Teradyne, Inc. — 2015 Second-Quarter Form 10-Q
Business context and reporting period. Teradyne supplies semiconductor, wireless, and system test equipment and collaborative robots. This unaudited report covers the three and six months ended July 5, 2015, compared with periods ended June 29, 2014. On June 11, 2015, Teradyne acquired Universal Robots, adding Industrial Automation as a reportable segment.
Financial results and liquidity
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Revenue | $512.7 million | $525.6 million | $855.1 million | $846.6 million |
| Gross profit / margin | $298.6 million / 58.2% | $290.4 million / 55.3% | $491.0 million / 57.4% | $457.5 million / 54.0% |
| Operating income | $130.8 million | $120.7 million | $165.9 million | $124.4 million |
| Net income | $102.9 million | $101.2 million | $135.7 million | $102.1 million |
| Diluted EPS | $0.48 | $0.47 | $0.62 | $0.45 |
| Operating cash flow | Not separately reported for the quarter | $193.5 million | $183.4 million |
Q2 revenue declined 2.4% year over year, while first-half revenue increased 1.0%. Approximate operating margins were 25.5% for Q2 2015 versus 23.0% a year earlier, and 19.4% for the first half versus 14.7%. Q2 net income rose modestly, but basic EPS fell to $0.48 from $0.52; first-half diluted EPS improved from $0.45 to $0.62.
- Cash, securities, and liquidity: At July 5, cash and cash equivalents were $300.7 million and marketable securities totaled $727.9 million, or about $1.029 billion combined, down $270.2 million from year-end. Current assets were $1.316 billion and current liabilities $402.1 million; working capital was approximately $914.3 million.
- Debt: Teradyne had no borrowings under its new five-year, $350 million secured revolving credit facility as of August 14, 2015. It was in covenant compliance at July 5. The facility permits requests for up to $150 million in additional commitments, subject to conditions.
- Cash deployment: First-half investing activities used $49.4 million, including $282.3 million for Universal Robots, partly offset by marketable-security proceeds. Financing activities used $137.7 million, including $128.3 million for repurchases and $25.9 million for dividends.
Material changes and notable items
- Gross margin improved year over year, which management attributed mainly to product mix and sales of previously leased Semiconductor Test equipment. Higher excess and obsolete inventory provisions partly offset the improvement.
- Q2 segment revenue was $400.3 million in Semiconductor Test (down 5%), $62.9 million in Wireless Test (down 8%), $45.8 million in System Test (up 29%), and $3.7 million in Industrial Automation. Semiconductor Test weakness reflected lower memory test sales; Wireless Test weakness reflected connectivity systems. System Test growth was primarily from 3.5-inch hard-disk-drive testers for cloud storage.
- First-half segment revenue was $671.2 million in Semiconductor Test (down $12.0 million), $96.9 million in Wireless Test (up $7.0 million), $83.3 million in System Test (up $9.8 million), and $3.7 million in Industrial Automation.
- Universal Robots’ purchase price was $317.7 million, including $283.9 million cash and $33.8 million estimated contingent consideration; potential additional payments are capped at $65 million. Purchase accounting is preliminary. From June 12 through July 5, Universal Robots contributed $3.7 million revenue and a $1.7 million pretax operating loss.
- First-half earnings included a $5.4 million gain from selling an equity investment. Q2 restructuring and other items included a $1.6 million gain from reducing the ZTEC earn-out fair value, partly offset by about $1.0 million of Universal Robots acquisition costs. Q2 inventory provisions were $14.4 million, including $7.7 million related to Storage Test demand revisions and $6.0 million to Semiconductor Test product transition.
Outlook, risks, and contingencies
- Teradyne provided no specific revenue or earnings guidance in the supplied filing text. Management said it intends to invest, grow market share and addressable markets, and tightly manage costs. It expected available cash and securities to cover dividends, the authorized repurchase program, working capital, and expenditures for at least the next 12 months.
- Management emphasized the cyclical nature of semiconductor and electronics demand and the resulting volatility in customers’ purchasing. It warned that further contraction in the wireless test market could lead to additional goodwill impairment, excess inventory, asset write-offs, or restructuring. Teradyne had recorded a $98.9 million Wireless Test goodwill impairment in Q4 2014.
- Inventory-related reserves for previously written-down or written-off inventory totaled $122.8 million at July 5; the filing states there is no predetermined timeline for scrapping the remaining inventory. Purchase commitments were $230.3 million, of which $222.9 million was due within one year.
- The revolving facility imposes financial tests and restrictive covenants; noncompliance could trigger default remedies. Management also cautioned that acquisition integration and realizing expected growth or synergies are uncertain.
- About $455 million of cash, cash equivalents, and marketable securities was held outside the U.S.; repatriation would incur additional taxes, which the company said it could not practicably estimate. Singapore tax-holiday savings were $6.2 million for the first half, and the holiday was expected to expire December 31, 2015; discussions about an extension were ongoing.
- Management said ordinary-course legal proceedings were not expected to have a material adverse effect. Uncertain tax-position reserves were $33.3 million, primarily involving transfer pricing; the filing anticipated a possible $0.5 million reduction over the next 12 months.
Most important facts for investors to verify
- Whether Semiconductor Test and Wireless Test demand stabilizes, and whether Storage Test inventory exposure or the $122.8 million reserve leads to further charges.
- Universal Robots’ post-acquisition growth, profitability, integration progress, and potential earn-out payments; the purchase-price allocation remains preliminary.
- Cash and securities available for U.S. operations, the tax implications of repatriating approximately $455 million held abroad, and the sustainability of buybacks and dividends.
- Whether the Singapore tax holiday is extended and how transfer-pricing exposures affect the effective tax rate.
- The filing’s reported period-end cash and securities, capital returns, and facility status against subsequent filings; Q2 book-to-bill was 1.0 overall, with segment ratios of 1.0 Semiconductor Test, 1.3 Wireless Test, 1.0 System Test, and 1.4 Industrial Automation.