Teradyne Reports Third Quarter 2019 Results

This release contains forward-looking statements regarding Teradyne’s future business prospects, results of operations, market conditions, earnings per share, the payment of a quarterly dividend, the repurchase of Teradyne common stock pursuant to a share repurchase program, use of proceeds and potential dilution from the senior convertible notes offering, and the impact of the U.S. tax reform, export and tariff laws. Such statements are based on the current assumptions and expectations of Teradyne’s management and are neither promises nor guarantees of future performance, events, earnings per share, use of cash, payment of dividends, repurchases of common stock, payment of the senior convertible notes, or the impact of the U.S. tax reform, export and tariff laws. There can be no assurance that management’s estimates of Teradyne’s future results or other forward-looking statements will be achieved. Additionally, the current dividend and share repurchase programs may be modified, suspended or discontinued at any time. On May 16, 2019, Huawei and 68 of its affiliates, including HiSilicon, were added to the U.S. Department of Commerce Entity List under U.S. Export Administration Regulations (the “EAR”). This action by the U.S. Department of Commerce imposes new export licensing requirements on exports, re-exports, and in-country transfers of all U.S. - regulated products, software and technology to the designated Huawei entities.  While most of our products are not subject to the EAR and therefore not affected by the Entity List restrictions, certain of our products are currently manufactured in the U.S. and thus subject to the Entity List restrictions.  Compliance with the Entity List restrictions has not significantly impacted our sales, but could limit sales in the future.  Important factors that could cause actual results, earnings per share, use of cash, dividend payments, repurchases of common stock, or payment of the senior convertible notes to differ materially from those presently expected include: conditions affecting the markets in which Teradyne operates; decreased or delayed product demand from one or more significant customers; development, delivery and acceptance of new products; the ability to grow the Industrial Automation business; increased research and development spending; deterioration of Teradyne’s financial condition; the consummation and success of any mergers or acquisitions; unexpected cash needs; insufficient cash flow to make required payments and pay the principal amount on the senior convertible notes; the business judgment of the board of directors that a declaration of a dividend or the repurchase of common stock is not in the company’s best interests; additional U.S. tax regulations or IRS guidance; the impact of any tariffs or export controls imposed in the U.S. or China; compliance with trade protection measures or export restrictions, including the addition of Huawei and HiSilicon to the U.S. Department of Commerce Entity List; and other events, factors and risks disclosed in filings with the SEC, including, but not limited to, the “Risk Factors” section of Teradyne’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018 and the Quarterly Report on Form 10-Q for the period ended June 30, 2019. The forward-looking statements provided by Teradyne in this press release represent management’s views as of the date of this release. Teradyne anticipates that subsequent events and developments may cause management’s views to change. However, while Teradyne may elect to update these forward-looking statements at some point in the future, Teradyne specifically disclaims any obligation to do so. These forward-looking statements should not be relied upon as representing Teradyne’s views as of any date subsequent to the date of this release.

          
          
TERADYNE, INC. REPORT FOR THIRD FISCAL QUARTER OF 2019         
                 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)         
                         
              Quarter Ended   Nine Months Ended  
              September 29, 2019   June 30,
2019
  September 30, 2018   September 29, 2019   September 30, 2018  
                                 
Net revenues   $ 582,038   $ 564,178   $ 566,848   $ 1,640,315   $ 1,581,244  
                                 
  Cost of revenues (exclusive of acquired intangible assets amortization shown separately below) (1)   237,000   240,260   233,155   683,724   670,385  
                                 
Gross profit   345,038   323,918   333,693   956,591   910,859  
                                 
Operating expenses:                      
  Selling and administrative (2)   109,166   108,811   100,199   319,990   290,115  
  Engineering and development   77,804   81,434   77,049   236,030   226,799  
  Acquired intangible assets amortization   9,647   10,083   11,142   30,363   28,633  
   Restructuring and other (3)   (6,500)   (10,404)   1,710   (11,792)   3,785  
      Operating expenses   190,117   189,924   190,100   574,591   549,332  
                                 
Income from operations   154,921   133,994   143,593   382,000   361,527  
                                 
  Interest and other expense (4)   3,188   2,817   2,749   5,111   4,852  
                                 
Income before income taxes   151,733   131,177   140,844   376,889   356,675  
  Income tax provision (5)   15,873   33,780   20,863   34,494   48,684  
Net income   $ 135,860   $ 97,397   $ 119,981   $ 342,395   $ 307,991  
                                 
