Teradyne, Inc. — Q2 2013 Form 10-Q
Business context and reporting period. Teradyne supplies automatic test equipment and services through Semiconductor Test, Wireless Test and Systems Test. This unaudited report covers the three and six months ended June 30, 2013; comparable periods ended July 1, 2012.
Financial performance
Amounts below are in millions of dollars, except per-share data and ratios.
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Revenue | $428.9 | $548.3 | $709.3 | $945.0 |
| Gross profit / margin | $241.2 / 56.2% | $309.5 / 56.4% | $394.7 / 55.6% | $500.4 / 53.0% |
| Operating income | $85.9 | $157.4 | $90.3 | $203.9 |
| Net income | $66.6 | $111.4 | $73.1 | $145.0 |
| Diluted EPS | $0.28 | $0.49 | $0.31 | $0.63 |
| Operating cash flow | Not provided by quarter in the filing text | $69.0 | $113.3 |
- Q2 operating margin was approximately 20.0% versus 28.7% a year earlier; first-half operating margin was approximately 12.7% versus 21.6%. Net margin was approximately 15.5% and 10.3% for Q2 and first-half 2013, respectively, versus 20.3% and 15.3% in the comparable 2012 periods.
- At June 30, cash and cash equivalents were $227.6 million; current and long-term marketable securities totaled $804.0 million. Combined cash and securities were approximately $1.032 billion, up $25.3 million from year-end 2012.
- Total debt carrying value was approximately $179.6 million, comprising $177.5 million of convertible notes and about $2.0 million of Japan loan debt. The notes mature March 15, 2014 and are classified as current. Current assets were $1.282 billion and current liabilities $465.1 million.
- First-half investing cash outflow was $190.1 million, including $50.8 million of capital expenditures; financing provided $9.8 million. Cash and cash equivalents fell $111.3 million as the company invested in marketable securities. CFO less capital expenditures was approximately $18.2 million, calculated from reported figures.
Material changes versus comparable periods
- Revenue declined 21.8% in Q2 and 25.0% in the first half. Semiconductor Test sales fell 20% in both comparisons, primarily from lower system-on-a-chip test sales. Systems Test declined 48% in Q2 and 57% in the first half, driven mainly by lower Storage Test volume; management linked this to weaker hard-disk-drive demand associated primarily with lower PC shipments. Wireless Test revenue fell 11% in Q2 and 7% in the first half.
- Q2 gross margin was nearly flat year over year, as lower volume and product mix were largely offset by lower inventory provisions. First-half gross margin improved 2.6 percentage points, primarily from favorable product mix and lower Storage Test sales.
- Operating income and net income fell substantially with lower revenue and operating leverage. First-half tax provision was $5.8 million versus $48.3 million, reflecting R&D tax credits and use of foreign tax credits; effective tax rates were 7% versus 25%.
- First-half operating cash flow declined to $69.0 million from $113.3 million, including a $74.8 million increase in receivables, partly offset by a $26.4 million reduction in inventory.
- Q2 total-company book-to-bill was 1.1, unchanged from the prior-year quarter. Semiconductor Test was 1.2, Wireless Test 0.9 and Systems Test 0.7.
Outlook, commentary, risks and unusual items
- Management provided no specific numerical revenue or earnings guidance in the supplied filing text. It said lower hard-disk-drive demand, primarily related to lower PC shipments, was expected to continue. Management emphasized the cyclical nature of customer purchasing and its intent to invest in growth markets while tightly managing costs.
- Management said available cash, cash equivalents and marketable securities should cover working-capital and expenditure needs for at least 12 months. Approximately $330 million of cash held outside the U.S. could incur additional taxes if repatriated.
- Purchase commitments totaled $265.0 million, of which $261.7 million was due within one year. Total contractual obligations were $647.7 million; this includes purchase and debt obligations and should not be treated as equivalent to funded debt.
- The $190 million principal convertible notes carry a 4.50% coupon and become convertible under specified conditions; the filing says a condition allowing early conversion was met during Q2. Their June 30 carrying amount was $177.5 million, while disclosed fair value was $610.7 million. One holder converted $2,000 principal on August 9, settled in cash.
- Inventory provisions were $2.0 million in Q2 and $5.8 million in the first half, down from $9.4 million and $10.9 million in the respective 2012 periods. Inventory previously written down or written off totaled $140.0 million at June 30; no fixed timeline for scrapping the remainder was stated.
- Boston Semi Equipment sued Teradyne alleging antitrust violations and unfair business practices, seeking unspecified damages and an injunction. Teradyne moved to dismiss and intends to defend itself. Management said a material effect on financial position was unlikely, but an effect on results or cash flows in an individual period could be material.
- The filing identifies cybersecurity or operational-system breaches as a risk. Management also noted estimates may differ from actual results and that deferred tax assets depend on future realizability assessments.
Most important facts for investors to verify
- Whether semiconductor and Systems Test demand stabilizes, particularly SOC testing and Storage Test exposure to HDD and PC demand; monitor segment revenue and book-to-bill.
- Whether the decline in earnings and operating cash flow continues, including receivables collection and the effect of lower sales on operating leverage.
- How the convertible notes are settled at maturity or upon conversion, and the impact of the note hedge, warrants and potential dilution.
- Whether the $140.0 million inventory reserve remains adequate and whether further demand revisions require provisions or write-offs.
- Developments in the BSE litigation, including potential exposure and any effect on results or cash flows.
- Liquidity composition and accessibility, including marketable-security valuation changes and taxes on potential repatriation of foreign cash.