Teradyne, Inc. — Q1 2013 Form 10-Q
Business context and period: Teradyne supplies automatic test equipment and related services for semiconductor, wireless, and systems-test markets. This unaudited report covers the three months ended March 31, 2013; comparison is with the three months ended April 1, 2012. Amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q1 2013 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $280.4 million | $396.7 million | Down $116.3 million (29%) |
| Gross profit / margin | $153.4 million / 54.7% | $190.9 million / 48.1% | Profit down $37.5 million; margin up 6.6 percentage points |
| Operating income | $4.4 million | $46.4 million | Down $42.0 million |
| Income (loss) before taxes | $(1.4) million | $41.2 million | Declined $42.7 million |
| Net income / diluted EPS | $6.6 million / $0.03 | $33.6 million / $0.15 | Net income down $27.0 million |
| Cash from operations | $(36.5) million | $11.2 million | Declined $47.7 million |
Product revenue was $214.3 million versus $330.9 million; services revenue was $66.1 million versus $65.8 million. Gross margin improved mainly because of favorable Semiconductor Test product mix and lower Storage Test sales, while operating expenses rose to $149.0 million from $144.5 million.
Segments: Semiconductor Test revenue was $211.5 million, down 21%; Wireless Test was $33.6 million, up 7%; and Systems Test was $35.3 million, down 64%. Semiconductor Test and Systems Test pretax income fell to $13.8 million and $1.5 million, respectively. Wireless Test reported a pretax loss of $10.0 million.
Cash, debt, and liquidity: Cash and cash equivalents were $305.2 million at March 31, 2013, and marketable securities totaled $651.0 million, for combined liquidity of $956.3 million, down $50.1 million from year-end. Current assets were $1.207 billion and current liabilities $417.4 million. Debt obligations totaled approximately $193.2 million; the balance sheet classified $176.8 million of debt as current and reported $3.2 million of Japan loan debt. The $190 million principal convertible notes mature March 15, 2014. Management said available liquidity should meet working-capital and expenditure needs for at least 12 months; approximately $300 million of cash outside the U.S. could incur additional taxes if repatriated.
Investing activities used $5.8 million, including $22.5 million of capital expenditures, partly offset by securities maturities and sales. Financing activities provided $8.6 million, primarily from employee stock issuances. The cash-flow statement reports a $33.7 million decrease in cash and cash equivalents.
Material changes and management commentary
- The revenue decline was driven chiefly by lower system-on-a-chip test product sales in Semiconductor Test and lower Storage Test system volume in Systems Test.
- Company book-to-bill was 1.4, compared with 1.2 a year earlier: Semiconductor Test 1.2, Wireless Test 3.3, and Systems Test 0.9. These ratios indicate bookings relative to sales, not a revenue forecast.
- Operating cash flow turned negative as changes in operating assets and liabilities used $85.9 million, including decreases in accrued compensation, customer advances/deferred revenue, and accrued taxes.
- The $8.0 million income-tax benefit included a $6.7 million discrete benefit from the retroactive reinstatement of the 2012 U.S. federal R&D tax credit. The filing reported a pretax loss, so this benefit materially contributed to reported net income.
Outlook, risks, and unusual items
- The filing provides no specific numerical revenue or earnings guidance. Management described demand as cyclical and said customer purchase timing can shift with semiconductor-industry conditions. It intends to invest to expand addressable markets while managing costs.
- Inventory provisions were $3.8 million, up from $1.6 million. The company reported $143.3 million of inventory-related reserves for items written down or written off.
- Convertible-note holders became eligible to convert under the note terms after the share-price threshold was met. As of May 10, 2013, one holder had exercised the option for $2,000 of notes. The company intends to settle the conversion spread in shares; the notes’ stated principal is due in 2014.
- Purchase commitments were $192.6 million, of which $190.2 million was due within one year. Total disclosed contractual obligations were $585.7 million. Management said ordinary-course legal matters were not expected to have a material adverse effect.
- Other notable items include $0.4 million of severance charges for four employees and the ongoing risk that actual results may differ from estimates. Management reported no material change in market-risk exposure and concluded disclosure controls were effective.
Important facts for investors to verify
- Whether bookings, especially the Wireless Test book-to-bill of 3.3, convert into shipments and revenue, and whether weak Systems Test bookings persist.
- The timing and cash or share impact of the March 2014 convertible-note maturity and any further holder conversions.
- Whether the working-capital cash outflow reverses and whether inventory levels and reserves reflect expected demand.
- How much of reported net income depended on the discrete tax benefit, and whether deferred tax assets remain realizable.
- The source filing’s full risk-factor discussion and the timing and funding of contractual obligations, including purchase commitments.