Net income per common share:                      
Basic       $ 0.80   $ 0.57   $ 0.65   $ 2.00   $ 1.62  
Diluted       $ 0.75   $ 0.55   $ 0.63   $ 1.92   $ 1.57  
                                 
Weighted average common shares - basic   169,641   171,241   185,744   171,471   190,576  
                                 
Weighted average common shares - diluted (6)   180,494   178,590   190,505   178,685   196,300  
                                 
                                 
Cash dividend declared per common share   $ 0.09   $ 0.09   $ 0.09   $ 0.27   $ 0.27  
                                 
                                 
                                 
(1) Cost of revenues includes:   Quarter Ended   Nine Months Ended  
              September 29, 2019   June 30,
2019
  September 30, 2018   September 29, 2019   September 30, 2018  
      Provision for excess and obsolete inventory $ 3,049   $ 3,402   $ 3,347   $ 8,848   $ 9,522  
      Sale of previously written down inventory   (821)   (363)   (1,013)   (1,962)   (5,178)  
      Inventory step-up   -   383   -   383   372  
              $ 2,228   $ 3,422   $ 2,334   $ 7,269   $ 4,716  
           
(2) For the quarter and nine months ended September 29, 2019, selling and administrative expenses include an equity charge of $2,109 for the modification of Teradyne's retired CFO's outstanding equity awards to allow continued vesting and maintain the original term in connection with his July 17, 2019 retirement.  
                                 
(3) Restructuring and other consists of:   Quarter Ended   Nine Months Ended  
              September 29, 2019   June 30,
2019
  September 30, 2018   September 29, 2019   September 30, 2018  
      Contingent consideration fair value adjustment   $ (7,759)   $ (11,671)   $ (768)   $ (16,460)   $ (9,236)  
      Employee severance   808   803   1,667   2,410   7,945  
      Acquisition related expenses and compensation   451   464   811   2,258   4,129  
      Other   -   -   -   -   947  
              $ (6,500)   $ (10,404)   $ 1,710   $ (11,792)   $ 3,785  
                                 
                                 
(4) Interest and other includes:   Quarter Ended   Nine Months Ended  
              September 29, 2019   June 30,
2019
  September 30, 2018   September 29, 2019   September 30, 2018  
      Non-cash convertible debt interest   $ 3,453   $ 3,410   $ 3,286   $ 10,231   $ 9,737  
      Pension actuarial loss   -   448   267   448   196  
              $ 3,453   $ 3,858   $ 3,553   $ 10,679   $ 9,933  
                                 
(5) For the quarter ended June 30, 2019, income tax provision includes a $15 million tax provision related to the finalization of our toll tax charge. For the nine months ended September 29, 2019, income tax provision includes a $26 million tax benefit from the release of uncertain tax position reserves due to the IRS completion of its audit of Teradyne's 2015 Federal tax return and a $15 million tax provision related to the finalization of our toll tax charge.  
                                 
 (6) Under GAAP, when calculating diluted earnings per share, convertible debt must be assumed to have converted if the effect on EPS would be dilutive. Diluted shares assume the conversion of the convertible debt as the effect would be dilutive. Accordingly, for the quarters ended September 29, 2019, June 30, 2019 and September 30, 2018, 5.8 million, 4.4 million and 3.0 million shares, respectively, have been included in diluted shares. For the nine months ended September 29, 2019 and September 30, 2018, 4.1 million and 3.4 million shares, respectively, have been included in diluted shares. For the three months ended September 29, 2019, June 30, 2019 and September 30, 2018, diluted shares also included 3.6 million, 1.8 million and 0.1 million shares, respectively, from the convertible note hedge transaction. For the nine months ended September 29, 2019 and September 30, 2018, diluted shares included 1.8 million and 0.6 million shares, respectively, from the convertible note hedge transaction.  
                                 
CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands)                  
                                 
              September 29, 2019   December 31, 2018              
                                 
Assets                          
  Cash and cash equivalents   $ 593,939   $ 926,752              
  Marketable securities   342,538   190,096              
  Accounts receivable, net   357,886   291,267              
  Inventories, net   178,203   153,541              
  Prepayments and other current assets   182,013   170,826              
      Total current assets   1,654,579   1,732,482              
                                 
  Property, plant and equipment, net   307,567   279,821              
  Operating lease right-of-use assets, net   57,595   -              
  Marketable securities   103,558   87,731              
  Deferred tax assets   69,120   70,848              
  Other assets   22,724   11,509              
  Retirement plans assets   16,358   16,883              
  Acquired intangible assets, net   96,573   125,482              
  Goodwill   370,717   381,850              
                                 
