Business context and reporting period
Teradyne, Inc. designs and supplies automatic test equipment for semiconductors, wireless devices, storage products, circuit boards, and military/aerospace applications. This Form 10-K covers the fiscal year ended December 31, 2012; quarterly figures below identify the fourth quarter specifically. The company reports Semiconductor Test, Wireless Test, and Systems Test Group.
Financial performance and liquidity
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Revenue | $1,656.8 million | $1,429.1 million |
| Gross profit / margin | $886.0 million / 53.5% | $711.8 million / 49.8% |
| Operating income / margin | $287.4 million / 17.3% | $231.5 million / 16.2% |
| Income from continuing operations | $217.0 million | $344.0 million |
| Net income | $217.0 million | $369.9 million |
| Diluted EPS | $0.94 | $1.63 |
| Cash from operations | $404.5 million | $273.8 million |
Fourth-quarter 2012 revenue was $248.4 million, versus $297.0 million in Q4 2011. Gross profit was $125.4 million; operating loss was $24.6 million and net loss was $16.5 million. Q4 diluted loss per share was $0.09. Q4 2011 net income included a substantial tax benefit, so its reported earnings are not directly comparable.
At year-end, cash, cash equivalents, and marketable securities totaled approximately $1.006 billion, up $251.7 million from 2011. Total debt principal obligations were $193.5 million, including $190.0 million of convertible notes due March 2014 and a Japan loan. Current assets were $1.236 billion and current liabilities were $297.8 million. Capital expenditures were $119.1 million. Management stated that available liquidity should fund working capital and expenditure needs for at least 12 months; approximately $300 million of cash held outside the U.S. could incur additional tax if repatriated.
Material changes versus the prior comparable period
- Revenue rose 15.9%, principally reflecting a full year of LitePoint Wireless Test results, acquired in October 2011. Semiconductor Test revenue increased 2%; Systems Test Group revenue decreased 18%.
- Wireless Test revenue was $286.4 million, compared with $28.4 million in 2011. Semiconductor Test generated $1.128 billion and Systems Test Group $242.7 million.
- Gross margin improved 3.7 percentage points. Management attributed much of the improvement to LitePoint, partially offset by higher inventory provisions.
- Net income declined from $369.9 million to $217.0 million despite higher revenue and operating income. The comparison is affected by the 2011 $129.5 million income tax benefit, primarily from reducing the deferred tax valuation allowance; 2012 included $48.9 million of income tax expense.
- Operating cash flow increased to $404.5 million from $273.8 million. Year-end backlog declined to $354.0 million from $454.5 million.
Outlook, commentary, risks, and unusual items
- The filing provides no quantified company-wide revenue or earnings guidance. Teradyne said it intended to enter the 3.5-inch hard-disk-drive test market in 2013 and planned to continue investing in growth markets while managing costs.
- Management expected a discrete tax benefit of approximately $7.0 million in Q1 2013 from the reinstated 2012 research and development tax credit.
- Risks highlighted include cyclical customer capital spending, order delays or cancellations, intense competition, customer concentration, dependence on suppliers and outsourced manufacturing, international operations, product development and acceptance, and potential intellectual-property, tax, environmental, and litigation exposures. Apple represented 10% of 2012 revenue; the three largest customers together represented 29%.
- Inventory provisions were $26.8 million in 2012, including charges associated with product transitions and lower-than-forecast demand. The inventory reserve reached $141.8 million.
- Teradyne changed its pension accounting in 2012 to recognize actuarial gains and losses and plan-asset fair-value changes immediately in earnings, applied retrospectively. Q4 mark-to-market adjustments reduced gross profit by $8.1 million and net income by $18.3 million.
- The company recorded an $8.8 million reduction in LitePoint contingent consideration following lower specified new-product revenue; $59.7 million of contingent consideration was paid during 2012. Management said pending legal claims were unlikely to have a material adverse effect, while noting outcomes could not be predicted.
Important facts for investors to verify
- How much of 2012 revenue growth and margin improvement is sustainable apart from LitePoint’s acquisition contribution?
- Whether lower backlog, particularly in Semiconductor Test and Systems Test Group, translated into weaker subsequent orders or shipments.
- The outlook for inventory reserves and product transitions, given the $26.8 million 2012 provision and $141.8 million reserve balance.
- Cash availability and any tax cost associated with repatriating foreign-held funds, alongside the convertible notes’ March 2014 maturity and conversion terms.
- The effects of pension mark-to-market accounting and changing tax assumptions on future earnings comparability.