Teradyne, Inc. — Q1 2020 Form 10-Q
Business context and period. Teradyne supplies semiconductor and other automated test equipment, as well as collaborative and mobile robots. This unaudited quarter ended March 29, 2020; comparisons are with the three months ended March 31, 2019. Results reflect strong test-equipment demand, while COVID-19 was already weighing on Industrial Automation.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $704.4 million | $494.1 million | +42.6% |
| Gross profit / margin | $405.6 million / 57.6% | $287.6 million / 58.2% | Margin down 0.6 percentage points |
| Operating income / margin | $206.7 million / 29.3% | $93.1 million / 18.8% | Operating income +122% |
| Net income / margin | $176.2 million / 25.0% | $109.1 million / 22.1% | Net income +61% |
| Diluted EPS | $0.97 | $0.62 | +56% |
| Operating cash flow | $43.1 million | $18.0 million | +$25.1 million |
| Capital expenditures | $36.7 million | $25.7 million | +$11.0 million |
Operating cash flow less capital expenditures was approximately $6.4 million, versus negative $7.7 million a year earlier. Working-capital movements used $172.8 million of cash, principally from a $126.8 million increase in receivables and a $39.6 million increase in prepayments and other assets.
At quarter-end, cash and cash equivalents were $593.5 million and marketable securities totaled $311.5 million, or $905.0 million combined. Current assets were $1.70 billion and current liabilities were $514.0 million. Debt had a $398.5 million carrying value; the notes’ $460.0 million principal is due December 2023. The company therefore held approximately $506.5 million more cash and marketable securities than debt at carrying value.
Changes versus prior period
- Semiconductor Test revenue rose 42% to $484.5 million, driven by mobility and memory tester sales.
- System Test revenue nearly doubled to $116.1 million, led by Storage Test and Defense/Aerospace. Wireless Test revenue rose 50% to $43.5 million, supported by 5G and newer connectivity demand.
- Industrial Automation revenue fell 8.8% to $60.3 million, and its segment reported a $15.3 million pretax loss versus a $5.3 million loss a year earlier.
- Gross margin eased despite higher sales, primarily due to Semiconductor Test product mix. Operating margin improved substantially as revenue grew faster than operating expenses.
- Net income benefited from a $7.6 million net credit in “Restructuring and other,” including a $10.0 million reduction in estimated contingent consideration, partly offset by acquisition-related costs and severance.
Outlook, risks and unusual items
- COVID-19 and outlook: Management said test demand remained strong through Q1 and into Q2, with strength in mobility, 5G and memory testing, but some automotive softening. Industrial Automation demand had declined significantly and was expected to remain weak in Q2. The company said it could not reliably estimate the pandemic’s full effects; no numerical earnings or revenue guidance is provided in the filing.
- Operations and supply: Management reported no significant supply-chain interruption to date, but warned that supplier, manufacturing, workforce, transport and customer-site restrictions could constrain output, increase costs or delay shipments. Most employees were working remotely, with some on-site operations continuing under safety protocols.
- Liquidity actions: The company suspended share repurchases effective April 1, 2020. On May 1 it entered into a three-year, $400 million secured revolving credit facility, with up to $150 million of additional commitments subject to conditions; no amount had been borrowed as of May 4. Management expected existing liquidity and anticipated operating cash flows to meet needs for the next 12 months.
- Capital returns: Q1 repurchases were $79.0 million and dividends paid were $16.7 million; the declared quarterly dividend was $0.10 per share. Management said future dividends may be reduced or eliminated and future repurchases remain at the board’s discretion.
- Tax and investment items: The effective tax rate was 10.6%, including $7.1 million of Q1 tax savings from a Singapore tax holiday scheduled to expire December 31, 2020. Other expense included $6.0 million of unrealized losses on equity securities; management attributed the year-over-year increase in other expense mainly to the shift from investment gains to losses.
- Commitments and legal matters: Purchase commitments totaled $543.8 million, of which $529.4 million was due within one year. The company described ordinary-course legal claims and said potential losses were unlikely to have a material adverse effect, while noting outcomes could not be predicted.
- Other risks: The filing highlights cyclical demand and dependence on a limited number of significant test-equipment customers, as well as COVID-19 and evolving U.S. export controls. It discusses potential impacts on Huawei-related business and China sales, including new export controls announced April 27, 2020.
Most important facts for investors to verify
- Whether test demand stays strong and Industrial Automation weakness persists or deepens as COVID-19 conditions evolve.
- Receivables, prepayments and other working-capital needs, and whether operating cash flow converts more consistently from reported earnings.
- The effect of Semiconductor Test product mix and inventory provisions on gross margin; Q1 inventory provision was $4.1 million and inventory reserves were $105.3 million.
- Potential dilution and settlement exposure from the convertible notes and warrants; diluted weighted-average shares rose to 180.7 million from 177.0 million.
- Potential contingent consideration payments, including AutoGuide’s maximum earn-out of $106.9 million, and the assumptions underlying its valuation.
- Whether export-control changes, customer concentration, or supply and logistics constraints materially affect sales, production or support.