Teradyne, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended April 2, 2023; comparisons are with the three months ended April 3, 2022. Teradyne supplies automated test equipment and robotics solutions. Unless otherwise noted, amounts are in U.S. dollars.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $617.5 million | $755.4 million | Down 18.2% |
| Gross profit / gross margin | $356.4 million / 57.7% | $454.9 million / 60.2% | Margin down 2.5 percentage points |
| Operating income / operating margin | $92.9 million / 15.0% | $185.9 million / 24.6% | Lower |
| Net income | $83.5 million | $161.9 million | Down 48.4% |
| Diluted EPS | $0.50 | $0.92 | Down 45.7% |
| Operating cash flow | $19.3 million | $7.5 million | Higher |
| Capital expenditures | $41.4 million | $44.0 million | Lower |
Gross-margin pressure reflected lower volume and product mix in Semiconductor Test and higher inventory reserves. Operating cash flow was positive but was more than offset by capital spending; operating cash flow less capital expenditures was approximately negative $22.1 million.
Revenue by segment and material changes
- Semiconductor Test: $415.0 million, down 14.0% year over year. Lower tester sales in high-performance computing and mobile applications, plus lower DRAM memory tester sales, were cited.
- System Test: $74.6 million, down 37.2%, mainly reflecting lower Storage Test and Defense/Aerospace sales.
- Robotics: $89.2 million, down 13.6%, due primarily to weaker demand for collaborative arms and autonomous mobile robots. Segment loss before tax widened to $18.5 million from $5.1 million.
- Wireless Test: $38.7 million, down 24.9%, primarily due to lower connectivity test product sales.
Services revenue rose to $144.1 million from $129.5 million, while product revenue fell to $473.4 million from $625.9 million. Asia Pacific represented $424.5 million of revenue, down from $563.8 million; China’s share of total revenue declined to 10% from 19%.
Liquidity, debt, and capital allocation
- Cash and cash equivalents were $649.2 million at April 2, 2023, down from $854.8 million at December 31, 2022. Cash, cash equivalents, and marketable securities totaled $859.0 million, down $146.1 million during the quarter.
- Total current and long-term marketable securities were $209.8 million. Current assets were $2.112 billion and current liabilities were $628.1 million.
- Convertible debt carrying value was $35.1 million, classified as current and due December 15, 2023. The $750 million revolving credit facility was undrawn as of May 5, 2023; Teradyne reported compliance with its covenants.
- Financing cash use included $93.3 million of share repurchases, $17.2 million of dividends, $19.9 million of employee-award tax withholding payments, and $15.2 million of convertible-debt principal payments. The new repurchase authorization is up to $2.0 billion; management intended to repurchase up to $500 million during 2023, subject to market conditions. The quarterly dividend was $0.11 per share.
Outlook, risks, and unusual items
- Management attributed weaker Semiconductor Test demand to end-market softness in mobility and compute and a slower technology transition in a major end market. Recovery depth and timing were uncertain. Management identified 3-nanometer and gate-all-around transitions, multichip packaging, increasing device complexity, and unit growth as potential longer-term test-demand drivers.
- Robotics sales-channel expansion and new products were expected to support growth in the second half of 2023. The filing does not provide a clear full-quarter revenue or earnings guidance range. The Q2 2023 forecast excludes approximately $25 million of revenue, primarily in test businesses, because of continuing supply constraints.
- Component shortages continued to affect lead times and costs. Teradyne reported $589.7 million of purchase commitments, of which $530.7 million was due in less than one year. Higher inventory, prepayments to contract manufacturers, and non-cancellable commitments may expose the company to inventory risk if demand forecasts prove inaccurate.
- Management noted customer concentration in test products, foreign-exchange exposure (approximately 70% of Robotics revenue is denominated in foreign currencies), and potential effects from renewed supply-chain disruption. Inflation’s Q1 impact was described as limited; management said it had not had a significant long-term impact on earnings.
- Unusual Q1 charges included $5.9 million of stock compensation related to the former CEO’s retirement agreement and $2.0 million of severance for reductions affecting 67 employees. Inventory-related charges totaled approximately $5.2 million across segments. The prior-year period included a $14.7 million arbitration charge; the related claim was settled in 2022 for $26.7 million, with no remaining earn-out obligations.
- As of May 5, 2023, holders had converted $427.2 million of the notes’ original $460.0 million principal; the filing said an additional $2.3 million of principal conversions were expected in Q2. The remaining notes and associated warrants may affect dilution and share price dynamics.
- Teradyne said SVB-related access to its cash was restored by March 13, 2023, and that balances at SVB were insignificant. It also disclosed cash balances at several financial institutions exceeding deposit-insurance limits, creating potential loss or access risk if another institution fails. Ordinary-course legal claims were not expected to have a material adverse effect, according to the company.
Important facts for investors to verify
- Whether demand in Semiconductor Test and System Test stabilizes, and how the timing of end-market recovery compares with management’s longer-term technology-transition expectations.
- Whether supply constraints and the approximately $25 million Q2 revenue exclusion persist, and whether inventory levels, reserves, and purchase commitments remain appropriate.
- Robotics demand, second-half growth expectations, and the effects of foreign-exchange movements on reported revenue.
- Cash generation relative to capital spending, repurchases, dividends, and the upcoming maturity of remaining convertible notes.
- Potential dilution from convertible-note warrants and the extent of uninsured cash exposure across financial institutions.