Teradyne, Inc. — 2017 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2017; filed March 1, 2018. The filing reports annual results and unaudited quarterly results, including fourth-quarter 2017.
Business context
Teradyne supplies automated test equipment for semiconductors and electronics, wireless test systems, and collaborative robots. Its four reporting segments are Semiconductor Test, System Test, Industrial Automation, and Wireless Test. Semiconductor Test accounted for 78% of 2017 revenue. The business is cyclical and sales are concentrated among a limited number of customers.
Key financial metrics
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Revenue | $2.137 billion | $1.753 billion |
| Gross profit / margin | $1.224 billion / 57.3% | $959.6 million / 54.7% |
| Operating income (loss) | $530.0 million | $(60.0) million |
| Net income (loss) | $257.7 million | $(43.4) million |
| Diluted earnings (loss) per share | $1.28 | $(0.21) |
| Cash from operating activities | $626.5 million | $455.2 million |
| Capital expenditures | $105.4 million | $85.3 million |
At year-end, cash, cash equivalents and marketable securities totaled approximately $1.904 billion, versus $1.613 billion in 2016. Current assets were $2.270 billion and current liabilities $454.3 million. Long-term debt had a $366.0 million carrying value; the convertible notes have $460 million principal, a 1.25% coupon, and mature in 2023. The $350 million revolving credit facility was undrawn, and Teradyne reported compliance with its covenants.
Fourth-quarter results
Q4 2017 revenue was $479.4 million, compared with $380.0 million in Q4 2016. Operating income was $98.0 million versus $59.2 million. Teradyne reported a Q4 net loss of $105.9 million, or $0.54 per diluted share, compared with net income of $66.3 million, or $0.33 per diluted share, a year earlier. The Q4 2017 income tax provision was $204.0 million and was principally affected by the Tax Cuts and Jobs Act charge.
Changes versus prior period
- Annual revenue increased 22%, led by Semiconductor Test, up 22% to $1.663 billion, and Industrial Automation, up 72% to $170.1 million. Wireless Test revenue rose 16% to $111.9 million after its steep 2016 decline; System Test was approximately flat.
- Gross margin improved 2.6 percentage points, attributed mainly to favorable Semiconductor Test mix and higher sales. Operating results also benefited from the absence of 2016 Wireless Test impairment charges totaling $338.3 million.
- Net income included a provisional $186.0 million tax expense recorded in Q4 2017 under the U.S. Tax Reform Act. The 2017 effective tax rate was 50.9%, compared with 21.1% in 2016.
- Operating cash flow increased to $626.5 million. Year-end cash and marketable securities rose, while the company repurchased $200.3 million of shares and paid $55.4 million in dividends.
- Year-end backlog declined to $626.4 million from $731.9 million. Q4 total-company book-to-bill was 1.2, versus 1.7 in Q4 2016.
Outlook, commentary and risks
- Management described plans to invest in the business, grow market share and expand addressable markets while managing costs. No quantified forward revenue or earnings guidance is provided in the filing.
- Management stated that available cash and marketable securities should be sufficient for dividends, the authorized repurchase program, working capital and expenditures for at least the next 12 months. In January 2018, the board raised the quarterly dividend to $0.09 per share, authorized $1.5 billion in repurchases, and the company said it intended to repurchase $750 million in 2018.
- The 2017 tax charge is provisional. The filing says later guidance or further analysis could change the estimate, with adjustments recorded in 2018. The estimated transition tax payable was $161.0 million, with payments scheduled over multiple years.
- Customer concentration is significant: the five largest customers represented 32% of revenue, and estimated demand associated with one OEM and its supply partners represented approximately 22%. Taiwan accounted for 32% of revenue; 88% of revenue came from outside the United States.
- Principal risks include semiconductor and electronics industry cyclicality, concentrated customer demand, competition and pricing pressure, product development and acceptance, supplier and contract-manufacturer reliance, international operations, and foreign exchange. Customers may delay or cancel orders, so backlog is not necessarily indicative of future sales.
- Universal Robots contingent consideration of $24.5 million was expected to be paid in March 2018; up to a further $25 million could be payable under the remaining earn-out. Legal proceedings were described as ordinary-course matters, with potential losses not expected to materially affect results, financial condition or cash flows.
- Teradyne expected a roughly $12 million cumulative retained-earnings adjustment on January 1, 2018 from adopting the new revenue standard, primarily reflecting earlier recognition of certain software license revenue.
Important facts for investors to verify
- Whether the provisional $186.0 million tax-reform expense and transition-tax payment schedule are finalized or adjusted.
- Subsequent revenue, margins and bookings, particularly Semiconductor Test demand and the meaning of lower backlog and book-to-bill.
- Customer concentration and the effect of changes in demand from the major OEM and its supply partners.
- Execution and profitability of Industrial Automation growth, including Universal Robots earn-out payments.
- Actual completion and funding of the stated 2018 share repurchases and the sustainability of dividends.
- Convertible-note dilution exposure, including the $31.80 conversion price and $39.91 warrant strike price.
Audit: The independent auditor gave an unqualified opinion on the financial statements and internal control over financial reporting; management and the auditor concluded controls were effective as of December 31, 2017.