Teradyne, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 28, 2020; comparisons are with the corresponding 2019 periods. Amounts below are in millions of dollars unless otherwise noted.
Business context
Teradyne supplies semiconductor, system and wireless test equipment and industrial automation products, including collaborative robots and autonomous mobile robots. Its results are exposed to cyclical customer demand and a concentrated test-equipment customer base. Semiconductor Test was the largest business in the quarter, at $659.1 million of revenue.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Revenue | $838.7 | $564.2 | $1,543.0 | $1,058.3 |
| Gross profit | $471.5 | $323.9 | $877.0 | $611.6 |
| Gross margin | 56.2% | 57.4% | 56.8% | 57.8% |
| Operating income | $217.9 | $134.0 | $424.7 | $227.1 |
| Net income | $188.9 | $97.4 | $365.1 | $206.5 |
| Diluted EPS | $1.05 | $0.55 | $2.02 | $1.16 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $266.0 | $163.3 |
Q2 revenue rose 48.7% year over year and net income rose 94.0%. First-half revenue increased 45.8% and net income increased 76.8%. Gross margin declined year over year, primarily due to Semiconductor Test product mix; Q2 results also reflected higher logistics and operating costs associated with COVID-19. The six-month effective tax rate was 11.9%, versus 8.3% a year earlier.
At June 28, cash and cash equivalents were $725.4 million and marketable securities totaled $336.8 million, or $1.062 billion combined, up from $1.016 billion at year-end. Operating cash flow was partly offset by a $331.0 million increase in receivables and increases in prepayments and other assets. Capital expenditures were $84.0 million for the first half. Debt carrying value was $402.3 million, representing convertible notes with $460.0 million principal due in 2023. A new $400 million, three-year secured revolving facility was undrawn as of August 3, 2020; Teradyne reported covenant compliance.
Material changes and notable items
- Semiconductor Test: Q2 revenue increased 75.8% to $659.1 million, driven by mobility tester demand and flash and DRAM memory testing. First-half revenue rose 59.8%.
- Wireless Test: Q2 revenue rose 19.4% to $49.2 million, attributed to 5G and WiFi 6 demand.
- Industrial Automation: Q2 revenue fell 21.3% to $58.8 million; first-half revenue declined 15.5%. The company cited weaker automotive and manufacturing demand, amplified by pandemic-related shutdowns.
- System Test: Q2 revenue decreased 2.2% to $71.8 million; first-half revenue increased 42.8%, with stronger Storage Test and Defense/Aerospace sales partly offset by weaker Production Board Test demand.
- Q2 restructuring and other expense was $37.2 million, including a $29.9 million increase in the estimated AutoGuide earn-out liability, a $4.0 million contract-termination settlement and acquisition-related costs. The AutoGuide contingent-consideration liability was $49.7 million; the maximum potential payment is $106.9 million.
- First-half share repurchases totaled $88.5 million; the program was suspended April 1. The quarterly dividend was $0.10 per share, up from $0.09 in 2019.
Outlook, risks and contingencies
Teradyne gave no specific financial guidance in the supplied filing text. Management said Test demand remained strong through Q2 and into Q3, with incremental automotive softness offset by stronger mobility, 5G and memory-test demand. Industrial Automation demand had declined significantly. Management could not reliably quantify the pandemic’s future effects, but said facilities were expected to remain operational at sufficient capacity and most R&D projects were on schedule. It believed cash, securities and anticipated operating cash flow would cover needs for at least 12 months.
Key risks include uncertainty from COVID-19 and possible supply-chain, transportation, workforce and demand disruptions; cyclical and concentrated customer demand; and export-control changes. The filing specifically discusses possible effects of U.S. restrictions involving Huawei and new China export controls. Purchase commitments totaled $544.2 million, of which $534.3 million was due within one year. Ordinary-course legal claims were not expected by the company to have a material adverse effect, though outcomes and loss ranges could not be determined. Singapore tax-holiday savings were $13.6 million, or $0.08 per diluted share, for the first half; the holiday was scheduled to expire December 31, 2020, and extension discussions were ongoing.
Investor verification points
- Whether strong semiconductor, mobility, memory and 5G/WiFi 6 demand persists, and how much revenue remains concentrated in a limited customer base and Asia (Taiwan represented 51% of Q2 revenue by customer location).
- Whether receivables growth converts to cash and whether working-capital requirements, supplier prepayments and purchase commitments remain manageable.
- How COVID-19 affects Industrial Automation, manufacturing and logistics costs, customer support, and the supply chain.
- Changes in the AutoGuide earn-out estimate and potential payments, including the $106.9 million maximum exposure.
- Whether the Singapore tax holiday is extended, and the effects of export restrictions on Huawei-related customers and contract manufacturers.
- Potential dilution from the convertible notes and warrants, and the terms and covenant headroom of the secured revolving facility.