Teradyne, Inc. — 2010 Form 10-K Summary
Business context and reporting period
Teradyne designs and sells automatic test equipment and related services. Its two reportable segments are Semiconductor Test and Systems Test Group, which includes military/aerospace, hard disk drive, commercial board test, and automotive diagnostic products. This annual report covers the fiscal year ended December 31, 2010; quarterly figures below identify the fourth quarter where relevant.
Financial performance and position
| Metric | 2010 | 2009 |
|---|---|---|
| Revenue | $1,608.7 million | $819.4 million |
| Gross profit / margin | $872.7 million / 54.3% | $311.6 million / 38.0% |
| Operating income (loss) / margin | $413.5 million / 25.7% | ($122.4) million / (14.9%) |
| Net income (loss) | $379.7 million | ($133.8) million |
| Diluted earnings (loss) per share | $1.73 | ($0.77) |
| Cash from operating activities | $566.8 million | $121.3 million |
| Capital expenditures | $76.0 million | $41.9 million |
| Cash, cash equivalents and marketable securities | $1,055.5 million | $519.0 million |
| Total assets | $1,810.4 million | $1,235.3 million |
At year-end, reported debt principal was $198.6 million, including $190.0 million of convertible notes due in 2014 and a Japan subsidiary loan. The balance sheet carries total debt at $152.6 million after the convertible notes’ unamortized discount. Management said available cash and marketable securities were sufficient for at least the next 12 months. The company had $205.1 million of non-cancelable purchase commitments due in 2011. No cash dividends were paid.
For fourth-quarter 2010, revenue was $322.2 million, operating income $58.8 million, and net income $60.1 million; diluted EPS was $0.27. The company reported a total-company book-to-bill ratio of 1.1 for the quarter.
Material changes versus prior periods
- Annual revenue rose 96% from 2009, primarily on a strong semiconductor-market recovery. Semiconductor Test revenue increased 156% to $1,413.3 million; Systems Test Group revenue declined 27% to $195.4 million.
- Gross margin improved 16.3 percentage points year over year, attributed to higher volume, favorable product mix, and lower inventory provisions. Inventory provisions fell to $6.2 million from $28.0 million.
- Teradyne moved from operating and net losses in 2009 to substantial profits in 2010. The comparison also reflects much lower restructuring costs and the absence of the $329.7 million goodwill impairment recorded in 2008.
- Operating cash flow increased to $566.8 million. Cash and marketable securities rose by $536.7 million during 2010, although investing activities used $627.7 million, largely reflecting purchases of marketable securities.
- Backlog increased to $514.3 million at year-end from $372.0 million a year earlier. The filing cautions that orders may be delayed or canceled and backlog is not necessarily indicative of future sales.
- Fourth-quarter revenue fell to $322.2 million from $502.1 million in the third quarter, and net income declined to $60.1 million from $147.3 million. Management’s filing attributes annual recovery chiefly to semiconductor demand; it does not provide a clear explanation in the supplied text for the sequential fourth-quarter decline.
Outlook, commentary, risks and unusual items
- Management described the business as cyclical and dependent on customer capital spending, semiconductor demand, order timing, and product mix. It said the company would continue investing to expand addressable markets while tightly managing costs, and observed that its 2010 cost structure supported higher profitability at comparable revenue levels than in the past. The filing provides no specific revenue or earnings guidance.
- Teradyne announced on February 16, 2011, after year-end, the sale of its Diagnostic Solutions business to SPX Corporation. The filing does not provide sale terms or expected financial impact in the supplied text.
- In 2010, Teradyne made a discretionary $45.0 million contribution to its U.S. qualified pension plan. It expected no U.S. qualified-plan contribution in 2011, but estimated approximately $3.9 million of contributions to its supplemental executive and non-U.S. plans.
- The company’s $190.0 million convertible notes bear a 4.50% coupon but have an approximately 14.5% effective annual interest rate under the accounting treatment described. Holders may require cash repurchase following specified fundamental changes; potential conversion and warrant settlement may dilute shareholders.
- Principal risks include semiconductor and electronics cycles, competition and pricing, product development and acceptance, international exposure, supplier and contract-manufacturer dependence (including Flextronics in China), order cancellations, and environmental, intellectual-property, tax, pension, and litigation contingencies. Teradyne reported that pending legal claims were not expected to have a material adverse effect, while noting outcomes and loss ranges could not be predicted.
- Year-end inventory reserves remained substantial at $126.1 million. The company also maintained a valuation allowance against significant deferred tax assets, reflecting uncertainty about future realization.
Important facts for investors to verify
- Whether semiconductor demand, bookings, backlog conversion, and margins remained strong after the 2010 recovery, particularly following the sharp sequential fourth-quarter revenue decline.
- The terms, closing status, and financial effects of the Diagnostic Solutions divestiture.
- The composition, maturity, liquidity, and credit quality of the $657.8 million of marketable securities, and the extent to which cash is available for corporate use.
- Convertible-note cash obligations, conversion exposure, warrant dilution, and the distinction between the $190.0 million principal and the lower balance-sheet carrying value.
- Inventory quality and reserve adequacy, customer advances, and customer or geographic concentration; 85% of 2010 revenue came from outside the United States.
- Pension funding assumptions and future contributions, deferred-tax-asset realizability, and material developments in contingencies or supplier arrangements.