Teradyne, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019; comparisons are to the three and six months ended July 1, 2018. Teradyne supplies automated test equipment and industrial automation products, including collaborative and autonomous mobile robots.
Financial performance and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $564.2 million | $526.9 million | $1,058.3 million | $1,014.4 million |
| Gross profit / margin | $323.9 million / 57.4% | $307.3 million / 58.3% | $611.6 million / 57.8% | $577.2 million / 56.9% |
| Operating income | $134.0 million | $120.4 million | $227.1 million | $217.9 million |
| Net income | $97.4 million | $101.0 million | $206.5 million | $188.0 million |
| Diluted EPS | $0.55 | $0.52 | $1.16 | $0.94 |
| Operating cash flow | Not separately reported for the quarter | Not separately reported for the quarter | $163.3 million | $49.9 million |
- Q2 revenue increased 7.1%; net income declined 3.6%, while diluted EPS rose as weighted-average diluted shares fell to 178.6 million from 194.9 million.
- For the first half, revenue increased 4.3% and net income increased 9.9%. Operating cash flow improved, though working-capital changes used $115.0 million.
- At June 30, cash and cash equivalents were $495.1 million and marketable securities totaled $499.2 million, or $994.3 million combined. Combined balances declined $210.2 million from year-end 2018.
- Debt was $387.2 million carrying value, representing $460 million principal of 1.25% convertible notes due December 2023. No borrowings under the revolving facility are reported; Teradyne terminated that facility in June 2019.
- Current assets were $1.617 billion and current liabilities $467.0 million. Total liabilities were $1.192 billion and shareholders’ equity $1.479 billion.
Material changes and segment performance
- Q2 Semiconductor Test revenue rose 4.1% to $374.9 million; Industrial Automation rose 20.3% to $74.7 million; System Test rose 5.3% to $73.4 million; and Wireless Test rose 17.0% to $41.2 million.
- First-half Semiconductor Test revenue fell 2.4% to $715.8 million, primarily because of lower memory-test sales. Industrial Automation revenue rose 27.1% to $140.9 million, including MiR; System Test rose 16.8% to $131.6 million; and Wireless Test rose 21.8% to $70.3 million.
- Q2 gross margin fell 0.9 percentage points, attributed mainly to higher Semiconductor Test inventory charges and unfavorable product mix. First-half gross margin increased 0.9 points, reflecting favorable Semiconductor Test and System Test mix.
- Q2 restructuring and other included an $11.7 million credit from a lower fair value for MiR contingent consideration. This helped lift operating income; the liability’s fair-value reduction was primarily associated with lower forecast revenue.
- Teradyne repurchased 6.5 million shares for $247.2 million in the first half and paid $31.0 million in dividends. It stated an intention to repurchase $500 million in 2019 under its existing program.
Outlook, commentary, and risks
- Management said first-half Industrial Automation revenue growth was below forecast and expected full-year 2019 growth to be below the low end of its long-term 30%–40% range. No consolidated full-year revenue or EPS guidance is stated in the provided filing text.
- Management expected cash, cash equivalents, and marketable securities to be sufficient for dividends, authorized repurchases, working capital, and expenditures for at least the next 12 months. Dividends and buybacks remain subject to board discretion.
- Demand is cyclical, and test-product sales are concentrated among a limited number of significant customers; two customers drive significant demand directly and through supply partners.
- Trade and export restrictions are a stated risk. Certain U.S.-manufactured products may be affected by restrictions involving Huawei and its affiliates added to the U.S. Entity List in May 2019. Teradyne said restrictions had not significantly affected sales to date but could limit sales, service, or product-development activity.
- Other items to monitor include $306.9 million of purchase commitments, $84.1 million maximum remaining MiR contingent consideration, and $13.4 million of reserves for uncertain tax positions. Management said ordinary-course legal matters were not expected to materially adversely affect results, financial condition, or cash flows.
- The Q2 effective tax rate was 25.8%, versus 15.8% a year earlier, including discrete tax expense. The first-half rate was 8.3%, versus 12.9%, benefiting in part from discrete tax benefits and reduced uncertain-tax-position expense. A subsequent executive retirement agreement is expected to result in approximately $2.5 million of stock-based compensation expense in Q3 2019.
Most important facts for investors to verify
- Whether the below-forecast Industrial Automation growth and weaker outlook persist, and how much segment results depend on MiR and Universal Robots.
- Customer concentration, semiconductor-cycle exposure, and the impact of export restrictions on sales, servicing, and development involving Huawei or other restricted customers.
- Cash generation and working-capital trends, including accounts receivable, inventory reserves, and the effect of factoring receivables.
- Potential dilution and economics of the convertible notes, including the $31.70 conversion price, $39.78 warrant strike, and share-repurchase pace.
- Uncertain tax exposures and whether remaining MiR earn-out payments or fair-value estimates change materially.