10-QPeriod: Q3 FY2006

TERADYNE, INC Quarterly Report for Q3 Ended Jul 2, 2006

Filed August 10, 2006For Securities:TER

Summary

Teradyne, Inc. reported strong revenue growth for the second quarter and first half of 2006 compared to the prior year, driven primarily by a significant rebound in its Semiconductor Test Systems segment. Net revenues increased by 73% in Q2 and 72.9% for the first half, reflecting recovery from depressed levels in 2005. The company saw a substantial increase in net bookings, particularly in Semiconductor Test Systems, fueled by demand in the System-on-a-Chip (SOC) tester market across various applications and regions. Profitability also improved, with gross margin expanding significantly due to higher volumes and a favorable product mix. The company has continued its strategic focus, including the sale of its Connection Systems segment in late 2005, which contributed a significant gain. Teradyne also authorized a new $400 million stock repurchase program in July 2006, indicating a commitment to returning capital to shareholders. Despite an increase in selling and administrative expenses and ongoing restructuring activities, the company's financial position appears robust, with a substantial cash and marketable securities balance expected to cover near-term needs. Investors should note the cyclical nature of the semiconductor industry and potential fluctuations in demand.

Key Highlights

  • 1Total net revenues surged by 73% year-over-year in Q2 2006 to $391.6 million and by 72.9% for the first six months to $754.5 million, driven by a strong recovery in the Semiconductor Test Systems segment.
  • 2Net bookings increased significantly by 60% in Q2 2006 to $403.7 million, with Semiconductor Test Systems showing a 76.6% increase due to high demand in the SOC tester market.
  • 3Gross margin improved substantially to 49.3% in Q2 2006 from 37.5% in Q2 2005, and to 48.2% for the six months from 37.2%, attributed to higher volumes and a better product mix.
  • 4The company recorded a significant gain from the disposal of its Connection Systems segment in November 2005, which boosted net income.
  • 5Teradyne's balance sheet shows a strong liquidity position, with cash, cash equivalents, and marketable securities totaling $1.1 billion as of July 2, 2006.
  • 6A new stock repurchase program of up to $400 million was authorized in July 2006, demonstrating confidence and a commitment to shareholder returns.
  • 7Engineering and development expenses decreased as a percentage of revenue, reflecting cost-saving measures and project completion, while selling and administrative expenses increased driven by variable compensation and facility consolidation.

Frequently Asked Questions

The primary driver was the strong recovery in the Semiconductor Test Systems segment, which experienced increased demand in the System-on-a-Chip (SOC) tester market. This led to a 95.6% increase in revenue for this segment over the six-month period compared to the prior year.

Teradyne adopted SFAS 123R (Share Based Payment) effective January 1, 2006, requiring the recognition of stock-based compensation expense based on fair value. This resulted in the recognition of $12.3 million in stock-based compensation expense for the first six months of 2006. This adoption did not require restatement of prior periods and had an impact of $0.06 per diluted share for the six-month period.

Teradyne is involved in a pending appeal related to a securities fraud and breach of contract claim stemming from an acquisition in 2000. The company is also designated as a potentially responsible party (PRP) at two environmental cleanup sites. While Teradyne believes it has meritorious defenses and does not expect a material adverse effect on its financial position or liquidity, it acknowledges that losses could be material to its results of operations in any single period.

Teradyne expects its cash, cash equivalents, and marketable securities balance of $1.1 billion as of July 2, 2006, to be sufficient to meet its working capital and expenditure needs for at least the next twelve months. The company also authorized a significant stock repurchase program and has repurchased a portion of its convertible notes.