Teradyne, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended April 4, 2021; comparisons are with the three months ended March 29, 2020. Teradyne supplies semiconductor and other test systems, as well as industrial automation products including collaborative and mobile robots.
Financial results and liquidity
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $781.6 million | $704.4 million | Up 11.0% |
| Gross profit / margin | $461.6 million / 59.1% | $405.6 million / 57.6% | Margin up 1.5 points |
| Operating income / margin | $233.0 million / 29.8% | $206.7 million / 29.3% | Operating income up 12.7% |
| Net income | $205.5 million | $176.2 million | Up 16.6% |
| Diluted EPS | $1.09 | $0.97 | Up 12.4% |
| Operating cash flow | $38.1 million | $43.1 million | Down $5.0 million |
Semiconductor Test revenue was $528.1 million, System Test $132.8 million, Industrial Automation $80.0 million, and Wireless Test $40.9 million. Asia Pacific accounted for $645.6 million of revenue. Net cash used in financing was $126.7 million; investing activities provided $4.7 million. Capital expenditures were $39.3 million, so operating cash flow less capital expenditures was approximately negative $1.1 million.
Cash and cash equivalents were $831.1 million and marketable securities totaled $593.9 million, or $1.425 billion combined, down $129.3 million from year-end. Current assets were $2.501 billion versus current liabilities of $686.8 million. Debt carrying value was $367.9 million, including $11.1 million current and $356.9 million long-term; principal outstanding on the convertible notes was $408.7 million. The company had not drawn on its $400 million revolving facility as of May 7, 2021.
Material changes and drivers
- Revenue growth reflected Semiconductor Test demand, including high-performance computing, automotive, industrial and memory applications, and stronger System Test sales. Industrial Automation revenue rose 32.7% as demand recovered; Wireless Test revenue declined 6.0% on lower cellular test demand.
- Gross margin improved primarily on higher volume and product mix in Semiconductor Test. Selling and administrative expense rose $18.4 million, and engineering and development expense rose $15.2 million, mainly due to higher variable compensation and spending.
- Industrial Automation remained loss-making, with a pretax loss of $13.0 million, improved from a $15.3 million loss a year earlier.
- Working-capital changes used $209.1 million of cash, including increases in receivables, supplier prepayments and inventory. Supplier prepayments rose to $291.2 million from $212.3 million at year-end.
Outlook, risks and unusual items
- Management reported Q1 test-business revenue above plan and Industrial Automation revenue above plan. It expects strong momentum in test businesses and a return to Industrial Automation growth in 2021. The filing provides no numerical revenue or earnings guidance.
- Teradyne cited a global electrical-component shortage, including semiconductor chips, as a risk to lead times, costs and ability to fulfill customer orders. It also noted uncertainty from COVID-19, possible supplier disruption and customer concentration in test equipment.
- In Q1 the company recorded a $7.2 million benefit from reducing the fair value of AutoGuide contingent consideration to zero, primarily due to lower revenue and earnings forecasts. AutoGuide’s seller has brought an arbitration claim seeking acceleration of an earn-out; Teradyne denies breach. The filing states a $106.875 million claim, while the acquisition note describes maximum potential contingent consideration of $100.2 million; the difference merits review.
- Convertible note holders converted $51.3 million of principal during the quarter, settled in cash for principal and shares for conversion value above principal. Further conversions of approximately $15.6 million were expected in Q2. The notes’ disclosed fair value was $1.665 billion, reflecting their conversion feature; this is not their balance-sheet carrying value.
- The board authorized a new $2.0 billion share repurchase program and management intends to repurchase at least $600 million in 2021. Q1 repurchases were $45.2 million; the quarterly dividend remained $0.10 per share. Future payouts remain at the board’s discretion.
- Management said COVID-19 had adversely affected operations and increased costs but could not quantify its Q1 impact. The company reported no material change in market-risk exposure from its prior annual report and stated disclosure controls were effective.
Important facts for investors to verify
- Whether component shortages, supplier capacity and elevated prepayments affect production, delivery, margins and cash conversion.
- Whether test-market demand and the anticipated Industrial Automation recovery persist, and when that segment may reach profitability.
- The status and potential financial exposure of the AutoGuide arbitration, including the differing earn-out amounts cited in the filing.
- The timing and dilution implications of remaining convertible-note conversions, and the effect of the warrant transactions on diluted EPS.
- Whether planned buybacks and dividends remain consistent with operating cash generation and investment needs.