Teradyne, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended July 2, 2017; comparisons are to the periods ended July 3, 2016. Amounts are in U.S. dollars unless stated otherwise.
Business context
Teradyne supplies automated test equipment for semiconductor, wireless, storage, and other electronics markets, as well as collaborative robots through Industrial Automation. It reports four segments: Semiconductor Test, Industrial Automation, System Test, and Wireless Test.
Financial performance
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Revenue | $696.9 million | $531.8 million | $1,153.8 million | $962.8 million |
| Gross profit | $391.2 million | $282.9 million | $656.2 million | $513.2 million |
| Gross margin | 56.1% | 53.2% | 56.9% | 53.3% |
| Operating income (loss) | $209.9 million | $(231.8) million | $303.3 million | $(175.7) million |
| Net income (loss) | $175.0 million | $(223.5) million | $260.2 million | $(173.6) million |
| Diluted EPS | $0.87 | $(1.10) | $1.29 | $(0.85) |
Q2 revenue rose about 31% year over year, led by Semiconductor Test; first-half revenue increased about 20%. Management attributed higher gross margins principally to favorable Semiconductor Test product mix and higher sales, including Industrial Automation. Q2 operating margin was approximately 30.1%, versus a loss in the prior-year quarter; the comparison is heavily affected by 2016 impairment charges.
Q2 segment revenue was Semiconductor Test $593.2 million, Industrial Automation $39.3 million, System Test $36.7 million, and Wireless Test $27.7 million. Semiconductor Test grew 36% year over year, Industrial Automation 57%, and Wireless Test 24%; System Test declined 25%. Total company book-to-bill was 0.7, down from 0.9 a year earlier.
Cash flow, balance sheet, and debt
- First-half operating cash flow was $169.2 million, compared with $216.6 million in 2016. Capital expenditures were $46.0 million; operating cash flow less capital expenditures was approximately $123.2 million.
- Cash and cash equivalents were $598.3 million; marketable securities totaled $1.022 billion. Combined cash and securities were $1.620 billion at July 2, versus $1.613 billion at year-end 2016.
- Current assets were $2.080 billion and current liabilities $439.2 million. Total liabilities were $981.6 million.
- Convertible notes had $460 million principal outstanding, maturing December 2023, with a 1.25% coupon. Their balance-sheet carrying amount was $359.2 million; disclosed fair value was $527.0 million. A $350 million revolving credit facility was undrawn as of August 11, 2017, and the company reported covenant compliance.
- First-half investing activities provided $240.1 million, largely reflecting marketable-security maturities and sales. Financing activities used $120.5 million, including $94.3 million of share repurchases and $27.9 million of dividends.
Material changes and unusual items
- Prior-year results included $254.9 million of Wireless Test goodwill impairment and $83.3 million of acquired-intangible impairment. These charges drove much of the prior-year reported loss; neither was recorded in the 2017 first half.
- Q2 2017 Semiconductor Test revenue increased on higher applications processor, image sensor, flash memory, microcontroller, power management, and automotive safety testing demand. System Test weakness reflected lower cloud-storage hard-disk-drive tester sales; development spending also increased.
- First-half net income includes a $6.5 million discrete tax benefit. The effective tax rate was 15.4% in Q2 and 12.9% for the first half. The Singapore tax holiday reduced first-half tax by $15.1 million, or $0.07 per diluted share, and is scheduled to expire December 31, 2020.
- First-half restructuring and other charges included $2.1 million from increased Universal Robots contingent consideration, $1.4 million of severance, and a $1.3 million lease impairment for a Wireless Test facility.
Outlook, risks, and contingencies
The filing gives no specific revenue or earnings guidance. Management said the company expects cash, cash equivalents, and marketable securities to cover dividends, the authorized repurchase program, working capital, and expenditures for at least 12 months. Teradyne intended to repurchase at least $200 million of stock during 2017 under a $500 million authorization; future repurchases and dividends remain at the Board’s discretion.
Management highlights cyclical demand in semiconductor and electronics markets, customer purchase timing, and concentration among a limited number of significant test-equipment customers. Taiwan represented 51% of Q2 revenue by customer-site location. System Test demand and Wireless Test market/customer exposure merit attention. The company also had $218.3 million of purchase commitments, mostly due within one year, and $39.4 million of contingent consideration. Management said ordinary-course legal matters were not expected to materially affect results, financial condition, or cash flows. Approximately $869 million of cash, cash equivalents, and securities was held outside the U.S.; repatriation could incur additional taxes, which the company could not practicably estimate.
Investor facts to verify
- Whether the strong Semiconductor Test growth and gross-margin gains persist, particularly given the 0.7 company book-to-bill ratio.
- How much demand remains concentrated among major customers and whether Wireless Test’s recovery is sustainable.
- Working-capital conversion: receivables increased $214.2 million during the first half and weighed on operating cash flow.
- Convertible-note dilution and the potential effect of the warrants, whose initial strike price was $39.95 per share; also monitor note-related interest expense.
- Progress against the 2017 repurchase intention, the Singapore tax-holiday expiry, and any change in tax or legal contingencies.