Teradyne, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended April 1, 2018. Amounts are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Business context and reporting period
Teradyne supplies automated test equipment for semiconductor and electronic products, as well as collaborative robots and related software. Its reportable segments are Semiconductor Test, System Test, Industrial Automation and Wireless Test. The interim statements are unaudited.
Financial performance, liquidity and debt
| Metric | Q1 2018 | Prior comparable quarter |
|---|---|---|
| Revenue | $487.5 | $456.9 |
| Gross profit / margin | $269.8 / 55.4% | $265.0 / 58.0% |
| Operating income / margin | $97.5 / 20.0% | $93.8 / 20.5% |
| Net income | $87.0 | $85.2 |
| Diluted EPS | $0.43 | $0.42 |
| Operating cash flow | $(81.9) | $(61.1) |
| Capital expenditures | $34.8 | $22.1 |
Revenue increased 6.7% year over year, while gross margin declined 2.6 percentage points, primarily due to product mix, particularly in Semiconductor Test. The effective tax rate was 9.2%, versus 7.4%.
Cash, cash equivalents and marketable securities totaled $1.588 billion at quarter-end, down $316.1 million from December 31, 2017. Operating cash use reflected working-capital needs, including a $140.7 million increase in receivables associated with higher late-quarter shipments and the new revenue standard. Current assets were $2.156 billion and current liabilities $391.3 million.
Long-term debt had a carrying value of $369.4 million; the convertible notes have $460 million principal, bear a 1.25% coupon and mature in 2023. The $350 million revolving credit facility was undrawn as of May 11, 2018, and the company reported covenant compliance. Financing included $134.3 million of share repurchases and $17.6 million of dividends.
Material changes and unusual items
- Q1 2018 results reflect adoption of ASC 606; Q1 2017 was reported under ASC 605. Teradyne reported Q1 2018 revenue of $487.5 million under ASC 606; on a legacy-GAAP basis it would have been $421.8 million, with net income of $53.6 million rather than $87.0 million. The adoption increased opening retained earnings by $12.7 million. Accordingly, reported year-over-year comparisons are not on the same accounting basis.
- Segment revenue: Semiconductor Test $373.3 million, up $17.8 million; Industrial Automation $48.8 million, up $12.5 million; System Test $43.0 million, up $3.2 million; Wireless Test $22.5 million, down $2.8 million. Semiconductor Test income before tax fell $9.9 million, primarily due to lower gross margin from product mix.
- Operating cash flow was negative despite positive earnings, largely because of receivables, inventory and accrued-liability movements. Inventory rose to $131.9 million; the quarter included a $3.5 million inventory provision.
- Restructuring and other was a net $0.3 million credit, including a $5.0 million reduction in Universal Robots contingent consideration, partly offset by $3.9 million in severance and $0.8 million in acquisition costs.
- Teradyne acquired Energid in February for a preliminary $27.6 million. After quarter-end, it acquired Mobile Industrial Robots for approximately $148 million net of cash, plus up to approximately $124 million tied to performance targets through 2020.
Outlook, management commentary, risks and contingencies
Management said mobile-device test-capacity demand for 2018 declined sharply during Q1 and that it reduced its 2018 revenue outlook. The filing text does not provide a clear revised numerical outlook. Management intends to continue investing, pursuing market share and addressable-market growth, and managing costs; it said available cash and securities should cover dividends, the authorized repurchase program and operating needs for at least 12 months.
Key risks include cyclical customer demand, significant customer concentration in test equipment, and international exposure. The filing specifically warns that proposed U.S. tariffs on certain China-manufactured products, or retaliatory Chinese tariffs, could materially affect the business. Management did not expect ordinary-course legal proceedings to have a material adverse effect. Purchase commitments totaled $285.8 million, mostly due within one year. The estimated transition-tax payable was $160.9 million; the final effects of the 2017 Tax Reform Act remained subject to possible adjustment. The IRS was examining the company, and the timing and amount of any change in uncertain tax benefits were not predictable.
The board authorized a new $1.5 billion repurchase program and management intended to repurchase $750 million in 2018; future repurchases and dividends remain at the board’s discretion. Teradyne also noted potential dilution from its convertible notes and warrants.
Important facts for investors to verify
- Reconcile ASC 606 results with legacy-GAAP figures when assessing revenue and earnings growth.
- Track the reduced 2018 revenue outlook and mobile-device test demand; the filing gives no revised numerical forecast.
- Assess cash conversion and working-capital trends, especially receivables, inventory and accrued compensation.
- Monitor Semiconductor Test margins, customer concentration and the possible effects of tariffs.
- Review the integration, purchase accounting and contingent payments for Energid and MiR, alongside the planned repurchases, dividends and convertible-note dilution.