Teradyne, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended July 1, 2018. Amounts below are in millions of U.S. dollars unless stated otherwise. Teradyne supplies automated test equipment and industrial automation products, including collaborative and autonomous mobile robots.
Financial results and liquidity
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $526.9 | $696.9 | $1,014.4 | $1,153.8 |
| Gross profit / margin | $307.3 / 58.3% | $390.6 / 56.1% | $577.2 / 56.9% | $655.7 / 56.8% |
| Operating income | $120.4 | $207.8 | $217.9 | $301.6 |
| Net income | $101.0 | $175.0 | $188.0 | $260.2 |
| Diluted EPS | $0.52 | $0.87 | $0.94 | $1.29 |
| Operating cash flow | Not separately stated for the quarter | $49.9 | $169.2 |
As reported, Q2 revenue declined 24.4% year over year and net income declined 42.3%; for the first half, revenue fell 12.1% and net income fell 27.7%. Q2 operating margin was approximately 22.8%, compared with 29.8% a year earlier. Gross margin improved, principally from product mix in Semiconductor Test, but lower revenue and higher selling and administrative expense weighed on operating results.
First-half operating cash flow was $49.9 million, down from $169.2 million. Capital expenditures were $62.7 million, implying approximately negative $12.7 million of operating cash flow less capital expenditures. Working capital movements used $225.2 million, including a $179.4 million increase in receivables associated with shipment timing and the revenue-accounting change.
At July 1, cash and cash equivalents were $480.4 million and marketable securities totaled $823.7 million, or $1.304 billion combined, down $599.6 million since year-end. Current assets were $1.894 billion and current liabilities $452.3 million. Long-term debt had a $372.9 million carrying value; the convertible notes have $460 million principal and mature in December 2023. The $350 million revolving facility was undrawn as of August 10, 2018, and the company reported covenant compliance.
Business trends and material changes
- Semiconductor Test: Q2 revenue fell 39.3% to $360.1 million, primarily because of lower mobile-device test sales. First-half revenue fell 22.7% to $733.4 million, reflecting weaker mobility and image-sensor test sales, partly offset by memory test growth. Segment pretax income fell to $91.2 million in Q2 from $211.3 million.
- System Test: Q2 revenue rose 89.9% to $69.7 million; first-half revenue increased 47.1% to $112.7 million, primarily on stronger storage test sales. Q2 segment pretax income was $20.4 million versus a $5.7 million loss.
- Industrial Automation: Q2 revenue increased 58.0% to $62.1 million and first-half revenue increased 46.7% to $110.9 million, reflecting demand for collaborative robots and the MiR acquisition. MiR contributed $4.5 million of revenue from its April 25 acquisition through quarter-end and recorded a $1.5 million pretax operating loss during that period. The segment reported a $2.9 million Q2 pretax loss.
- Wireless Test: Q2 revenue rose 27.1% to $35.2 million and first-half revenue rose 9.0% to $57.7 million, mainly on connectivity test demand.
Teradyne acquired Energid in February for approximately $27.6 million and MiR in April for a preliminary purchase price of approximately $196.6 million, including $51.4 million of contingent consideration. MiR contingent payments could reach $117 million, subject to revenue and earnings targets through 2020. The acquisitions increased goodwill and acquired intangible assets and contributed to higher amortization and selling and administrative expenses.
First-half investing cash flow included $170.6 million for acquisitions and $62.7 million for capital expenditures. Financing used $360.8 million to repurchase 8.8 million shares and $34.7 million for dividends. The board authorized a new $1.5 billion repurchase program and management intended to repurchase $750 million in 2018; the quarterly dividend was raised to $0.09 per share from $0.07.
Outlook, accounting, and risks
- Management said the outlook for 2018 mobile-device test capacity demand declined sharply in Q1 and that it reduced its 2018 revenue outlook accordingly. The supplied filing text gives no clear numeric revenue or earnings guidance.
- Teradyne adopted ASC 606 on January 1, 2018. Reported 2018 results use ASC 606, while 2017 comparatives use prior guidance, limiting direct comparability. For Q2 2018, the filing’s legacy-GAAP reconciliation gives revenue of $498.3 million and net income of $83.1 million, versus reported ASC 606 revenue of $526.9 million and net income of $101.0 million. For the first half, legacy-GAAP revenue and net income were $920.1 million and $136.7 million, respectively. Adoption increased opening retained earnings by $12.7 million.
- Management highlighted concentrated test-equipment customers and cyclical semiconductor and electronics demand. It noted U.S. tariffs imposed on certain China-made products and proposed additional tariffs; the company said operational changes were expected to mitigate the enacted tariff and it did not expect the proposed tariff to have a material impact. Potential new export controls and possible Chinese trade restrictions could materially affect the business.
- Legal claims arising in the ordinary course were not expected by management to have a material adverse effect. The company was under IRS examination; the timing and outcome were uncertain, and unrecognized tax benefits could change materially within twelve months, though the company could not estimate a range. Purchase commitments totaled $310.4 million, $302.7 million due within one year.
- The company expected adoption of the new lease standard to have a material effect on financial position but an immaterial effect on results of operations. It also reported significant foreign-currency translation losses in Q2, contributing to a $29.4 million other comprehensive loss for the quarter.
Investor verification points
- Assess the extent and duration of the Semiconductor Test demand decline, particularly in mobile-device and image-sensor applications, and whether memory growth offsets it.
- Compare 2018 and 2017 performance on a consistent revenue-recognition basis; ASC 606 materially changes the reported 2018 revenue and earnings timing.
- Track receivables, inventory, and operating cash conversion after the large first-half working-capital use, alongside the $103.2 million inventory reserve.
- Monitor MiR and Energid integration, Industrial Automation profitability, purchase-price allocation, and potential MiR earn-out payments of up to $117 million.
- Verify the pace and funding of planned repurchases and dividends against cash generation, and review the convertible notes’ potential dilution and maturity obligations.
- Follow tariff and export-control developments, customer concentration, and the status of the IRS examination and uncertain tax positions.