Teradyne, Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also presents unaudited fourth-quarter results; it is an annual report, not a standalone quarterly filing.
Business context and reporting period
Teradyne supplies automated test equipment for semiconductors, wireless products, storage and electronic systems, and collaborative robots through Universal Robots. Its four reportable segments are Semiconductor Test, System Test, Industrial Automation and Wireless Test. Semiconductor Test represented 78% of 2016 revenue. International customers accounted for 87% of revenue.
Key financial metrics
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Revenue | $1.753 billion | $1.640 billion |
| Gross profit / margin | $959.6 million / 54.7% | $915.6 million / 55.8% |
| Operating income (loss) / margin | $(60.0) million / (3.4)% | $243.0 million / 14.8% |
| Net income (loss) / diluted EPS | $(43.4) million / $(0.21) | $206.5 million / $0.97 |
| Operating cash flow | $445.8 million | $412.8 million |
| Cash, cash equivalents and marketable securities | $1.613 billion | $1.008 billion |
| Total assets | $2.762 billion | $2.549 billion |
Capital expenditures were $85.3 million; operating cash flow less capital expenditures was approximately $360.5 million. Current assets were $1.624 billion and current liabilities $372.7 million. Long-term debt had a $352.7 million carrying value; principal on the convertible notes was $460 million. The company also had an undrawn $350 million revolving credit facility.
Fourth quarter: Revenue was $380.0 million and net income was $66.3 million, versus revenue of $318.4 million and a net loss of $0.6 million in Q4 2015. Q4 2016 diluted EPS was $0.33.
Material changes versus the prior comparable period
- Annual revenue rose 7%, led by Semiconductor Test revenue growth of 14% to $1.368 billion, primarily from mobile application processor demand.
- Wireless Test revenue fell 48% to $96.2 million, mainly due to lower demand from its largest customer. System Test revenue declined 10% to $189.8 million, largely on lower storage tester sales.
- Industrial Automation revenue reached $99.0 million, compared with $41.9 million in 2015; the prior year included Universal Robots only from its June 2015 acquisition.
- Gross margin declined 1.1 percentage points. The company reported $254.9 million of Wireless Test goodwill impairment and $83.3 million of acquired intangible asset impairment in 2016. These charges were the primary reason for the full-year operating and net losses.
- Cash and marketable securities increased by $604 million. Financing included $450.8 million net proceeds from convertible notes, partly offset by share repurchases, note hedges and dividends.
- Backlog rose to $729.7 million from $615.7 million. Semiconductor Test backlog was $575.7 million; management cautioned that orders may be delayed or cancelled.
Outlook, management commentary, risks and unusual items
- Management said it intends to invest in the business, grow market share and addressable markets, and tightly manage costs. The filing does not provide a formal revenue or earnings forecast.
- Management described semiconductor and electronics demand as cyclical, with an historical even/odd-year pattern tied principally to mobile demand; it expected that pattern to lessen as smartphone growth slows and device complexity increases.
- Wireless Test reduced headcount by 11% in Q2 and a further 14% in Q3 following weaker demand expectations. The decline reflected reduced expected buying from its major customer, slower smartphone growth and slower adoption of new wireless technologies.
- Customer concentration is material: two customers each accounted for 12% of 2016 consolidated revenue, and a single OEM’s estimated demand, including sales through its assembly and test providers, represented about 25%. The five largest customers collectively represented 36%.
- Teradyne issued $460 million of 1.25% convertible senior notes due 2023. The notes’ initial conversion price was approximately $31.84 per share; related warrants have an initial $39.95 strike and could dilute shareholders above that price. The note hedge is intended to reduce conversion dilution.
- Management believed available cash and securities were sufficient for at least the next 12 months. Approximately $768 million of cash was held outside the U.S. and could incur additional taxes if repatriated. A $500 million repurchase authorization began in January 2017; the company intended to repurchase at least $200 million during 2017. The quarterly dividend was raised to $0.07 per share in January 2017.
- A 2016 earthquake damaged the Kumamoto, Japan building beyond repair. Operations were temporarily transferred; recorded earthquake-related charges were offset by property insurance recovery. The company noted possible rebuilding costs and continuing uncertainty.
- Other risks include industry cyclicality and competition, supplier and outsourced-manufacturing reliance, international operations, intellectual-property and litigation exposure, tax uncertainty, pension obligations and potential customer order cancellations. Management said pending legal matters were not expected to have a material adverse effect. The independent auditor reported effective internal control over financial reporting and issued an unqualified opinion on the financial statements.
Important facts for investors to verify
- Whether Semiconductor Test demand and backlog convert into 2017 sales, and whether reported backlog is delayed or cancelled.
- Whether Wireless Test demand stabilizes and customer concentration declines; assess the remaining goodwill and intangible asset carrying values after impairment.
- The extent to which annual results excluding the $338.3 million Wireless Test impairments reflect sustainable profitability and margins.
- Convertible-note repayment, conversion and potential warrant dilution terms, alongside the company’s planned repurchases and dividend commitments.
- Availability and tax implications of foreign-held cash, and actual Kumamoto recovery and rebuilding costs.