Teradyne, Inc. — Q1 2019 Form 10-Q
Business context and period. Teradyne supplies semiconductor and other automated test equipment, as well as collaborative and autonomous industrial robots. This unaudited report covers the three months ended March 31, 2019; comparisons are to the three months ended April 1, 2018. Amounts below are in U.S. dollars unless stated otherwise.
Financial performance
| Metric | Q1 2019 | Prior-year comparable |
|---|---|---|
| Revenue | $494.1 million | $487.5 million |
| Gross profit / margin | $287.6 million / 58.2% | $269.8 million / 55.4% |
| Operating income / margin | $93.1 million / 18.8% | $97.5 million / 20.0% |
| Income before taxes | $94.0 million | $95.8 million |
| Net income | $109.1 million | $87.0 million |
| Diluted earnings per share | $0.62 | $0.43 |
| Cash from operations | $18.0 million | Cash used: $81.9 million |
| Capital expenditures | $25.7 million | $34.8 million |
Revenue rose 1.4%. Product revenue declined to $393.4 million from $403.9 million, while services revenue increased to $100.7 million from $83.5 million. Gross margin improved 2.8 percentage points, primarily from favorable product mix. Operating expenses increased to $194.6 million from $172.3 million, including higher selling and administrative costs and acquired-intangible amortization.
Net income benefited substantially from a $15.2 million income tax benefit, including $30.2 million of net discrete tax benefits, chiefly from releases of uncertain-tax-position reserves following conclusion of the 2015 U.S. federal tax audit. The effective tax rate was (16.1%), versus 9.2% a year earlier; the year-over-year net income increase should be assessed in light of this tax benefit.
Liquidity, debt, and capital allocation
Cash, cash equivalents, and marketable securities totaled $996.7 million at March 31, 2019, down $207.8 million from year-end 2018. Cash and cash equivalents were $483.7 million; current and long-term marketable securities were $421.1 million and $91.9 million. Current assets were $1.594 billion and current liabilities $442.0 million.
Operating cash flow was positive but modest despite reported net income: operating assets and liabilities used $134.2 million, including higher receivables and prepayments and lower accrued compensation and tax liabilities. Investing activities used $261.0 million, principally for net marketable-security purchases; financing activities used $199.8 million, including $156.5 million of share repurchases, $27.6 million of contingent-consideration payments, and $15.6 million of dividends.
Convertible notes had $460.0 million principal, a $383.6 million carrying value, and a December 2023 maturity. The notes bear a 1.25% coupon, with approximately 5.0% effective annual interest cost under the accounting treatment. The company reported no borrowings under its $350 million revolving credit facility as of May 10, 2019 and said it was in covenant compliance. Management believed available cash and securities would meet dividends, the authorized repurchase program, working capital, and expenditure needs for at least 12 months.
Material changes and segment trends
- Semiconductor Test: Revenue was $340.9 million, down $32.4 million (8.7%), mainly from lower memory and mobility test sales, partly offset by image-sensor demand. Segment income before taxes fell to $83.0 million from $88.1 million.
- Industrial Automation: Revenue increased to $66.1 million from $48.8 million, reflecting higher collaborative-robot demand and $9.1 million of MiR revenue. The segment recorded a $5.3 million pretax loss versus $0.8 million income, primarily reflecting increased amortization from acquisitions.
- System Test: Revenue rose to $58.2 million from $43.0 million, primarily on higher storage and production-board test sales; pretax income increased to $15.3 million from $5.9 million.
- Wireless Test: Revenue rose to $29.0 million from $22.5 million, primarily on millimeter-wave and cellular test demand; pretax income was $3.6 million versus $0.5 million.
Teradyne repurchased 4.5 million shares for $156.5 million during the quarter. The board’s authorization is up to $1.5 billion; cumulative repurchases under it were $979.9 million at quarter-end. Management intended to repurchase $500 million in 2019, subject to board discretion. The quarterly dividend remained $0.09 per share.
Outlook, risks, and unusual items
- The filing provides no specific quarterly or annual revenue or earnings guidance. Management said it intends to invest in the business, grow market share and addressable markets, and tightly manage costs.
- Management emphasized cyclical demand in semiconductor and electronics markets and concentration of test-equipment sales among a limited number of significant customers; one customer drives substantial direct and supply-partner demand.
- Teradyne recorded a $3.0 million increase in MiR contingent consideration fair value, $1.3 million of acquisition-related costs, and $0.8 million of severance expense. Remaining maximum MiR contingent consideration could reach $83.2 million; the recorded fair value was $38.3 million.
- Purchase commitments were approximately $263.0 million, of which $255.3 million was due within one year. Management said ordinary-course legal matters were not expected to have a material adverse effect.
- The company adopted lease accounting Topic 842 on January 1, 2019, recording operating-lease right-of-use assets and liabilities; management reported no material effect on earnings, cash flows, or EPS. Operating lease liabilities totaled $55.2 million at quarter-end.
Important facts for investors to verify
- How much of the earnings and EPS improvement is sustainable after excluding discrete tax benefits?
- Whether Semiconductor Test demand, especially memory and mobility testing, stabilizes or weakens further, given customer concentration and industry cyclicality.
- Whether Industrial Automation revenue growth translates into segment profitability as acquisition-related amortization and spending continue.
- Whether operating cash generation improves, and how working-capital movements, repurchases, dividends, and contingent payments affect liquidity.
- The potential timing and amount of MiR earn-out payments, and the dilution and settlement implications of the convertible notes and warrants.