Teradyne, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 30, 2014; compared with the three months ended March 31, 2013. Teradyne supplies automatic test equipment and related services across Semiconductor Test, Wireless Test, and System Test. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Revenue | $321.0 | $280.4 | +14.5% |
| Gross profit / margin | $167.0 / 52.0% | $153.4 / 54.7% | +8.9% / -2.7 points |
| Operating income | $3.7 | $4.4 | Down $0.7 |
| Pre-tax loss | $(1.9) | $(1.4) | Loss widened $0.4 |
| Income tax benefit | $2.8 | $8.0 | Down $5.2 |
| Net income / diluted EPS | $0.9 / $0.00 | $6.6 / $0.03 | Net income down $5.7 |
| Operating cash flow | $(25.8) | $(36.5) | Cash use narrowed $10.7 |
Product revenue increased to $255.4 million from $214.3 million; service revenue was $65.6 million versus $66.1 million. Segment revenue was $261.7 million in Semiconductor Test (+24%), $21.2 million in Wireless Test (-37%), and $38.1 million in System Test (+8%). Segment pre-tax results were $34.6 million, a loss of $25.1 million, and $0.4 million, respectively.
Total assets were $2.43 billion and shareholders’ equity was $1.99 billion at March 30, 2014. Cash and cash equivalents were $232.6 million, with marketable securities of $734.2 million, for combined cash and securities of $966.8 million. Current assets were $1.26 billion versus current liabilities of $273.1 million. Teradyne reported no current or long-term debt at quarter-end, following repayment of approximately $191.0 million of convertible-note principal and the final Japan loan payments.
Cash flows, liquidity, and capital allocation
- Operating cash use reflected $103.8 million of cash used by changes in operating assets and liabilities, including a $58.9 million increase in receivables associated with higher sales and later-quarter shipments.
- Investing activities provided $97.6 million, including net proceeds from marketable securities; property, plant and equipment purchases were $31.2 million.
- Financing activities used $180.8 million, primarily for debt repayment. Cash and cash equivalents decreased $109.0 million during the quarter; cash and securities together fell $232.8 million from year-end.
- Management said liquidity should be sufficient for working capital and expenditures for at least 12 months. Approximately $340 million of cash was held outside the U.S. and would incur additional taxes if repatriated.
- Management expected approximately $145 million of capital additions in 2014, including about $75 million for testers used in customer leases.
- The board declared an initial quarterly dividend of $0.06 per share, expected to require about $12 million in Q2. Future dividends remain at the board’s discretion.
Material changes, outlook, and risks
- Semiconductor Test growth was primarily driven by higher system-on-a-chip product volume. Wireless Test revenue declined primarily on lower volume; System Test growth reflected Storage Test, partly offset by lower Mil/Aero sales.
- Gross margin declined 2.7 percentage points, attributed to product mix in Semiconductor Test, lower Wireless Test sales, higher Storage Test sales, and a 1.7-point impact from increased excess and obsolete inventory provisions.
- Inventory provisions were $10.0 million, versus $3.8 million a year earlier. Management attributed $6.1 million to Semiconductor Test product transitions and $3.9 million to lower revised demand forecasts. Recorded inventory reserves totaled $124.4 million.
- Selling and administrative expense included a one-time $6.6 million stock-compensation charge related to former CEO Michael Bradley’s retirement agreement. Bradley retired effective January 31, 2014 and remained on the board.
- Book-to-bill was 1.4 company-wide (Semiconductor Test 1.4, Wireless Test 2.7, System Test 0.7), compared with 1.4 company-wide a year earlier. The filing provides no specific revenue or earnings forecast.
- Teradyne described demand as cyclical and subject to customer purchase timing and fluctuations in semiconductor and electronics markets. It reported $246.4 million of purchase commitments, mostly due within one year, and stated ordinary-course legal matters were not expected to have a material adverse effect.
- Tax benefits included $1.0 million each from employee stock dispositions and changes in uncertain tax positions. The prior-year benefit included an approximately $6.7 million U.S. R&D credit benefit; that credit expired at the end of 2013.
- Potential dilution warrants associated with the converted notes may be net-share-settled from June through September 2014; the filing caps potential issuance under the warrant transaction at 34,526,500 shares. The reported diluted weighted-average share count was 236.5 million.
Investor verification points
- Assess whether Semiconductor Test growth and the 1.4 company-wide book-to-bill ratio offset continued Wireless Test weakness and System Test’s 0.7 ratio.
- Track gross margin, inventory provisions and the $124.4 million of inventory reserves, including the impact of product transitions and demand revisions.
- Monitor receivables, operating cash conversion, planned 2014 capital spending and the use of the company’s $966.8 million cash-and-securities position.
- Verify the share impact and settlement of the convertible-note warrants, and consider the separate dilution reflected in weighted-average diluted shares.
- Consider the recurring cost base after the one-time CEO retirement charge and the effect of the expired U.S. R&D tax credit on future taxes.