Teradyne, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended July 2, 2023; comparisons are to the periods ended July 3, 2022. Amounts below are in U.S. dollars; financial figures are in millions except per-share data.
Business context
Teradyne supplies automated test equipment and robotics, including semiconductor, system and wireless test products, collaborative robots and autonomous mobile robots. Management reported a semiconductor-test correction driven mainly by excess inventory in mobility, and significantly softer robotics demand amid slower industrial activity and macroeconomic headwinds. Test-product sales are concentrated among a limited number of significant customers.
Key financial results
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $684.4 | $840.8 | $1,302.0 | $1,596.1 |
| Gross profit | $402.5 | $506.4 | $758.9 | $961.3 |
| Gross margin | 58.8% | 60.2% | 58.3% | 60.2% |
| Operating income | $139.9 | $248.0 | $232.8 | $433.8 |
| Net income | $120.1 | $197.8 | $203.6 | $359.7 |
| Diluted EPS | $0.73 | $1.16 | $1.23 | $2.07 |
| Operating cash flow | Not stated separately | Not stated separately | $162.1 | $122.9 |
Q2 revenue declined 18.6% year over year, while net income fell 39.3%. Six-month revenue decreased 18.4% and net income decreased 43.4%. Q2 operating margin was approximately 20.4%, versus 29.5% a year earlier; net margin was approximately 17.5%, versus 23.5%.
Q2 segment revenue was $474.7 million in Semiconductor Test (down 12.3%), $94.3 million in System Test (down 30.0%), $71.6 million in Robotics (down 29.2%) and $43.8 million in Wireless Test (down 31.5%). Robotics recorded a Q2 pretax loss of $26.4 million, compared with $6.4 million a year earlier.
Liquidity, debt and capital allocation
- At July 2, 2023, cash and cash equivalents were $613.2 million and marketable securities were $199.9 million, totaling $813.1 million. Cash and cash equivalents plus marketable securities had declined $192.1 million from year-end 2022.
- Current assets were $2,123.8 million and current liabilities were $669.8 million. Total liabilities were $960.0 million.
- Current convertible debt was $32.8 million, down from $50.1 million at year-end. The notes mature December 15, 2023; Teradyne reported that holders had exercised conversion rights on $436.1 million of notes by August 4, 2023, with approximately $8.9 million of additional principal conversions expected in Q3.
- The $750 million revolving credit facility was undrawn as of August 4, 2023, and Teradyne reported compliance with its covenants. Management said available cash, securities and the facility should meet working-capital, expenditure and dividend needs for at least the next 12 months.
- Six-month investing cash use was $121.7 million, including $80.7 million of capital expenditures. Financing cash use was $283.2 million, including $227.8 million of repurchases, $34.2 million of dividends and $17.5 million of convertible-debt principal payments.
- The company repurchased 2.2 million shares for approximately $229.5 million during the first half and authorized a new $2.0 billion repurchase program, with intent to repurchase up to $500 million in 2023 subject to market conditions. Quarterly dividend was $0.11 per share.
Material changes, outlook and notable items
- Revenue fell across all four reportable segments. Semiconductor Test weakness was mainly in mobility and compute, partly offset by Memory test; System Test weakness centered on storage products; Robotics reflected weaker demand and a Universal Robots distribution-channel transition; Wireless Test declined on connectivity products.
- Gross margin fell 1.4 percentage points in Q2 and 1.9 points for the first half, primarily because of lower volume. Management said inflation had a minimal effect in Q2, though component and wage inflation contributed to cost pressure.
- Management cited improving but continuing supply constraints and higher component lead times and costs. The Q3 forecast excludes approximately $35 million of revenue, primarily in test businesses, because of those constraints. The filing does not provide a clear numerical Q3 revenue or earnings outlook.
- Longer-term, management expects 3-nanometer and gate-all-around process ramps, advanced packaging, device complexity and unit growth to support test demand. It also cited DDR5 and high-bandwidth memory demand as partial offsets to current weakness.
- As of July 2, unsatisfied performance obligations were $1,271.6 million; about 90% was expected to be recognized within 12 months and the remainder within one to three years.
- Six-month restructuring and other costs included $7.2 million of severance tied to 179 headcount reductions, mainly in Semiconductor Test and Robotics, and a $1.1 million increase in environmental liability. The former CEO’s retirement-related equity modification generated $5.9 million of stock-based compensation expense.
- Ordinary-course legal claims remain outstanding; management said potential losses were not expected to have a material adverse effect. The AutoGuide earn-out arbitration was settled in 2022 for $26.7 million, with no remaining earn-out obligations.
- Teradyne disclosed that SVB-related cash access was restored by March 13, 2023, and that balances there were insignificant; it nevertheless holds cash at financial institutions above applicable insurance limits. Management also cited customer concentration, foreign-exchange exposure, supply-chain risks and uncertainty around the timing of market recovery.
Most important facts for investors to verify
- Whether semiconductor-test demand stabilizes and the expected recovery timing, particularly in mobility and compute, and the contribution from Memory, automotive and advanced-node testing.
- Whether robotics demand and the Universal Robots distribution-channel transition improve, given the segment’s wider pretax loss.
- Whether supply constraints continue to defer the approximately $35 million of Q3 forecast revenue and affect costs or margins.
- Cash conversion and working-capital trends, including inventory, supplier prepayments and deferred customer advances, alongside planned capital expenditure and shareholder returns.
- Completion and settlement of the remaining convertible notes due December 2023, and potential dilution from the associated warrants.
- Exposure to major customers, foreign currencies and uninsured cash deposits, as well as developments in legal, environmental and purchase commitments.