Teradyne, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended July 3, 2022; comparisons are to periods ended July 4, 2021. Amounts are in U.S. dollars.
Business context
Teradyne supplies automated test equipment for semiconductors, wireless products and other electronics, as well as collaborative and mobile industrial robots. Its reportable segments are Semiconductor Test, System Test, Industrial Automation and Wireless Test. Management cited weaker mobility and compute demand and slower technology transitions in parts of Semiconductor Test, while demand in several other segments grew.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $840.8 million | $1,085.7 million | $1,596.1 million | $1,867.3 million |
| Gross profit | $506.4 million | $647.0 million | $961.3 million | $1,108.6 million |
| Gross margin | 60.2% | 59.6% | 60.2% | 59.4% |
| Operating income | $248.0 million | $388.9 million | $433.8 million | $621.9 million |
| Net income | $197.8 million | $328.3 million | $359.7 million | $533.8 million |
| Diluted EPS | $1.16 | $1.76 | $2.07 | $2.85 |
| Operating cash flow | Not separately stated | Not separately stated | $122.9 million | $244.4 million |
Q2 operating margin was approximately 29.5% versus 35.8% a year earlier; net margin was approximately 23.5% versus 30.2%. For the six-month periods, operating margin was approximately 27.2% versus 33.3%, and net margin approximately 22.5% versus 28.6%. Gross margin improved despite lower revenue, primarily from favorable Semiconductor Test product mix, partly offset by higher material costs.
- Revenue by segment, Q2: Semiconductor Test $541.3 million, down 35.1%; System Test $134.7 million, up 28.5%; Industrial Automation $101.1 million, up 9.7%; Wireless Test $63.9 million, up 16.4%.
- Cash and liquidity: Cash and cash equivalents were $572.0 million; marketable securities totaled $321.8 million, for $893.9 million combined. Combined balances fell $606.4 million from year-end 2021.
- Cash flows, six months: Operating activities generated $122.9 million; investing activities used $54.3 million; financing activities used $626.8 million. Capital expenditures were $89.7 million.
- Debt: Convertible debt carrying value was $74.4 million, including $9.6 million classified as current. The $400 million revolving facility was undrawn as of August 5, 2022, and Teradyne reported covenant compliance.
- Working capital indicators: Inventories were $295.6 million, up from $243.3 million at year-end; prepayments were $498.1 million, including $460.7 million of contract manufacturer and supplier prepayments.
Changes versus comparable periods
- Q2 revenue declined 22.6% year over year, mainly because Semiconductor Test revenue fell $292.7 million. Six-month revenue declined 14.5%.
- Q2 net income fell 39.8%; six-month net income fell 32.6%. Lower Semiconductor Test sales were the primary operating driver.
- System Test, Industrial Automation and Wireless Test revenue increased in both the quarter and six-month comparison. Industrial Automation remained loss-making, though its loss narrowed.
- Operating cash flow for the first six months was about half the prior-year amount, reflecting working-capital investment, including higher receivables, supplier prepayments and inventory.
- Cash returned to shareholders increased: six-month repurchases were $532.8 million for 5.0 million shares, versus $196.6 million for 1.6 million shares in 2021. Dividends paid were $35.4 million, with the quarterly rate raised to $0.11 per share from $0.10.
Outlook, commentary, risks and unusual items
- Management expected lower 2022 demand in Semiconductor Test mobility and compute applications, citing end-market weakness and slower technology transition. It identified 3-nanometer production beginning in 2023, followed by gate-all-around technology and multichip packaging, as longer-term growth drivers; recovery timing remained uncertain.
- Management expected strong 2022 Semiconductor Test demand in automation and industrial applications and continued growth in Universal Robots and MiR. AutoGuide was focused on investing to scale and integrate high-payload mobile robot solutions.
- Supply constraints prevented approximately $40 million of Q2 test-business revenue from being shipped despite customer demand. The Q3 forecast excluded approximately $50 million of revenue, primarily in test, because of continuing supply constraints. These are disclosed revenue impacts, not a complete revenue or EPS forecast.
- Component shortages, logistics disruptions and inflation were increasing lead times and costs. Management said inflation had not materially affected results through Q2, but warned it may not be able to pass all cost increases to customers. Non-cancellable supplier commitments and advance inventory purchases create inventory risk if forecasts change.
- COVID-19 disruptions, including conditions in China, could affect operations, suppliers and demand. Russia’s invasion of Ukraine had no significant direct business impact, but sanctions and resulting economic uncertainty could affect demand or supply chains.
- The market for test products is concentrated among a limited number of significant customers. Asia Pacific represented $654.9 million, or about 78%, of Q2 revenue by customer-site geography.
- The AutoGuide earn-out arbitration was settled for $26.7 million in March 2022, with no remaining earn-out obligation. Teradyne recorded a $14.7 million charge in the first half of 2022 related to the dispute, in addition to a $12 million charge recorded in Q4 2021. The claim had sought up to $106.9 million.
- Other expense included $6.6 million of Q2 unrealized losses on equity securities. The six-month effective tax rate was 14.1%, up from 12.2%; Singapore tax-holiday savings were $8.3 million, or $0.05 per diluted share.
- Purchase commitments totaled approximately $1.01 billion, including $870.5 million due within one year. Management stated cash, securities and anticipated operating cash flow should cover working capital and other needs for at least 12 months. It intended to repurchase at least $750 million of shares in 2022, subject to board discretion.
Important facts for investors to verify
- Whether Semiconductor Test demand and customer purchasing recover, and how segment trends evolve against management’s 2022 commentary.
- Whether component availability improves enough to recover the approximately $40 million of constrained Q2 demand and the approximately $50 million excluded from the Q3 forecast.
- How working-capital investment, supplier prepayments and inventory affect cash generation, particularly if demand forecasts change.
- The remaining convertible-note conversion, cash settlement and dilution implications; holders had elected to convert $386.4 million of notes by August 5, 2022, and the filing reported $74.7 million of principal outstanding at quarter-end.
- Whether the planned minimum $750 million of 2022 repurchases is completed while maintaining liquidity and the $0.11 quarterly dividend.
- Potential changes in margins from product mix, inflation, pricing, customer concentration and geographic exposure.