Teradyne, Inc. — Q1 2017 Form 10-Q
Business context and period. The filing covers the three months ended April 2, 2017, compared with the three months ended April 3, 2016. Teradyne supplies semiconductor, system and wireless test equipment and collaborative robots through its Industrial Automation business.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $456.9 million | $431.0 million | +6.0% |
| Gross profit / margin | $264.9 million / 58.0% | $230.3 million / 53.4% | Margin +4.6 points |
| Operating income / margin | $93.4 million / 20.4% | $56.1 million / 13.0% | +66% |
| Net income | $85.2 million | $50.0 million | +70% |
| Diluted EPS | $0.42 | $0.24 | +$0.18 |
| Operating cash flow | $(61.1) million | $35.7 million | Declined $96.8 million |
| Capital expenditures | $22.1 million | $20.3 million | — |
- Revenue growth reflected Semiconductor Test (+4.5%), Industrial Automation (+117.4%) and Wireless Test (+24.6%); System Test declined 25.9%. Semiconductor Test revenue was $355.5 million, System Test $39.8 million, Industrial Automation $36.3 million and Wireless Test $25.3 million.
- Gross margin improved mainly from favorable Semiconductor Test product mix, increased sales and lower inventory provisions. Acquired-intangible amortization fell to $8.0 million from $20.0 million, largely following prior-year impairment in Wireless Test.
- Segment income before taxes increased in Semiconductor Test and Wireless Test, while System Test moved from $9.5 million income to a $2.8 million loss. Industrial Automation reduced its loss to $2.6 million from $7.2 million.
Balance sheet, liquidity and capital
- At April 2, 2017, cash and cash equivalents were $324.7 million and marketable securities totaled $1.158 billion, or approximately $1.482 billion combined. Combined cash and securities were down $130.4 million from year-end 2016.
- Current assets were $1.854 billion and current liabilities $393.1 million. Inventory rose to $203.3 million from $136.0 million; accounts receivable rose to $315.0 million from $192.4 million.
- Operating cash use reflected working-capital investment, including $123.8 million of increased receivables and $62.2 million of increased inventory, partly to support expected second-quarter shipments.
- Long-term debt had a $355.9 million carrying value; the $460 million principal convertible notes mature in December 2023 and carry a 1.25% coupon. The company reported no revolver borrowings as of May 12, 2017 and was in compliance with facility covenants.
- Teradyne repurchased $37.7 million of shares and paid $14.0 million in dividends in the quarter. The board’s $500 million repurchase authorization began in 2017; management stated an intention to repurchase at least $200 million during 2017. The quarterly dividend was $0.07 per share.
Material changes, outlook and risks
- Total company book-to-bill was 1.3, compared with 0.9 a year earlier; each of the four reportable segments exceeded 1.0.
- Management said cash, cash equivalents and marketable securities should be sufficient for dividends, the authorized repurchase program, working capital and expenditures for at least 12 months. It disclosed $704 million of cash, cash equivalents and marketable securities outside the U.S.; repatriation would incur additional taxes, not quantified in the filing.
- No specific revenue or earnings forecast for a future quarter is provided in the supplied filing text. Management described semiconductor and electronics demand as cyclical, said customer purchasing can shift with market conditions, and expected the historical even/odd-year mobility demand pattern to lessen in 2017 and later years.
- Customer concentration is a risk: a limited number of customers account for a substantial portion of test-equipment purchases, including one customer that drives significant demand directly and through suppliers. Other relevant risks include demand cyclicality, inventory forecast changes and potential dilution from convertible notes and warrants.
- Unusual items include a $5.2 million discrete tax benefit from stock-based compensation under newly adopted accounting guidance; the effective tax rate was 7.4%, versus 12.6%. The Singapore tax holiday contributed $4.7 million, or $0.02 per diluted share, and is scheduled to expire December 31, 2020.
- Restructuring charges were $1.9 million, including a $1.3 million lease impairment for a Wireless Test facility and $0.6 million of severance. Purchase commitments totaled approximately $292.0 million, mostly due within one year. Management said ordinary-course legal matters were not expected to have a material adverse effect.
Most important facts for investors to verify
- Whether the strong book-to-bill and shipment outlook translate into revenue, particularly given Semiconductor Test customer concentration and industry cyclicality.
- Whether receivables and inventory convert to cash as expected; operating cash flow was negative despite higher earnings.
- Whether System Test weakness persists and Industrial Automation can improve profitability as collaborative-robot demand grows.
- The terms and potential dilution of the convertible notes and warrants, alongside planned share repurchases and dividends.
- The sustainability of the low effective tax rate and the potential tax cost associated with repatriating offshore funds.