      Total assets   $ 2,698,791   $ 2,706,606              
                                 
Liabilities                        
  Accounts payable   $ 117,936   $ 100,688              
  Accrued employees' compensation and withholdings   127,912   148,566              
  Deferred revenue and customer advances   95,936   77,711              
  Other accrued liabilities   93,736   78,272              
  Operating lease liabilities   18,386   -              
  Contingent consideration   6,297   34,865              
  Income taxes payable   33,508   36,185              
                                 
      Total current liabilities   493,711   476,287              
                                 
  Retirement plans liabilities   121,340   117,456              
  Long-term deferred revenue and customer advances   42,592   32,750              
  Deferred tax liabilities   15,390   20,662              
  Long-term other accrued liabilities   9,803   37,547              
  Long-term contingent consideration   11,783   35,678              
  Long-term operating lease liabilities   46,813   -              
  Long-term income taxes payable   83,782   83,891              
  Debt   390,942   379,981              
                                 
      Total liabilities   1,216,156   1,184,252              
                                 
Shareholders' equity   1,482,635   1,522,354              
                                 
      Total liabilities and shareholders' equity   $ 2,698,791   $ 2,706,606              
                                 
                                 
                                 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)              
                                 
              Quarter Ended   Nine Months Ended      
              September 29, 2019   September 30, 2018   September 29, 2019   September 30, 2018      
Cash flows from operating activities:                      
  Net income   $ 135,860   $ 119,981   $ 342,395   $ 307,991      
  Adjustments to reconcile net income to net cash provided by operating activities:                      
      Depreciation   17,626   16,774   51,508   49,930      
      Amortization   11,873   12,732   36,849   32,909      
      Deferred taxes   (3,492)   7,130   (2,977)   24,442      
      Stock-based compensation   10,713   7,702   28,822   25,327      
      Provision for excess and obsolete inventory   3,049   3,347   8,848   9,522      
      Contingent consideration fair value adjustment (7,759)   (768)   (16,460)   (9,236)      
      Retirement plans actuarial loss   -   267   448   196      
      Gains on marketable securities   (417)   (1,182)   (4,158)   (420)      
      Other   181   530   610   936      
      Changes in operating assets and liabilities, net of businesses acquired:                    
          Accounts receivable   12,689   101,596   (66,789)   (77,807)      
          Inventories   (11,696)   (12,834)   (14,143)   (34,117)      
          Prepayments and other assets   949   (30,360)   (16,118)   (28,719)      
          Accounts payable and other liabilities   35,231   24,279   20,807   16,124      
          Deferred revenue and customer advances   11,953   (695)   27,779   9,823      
          Retirement plans contributions   (1,361)   (1,071)   (3,775)   (3,244)      
          Income taxes   (16,251)   (6,844)   (31,224)   (33,152)      
Net cash provided by operating activities   199,148   240,584   362,422   290,505      
                                 
Cash flows from investing activities:                      
  Purchases of property, plant and equipment   (37,092)   (25,606)   (96,048)   (88,269)      
  Proceeds from government subsidy for property, plant and equipment   -   7,920   -   7,920      
  Purchases of marketable securities   (121,358)   (162,450)   (605,539)   (809,521)      
  Proceeds from sales of marketable securities   17,820   14,111   60,274   843,164      
  Proceeds from maturities of marketable securities   160,279   464,238   393,472   934,100      
  Proceeds from life insurance   2,639   1,126   2,912   1,126      
  Purchase of investments and acquisition of businesses, net of cash acquired   -   1,158   (21,970)   (169,474)      
Net cash provided by (used for) investing activities   22,288   300,497   (266,899)   719,046      
                                 
Cash flows from financing activities:                      
  Issuance of common stock under stock purchase and stock option plans   14,191   10,278   29,280   20,959      
  Repurchase of common stock   (121,560)   (201,468)   (368,782)   (562,263)      
  Dividend payments   (15,250)   (16,638)   (46,269)   (51,320)      
  Payments related to net settlement of employee stock compensation awards   (104)   (90)   (14,550)   (19,841)      
  Payments of contingent consideration   -   -   (27,615)   (13,571)      
Net cash used for financing activities   (122,723)   (207,918)   (427,936)   (626,036)      
                                 
Effects of exchange rate changes on cash and cash equivalents
  119   472   (400)   661      
                                 
Increase (decrease) in cash and cash equivalents   98,832   333,635   (332,813)   384,176      
Cash and cash equivalents at beginning of period   495,107   480,384   926,752   429,843      
Cash and cash equivalents at end of period   $ 593,939   $ 814,019   $ 593,939   $ 814,019      
                                 




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