Teradyne, Inc. — Q2 2016 Form 10-Q
Business context and reporting period. Teradyne supplies semiconductor, system and wireless test equipment and collaborative robots through its Industrial Automation segment. The quarter ended July 3, 2016; comparisons are with the quarter ended July 5, 2015. Six-month figures cover the corresponding periods ended on those dates. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and liquidity
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $531.8 | $512.7 | $962.8 | $855.1 |
| Gross profit / margin | $282.9 / 53.2% | $298.6 / 58.2% | $513.2 / 53.3% | $491.0 / 57.4% |
| Operating income (loss) | $(231.8) | $130.8 | $(175.7) | $165.9 |
| Net income (loss) | $(223.5) | $102.9 | $(173.6) | $135.7 |
| Diluted EPS | $(1.10) | $0.48 | $(0.85) | $0.62 |
- Q2 revenue rose 3.7% year over year, while six-month revenue grew 12.6%. Semiconductor Test and System Test grew; Wireless Test contracted sharply. Industrial Automation revenue included Universal Robots, acquired in June 2015.
- Reported losses were driven principally by noncash Wireless Test impairment charges: $254.9 million of goodwill and $83.3 million of acquired intangible assets. The impairment followed lower projected demand and an 11% Wireless Test headcount reduction. Wireless Test retained approximately $8.0 million of goodwill and $5.8 million of intangible assets.
- Six-month operating cash flow was $207.4 million, compared with $193.5 million a year earlier. Investing activities used $16.0 million and financing activities used $75.0 million. Capital expenditures were $46.6 million.
- At July 3, cash and cash equivalents were $381.1 million; marketable securities totaled $724.7 million, for combined liquidity of approximately $1.106 billion. Current assets were $1.413 billion and current liabilities $455.3 million. The filing reports no outstanding borrowings under the $350 million revolving credit facility as of August 12, 2016; it provides no separate debt balance value.
- Cash, cash equivalents and marketable securities increased $97.5 million in the first half. Approximately $668 million was held outside the United States and could incur additional taxes if repatriated. Management believed liquidity would cover dividends, the authorized buyback, working capital and expenditures for at least 12 months.
Material changes and segment trends
- Q2 Semiconductor Test revenue increased 8.7% to $435.3 million, primarily on application-processor demand. System Test revenue increased 7.0% to $49.0 million, aided by cloud-storage hard-drive testers.
- Q2 Wireless Test revenue fell 64.4% to $22.4 million, primarily because of reduced connectivity and cellular test demand from its largest customer. That customer represented 51%–73% of annual Wireless Test sales since 2011, creating significant revenue concentration.
- Industrial Automation revenue was $25.1 million in Q2 and $41.8 million for the first half, compared with $3.7 million in both prior-year periods, reflecting the Universal Robots acquisition timing.
- Gross margin declined 5.0 percentage points in Q2 and 4.1 points in the first half. Management cited product mix, 2015 sales of previously leased Semiconductor Test systems, higher Storage Test sales and lower Wireless Test sales; lower inventory provisions partly offset the effects.
- Q2 book-to-bill was 0.9 overall: Semiconductor Test 0.9, System Test 0.6, Wireless Test 1.0 and Industrial Automation 1.0. The prior-year total was 1.0.
Outlook, commentary, risks and unusual items
- The filing provides no specific revenue or earnings guidance. Management described cyclical customer purchasing and an historical even/odd-year pattern in mobility-related Semiconductor Test demand; it expected that pattern to lessen over time as smartphone growth slows and device complexity rises.
- Management attributed Wireless Test weakness to reduced buying from its largest customer, slower smartphone growth and slower adoption of new wireless technologies. Actual demand and impairment assumptions remain sensitive to market and customer forecasts.
- An April 2016 earthquake damaged Teradyne’s Kumamoto, Japan facility beyond repair. Operations were temporarily transferred. The company recorded $5.1 million of building and related charges, offset by $5.1 million of insurance proceeds received; it was still assessing the total impact. Management warned of possible short-term disruption and uninsured rebuilding costs. Insurance coverage was $10 million, with an approximately $2.5 million deductible.
- Q2 effective tax rate was 3.2% and first-half rate was 0.0%, affected by the nondeductible goodwill impairment, geographic income mix and discrete tax benefits. The Singapore tax holiday saved $30.7 million, or $0.15 per diluted share, in the first half and is scheduled to expire December 31, 2020.
- Teradyne repurchased $56.8 million of shares in the first half and stated an intention to repurchase $100–$200 million during 2016. It paid $24.4 million in dividends and declared a quarterly dividend of $0.06 per share; future dividends and repurchases remain at the board’s discretion.
- Purchase commitments totaled $201.1 million, nearly all due within one year. Management stated ordinary-course legal matters were not expected to have a material adverse effect. The company was in compliance with credit-facility covenants as of August 12, 2016.
Key investor verification points
- Track Wireless Test orders, revenue and customer concentration, and test the assumptions underlying the $338.3 million impairment charges.
- Assess whether Semiconductor Test growth and Industrial Automation expansion can offset Wireless Test weakness and pressure on gross margins.
- Reconcile reported cash generation with working-capital movements, including the increase in receivables and deferred revenue/customer advances.
- Verify the full financial and operational impact of the Kumamoto earthquake, insurance recoveries and any rebuilding costs.
- Monitor execution of the stated 2016 buyback range, dividend decisions, overseas cash tax implications and contingent consideration obligations.