119.2) |
| Net income (loss) | $103.4 | $63.8 | $363.6 | $(109.8) |
| Diluted EPS | $0.52 | $0.31 | $1.81 | $(0.54) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $479.0 | $418.0 |
- Year-over-year revenue increased 22.6% in Q3 and 20.7% for the first nine months. Semiconductor Test was the largest business: Q3 revenue rose 23.3% to $396.9 million; nine-month revenue increased 22.6% to $1,345.6 million.
- Q3 gross margin improved 3.2 percentage points, mainly from favorable Semiconductor Test product mix and higher sales. Nine-month gross margin improved 3.5 points for similar reasons.
- Nine-month 2016 operating and net losses included $254.9 million of goodwill impairment and $83.3 million of acquired-intangible impairment, both related to Wireless Test. Their absence, alongside higher revenue and lower amortization, contributed substantially to the 2017 year-to-date profit improvement.
- Cash, cash equivalents and marketable securities totaled $1,848.5 million at October 1, 2017, up from $1,612.8 million at year-end 2016. Current assets were $2,140.1 million versus current liabilities of $431.4 million. Long-term debt had a $362.6 million carrying value; the convertible notes have $460 million principal. The $350 million revolving facility was undrawn as of November 9, 2017.
- Nine-month investing cash use was $188.3 million, including $73.2 million of capital expenditures; financing cash use was $182.7 million. Operating cash flow less capital expenditures was approximately $405.8 million.
- Teradyne repurchased 4.6 million shares for $151.8 million and paid $41.7 million in dividends during the first nine months. The quarterly dividend was $0.07 per share.
Material changes, outlook and risks
- Industrial Automation revenue increased 70.6% in Q3 and 76.9% year to date, reflecting demand for collaborative robots. Wireless Test revenue rose 10.8% in Q3 and 18.5% year to date. System Test revenue declined 3.8% in Q3 and 19.7% year to date, mainly on lower cloud-storage hard-disk-drive tester sales.
- Q3 total-company book-to-bill was 0.8, compared with 0.9 a year earlier; Semiconductor Test was 0.7, Industrial Automation 1.0, System Test 1.2, and Wireless Test 1.1.
- Q3 restructuring and other included a $5.1 million Japan earthquake insurance recovery, partly offset by earthquake costs, severance and other items. Nine-month restructuring and other was a net credit, primarily reflecting that recovery.
- Management provided no specific revenue or earnings guidance in the supplied filing text. It said available cash and securities should fund dividends, the authorized repurchase program, working capital and expenditures for at least the next 12 months; it also intended to repurchase at least $200 million of shares in 2017. Future dividends and repurchases remain subject to Board discretion.
- Management described test-equipment demand as cyclical and customer purchases as concentrated among a limited number of significant customers. One customer drives substantial demand directly and through supply partners; Taiwan accounted for 31% of Q3 revenue and 38% of nine-month revenue by customer-site location. Management expects the historical even/odd-year mobility demand pattern to lessen, citing slower smartphone unit growth, greater device complexity and reduced impact from parallel testing.
- Other risks include market and product demand uncertainty, foreign-exchange exposure, and potential additional taxes if $1,106 million of cash, cash equivalents and marketable securities held outside the U.S. is repatriated. Management said ordinary-course legal matters were not expected to have a material adverse effect. The filing reports compliance with credit-facility covenants as of November 9, 2017.
- Teradyne planned to adopt the new revenue-recognition standard in Q1 2018 using the modified retrospective method and preliminarily expected no material effect; a cumulative retained-earnings adjustment would be recorded. The filing also notes other forthcoming accounting standards, including leases, whose impact was still under evaluation.
Important facts for investors to verify
- Whether Semiconductor Test growth and improved margins persist, and whether the 0.7 segment book-to-bill signals softer near-term orders.
- How concentrated customer demand and geographic sales exposure affect results, particularly given the disclosed reliance on a major test-equipment customer.
- The trajectory of System Test and Wireless Test demand, and whether Industrial Automation growth translates into sustained segment profitability.
- The terms, potential dilution and effective interest cost of the convertible notes, including the possible dilution from warrants above their $39.95 initial strike price.
- Execution of the stated 2017 repurchase intention, ongoing dividend decisions, and the tax implications of overseas cash repatriation.