Teradyne, Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 29, 2014. Teradyne supplies automatic test equipment, including semiconductor, wireless and system test products and services.
Financial results and liquidity
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $525.6 million | $428.9 million | $846.6 million | $709.3 million |
| Gross profit / margin | $290.4 million / 55.3% | $241.2 million / 56.2% | $457.5 million / 54.0% | $394.7 million / 55.6% |
| Operating income | $120.7 million | $85.9 million | $124.4 million | $90.3 million |
| Net income | $101.2 million | $66.6 million | $102.1 million | $73.1 million |
| Diluted EPS | $0.47 | $0.28 | $0.45 | $0.31 |
- Q2 revenue grew 23% year over year, while net income rose 52%. Six-month revenue grew 19% and net income 40%.
- Six-month operating cash flow was $183.4 million, versus $69.0 million a year earlier. Capital expenditures were $91.4 million; the filing attributes the increase partly to testers for customer leases.
- Cash, cash equivalents and marketable securities totaled $1.107 billion at quarter-end, down $92.5 million from year-end. The company reported no debt at June 29 after repaying the convertible notes and Japan loan; debt payments used $191.0 million in the first half.
- Total current assets were $1.355 billion and current liabilities $361.2 million. Approximately $430 million of cash and marketable securities was held outside the U.S. and would incur additional taxes if repatriated.
- Teradyne declared its first quarterly dividend, $0.06 per share, paid June 2, 2014. The six-month cash payment was $11.7 million.
Material changes and operating performance
- Semiconductor Test drove growth: Q2 revenue rose 44% to $421.4 million, primarily from higher system-on-a-chip demand for application processors and microcontrollers and higher memory volume. Its six-month revenue rose 36% to $683.2 million.
- Wireless Test was weaker: Q2 revenue fell 31% to $68.7 million and first-half revenue fell 32% to $89.9 million, primarily due to lower cellular product volume. System Test Q2 revenue declined 5% to $35.4 million.
- Q2 book-to-bill was 1.2 overall: 1.3 for Semiconductor Test, 0.8 for Wireless Test and 1.1 for System Test.
- Gross margin fell 0.9 percentage point in Q2 and 1.6 points for the first half. Management cited product mix, lower Wireless Test sales and increased excess-and-obsolete inventory provisions, partly offset by higher volume.
- First-half inventory provisions were $15.1 million, versus $5.8 million in 2013; $6.1 million related to Semiconductor Test product transitions. Inventory reserves for written-down or written-off inventory totaled $125.5 million at June 29.
- Operating expenses increased in dollars, including a one-time $6.6 million stock-compensation charge tied to former CEO Michael Bradley’s retirement agreement. He retired effective January 31, 2014 and remained on the board.
Outlook, risks and unusual items
- Management expected 2014 capital additions of approximately $162 million, including about $75 million for testers used in customer leases; approximately $45 million of that lease-related amount had been purchased by June 29. Management believed available cash and securities would fund working capital and expenditures for at least twelve months.
- The filing provides no specific revenue or earnings guidance. Management noted that customer demand is cyclical and that purchasing can shift with conditions in semiconductor and electronics markets.
- Purchase obligations totaled $222.5 million, including $211.5 million due within one year. Contractual obligations totaled $452.3 million, including retirement-plan contributions and operating leases.
- The Singapore tax holiday reduced first-half tax by $6.1 million, or $0.03 per diluted share, and was expected to expire December 31, 2015. The first-half effective tax rate was 15%, versus 7% a year earlier, largely because the prior-year period included a discrete R&D tax-credit benefit.
- Ordinary-course legal claims were not expected by management to materially affect results, financial condition or cash flows. The company identified no material change in market-risk exposure and reported effective disclosure controls.
- Teradyne was evaluating the impact of the new revenue-recognition standard, effective for it in Q1 2017; it had not selected a transition method.
Most important facts for investors to verify
- Whether strong Semiconductor Test demand and the 1.2 overall book-to-bill translated into sustained orders and revenue, particularly given Wireless Test’s 0.8 ratio.
- Whether margins recover as product mix changes and whether inventory provisions, including the $125.5 million reserve balance, stabilize.
- Actual spending and returns on the planned $162 million of 2014 capital additions, especially customer-lease testers.
- Share dilution and remaining warrant exercises following the convertible-note settlement; the filing reports about 1.9 million shares issued for warrants in Q2, with exercises scheduled through September 17, 2014.
- The ongoing cost and benefit of the dividend, the tax cost of repatriating offshore funds, and the eventual impact of the 2017 revenue-recognition standard.