Teradyne, Inc. — FY2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; the filing also reports fourth-quarter results. This is an annual report, not a standalone Q4 filing. Teradyne supplies automated test equipment for semiconductors, wireless devices, storage, circuit boards, and aerospace and defense markets. It acquired Avionics Interface Technologies (AIT) in October 2014 for approximately $21.2 million.
Financial performance and liquidity
| Metric | FY2014 | FY2013 |
|---|
| Revenue | $1.648 billion | $1.428 billion |
| Gross profit / gross margin | $878.8 million / 53.3% | $808.8 million / 56.6% |
| Operating income / margin | $96.4 million / 5.9% | $190.7 million / 13.4% |
| Net income / diluted EPS | $81.3 million / $0.37 | $164.9 million / $0.70 |
| Cash from operating activities | $492.1 million | $268.7 million |
- Revenue increased 15.4%, led by Semiconductor Test; net income fell 50.7%. Gross margin declined 3.3 percentage points.
- FY2014 investing cash outflow was $332.9 million, including $169.0 million of capital expenditures. Approximate operating cash flow less capital expenditures was $323.1 million.
- Cash, cash equivalents, and marketable securities totaled $1.299 billion at year-end, up $99.2 million from 2013. Current assets were $1.244 billion and current liabilities $292.4 million.
- Year-end debt was zero, following repayment of the convertible notes and Japan loan during 2014. Financing activities used $206.6 million, including $191.0 million of debt payments and $37.4 million of dividends.
- Total assets were $2.539 billion and shareholders’ equity was $2.079 billion at year-end.
Segments and material changes
| Segment | FY2014 revenue | Change vs. FY2013 |
|---|
| Semiconductor Test | $1.301 billion | Up $277.8 million (27%) |
| Wireless Test | $184.5 million | Down $67.4 million (27%) |
| System Test | $162.5 million | Up $9.5 million (6%) |
- Higher system-on-chip and application-processor test demand drove the Semiconductor Test increase. Wireless Test fell on lower cellular and connectivity product volume. System Test improved mainly on Storage Test and Production Board Test sales.
- In Q4, revenue was $323.2 million, versus $478.0 million in Q3. The company recorded a $103.8 million net loss, including a $98.9 million Wireless Test goodwill impairment and $46.6 million of pension and postretirement actuarial losses.
- The impairment reflected management’s reduced projections for the future wireless test market, citing equipment reuse, price competition, and different testing techniques. Wireless Test reported a $116.2 million loss before taxes for the year.
- Gross margin pressure reflected unfavorable Semiconductor Test product mix, lower Wireless Test sales, and pension expense. Engineering and development spending rose to $291.6 million, or 17.7% of revenue.
Outlook, risks, and other notable items
- Management said it would continue investing, seeking market-share and addressable-market growth, while managing costs. The filing provides no specific 2015 revenue or earnings guidance.
- Management stated that available cash and marketable securities should fund the dividend, authorized repurchases, working capital, and expenditures for at least the next 12 months. In January 2015, the board authorized up to $500 million of repurchases and indicated an intention to repurchase $300 million in 2015. A $0.06 quarterly dividend was declared.
- Backlog was $395.9 million at year-end versus $361.6 million a year earlier. The company cautioned that customers can delay or cancel orders, so backlog is not necessarily indicative of future sales. Q4 total book-to-bill was 1.0.
- Key risks include semiconductor and electronics industry cyclicality; intense competition; dependence on large customers; international sales and manufacturing exposure; supplier and contract-manufacturer reliance; and possible excess inventory or further wireless goodwill impairment. Taiwan represented 30% of 2014 revenue, and 87% of revenue came from outside the United States.
- Approximately $616 million of cash was held outside the United States and could incur additional tax if repatriated. The Singapore tax holiday expires December 31, 2015; extension discussions were ongoing, with no assurance of success. The U.S. R&D tax credit also expired at the end of 2014 unless renewed.
- The company reported $151.5 million in non-cancelable purchase commitments and $54.0 million in operating lease obligations. It also disclosed pension-plan underfunding and sensitivity to actuarial assumptions, including discount rates and mortality estimates.
- AIT contributed $0.6 million of revenue and a $0.8 million pretax operating loss from acquisition through year-end. The auditor gave an unqualified opinion on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether Semiconductor Test growth and its application-processor demand drivers persist, and whether Wireless Test sales and valuation stabilize after the impairment.
- How the Q4 impairment and pension actuarial losses affect ongoing earnings, and whether further impairment or inventory charges emerge.
- Execution and cash implications of the planned 2015 repurchases, dividend, capital expenditures, and customer equipment leases.
- Renewal of the Singapore tax holiday, treatment of foreign-held cash and earnings, and any changes to U.S. tax credits.
- Customer concentration, geographic exposure, backlog conversion, and the sustainability of FY2014 operating cash flow.
