Teradyne, Inc. — 2019 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2019; filed March 2, 2020. The filing also provides fourth-quarter results. Teradyne supplies automated test equipment and industrial automation products, including collaborative and autonomous mobile robots.
Financial performance and liquidity
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue | $2.295 billion | $2.101 billion |
| Gross profit / margin | $1.340 billion / 58.4% | $1.220 billion / 58.1% |
| Operating income / margin | $553.7 million / 24.1% | $473.8 million / 22.6% |
| Net income | $467.5 million | $451.8 million |
| Diluted earnings per share | $2.60 | $2.35 |
| Cash from operating activities | $578.8 million | $476.9 million |
- Revenue increased 9.2%; net income rose 3.5%. Gross margin improved 0.3 percentage points and operating margin improved 1.5 points.
- Cash, cash equivalents and marketable securities totaled approximately $1.016 billion at year-end, down $189 million from 2018. Current assets were $1.659 billion and current liabilities $539.0 million.
- Convertible notes had $460 million principal, 1.25% coupon and a December 2023 maturity; carrying value was $394.7 million. The revolving credit facility was terminated in June 2019 while undrawn.
- Capital returns included $500 million of share repurchases and $61.3 million of dividends in 2019. The quarterly dividend was raised to $0.10 per share in January 2020; a new $1.0 billion repurchase authorization was approved, with at least $250 million of 2020 repurchases intended.
- Free cash flow is not stated as a separate measure in the filing.
Segments and fourth quarter
- 2019 segment revenue: Semiconductor Test $1.553 billion (+4%); Industrial Automation $298.1 million (+14%); System Test $287.5 million (+33%); Wireless Test $157.3 million (+19%). System Test had the fastest reported segment growth.
- Segment income before taxes was $417.0 million for Semiconductor Test, $93.5 million for System Test, $35.6 million for Wireless Test, and a $5.9 million loss for Industrial Automation.
- Fourth-quarter revenue was $654.7 million versus $519.6 million in Q4 2018. Q4 net income was $125.1 million versus $143.8 million, and diluted EPS was $0.69 versus $0.79. Q4 included a $15 million RealWear investment impairment and $7.7 million of pension and postretirement actuarial losses.
- Year-end backlog rose to $810.0 million from $568.7 million, led by Semiconductor Test. Management cautions that orders may be delayed or cancelled, so backlog is not necessarily predictive of future sales.
Material changes, outlook and risks
- Management said 2019 test-business revenue exceeded plan, driven by China Semiconductor Test demand, early 5G investment and stronger System Test. Industrial Automation growth fell short of plan. For 2020, management expected continued strong test-business momentum and improved Industrial Automation growth; no quantified revenue or earnings guidance was provided.
- Tax expense rose to $58.3 million from $16.0 million and the effective tax rate increased to 11.1% from 3.4%. The prior-year rate benefited from a $49.5 million tax benefit related to finalizing the U.S. transition-tax estimate. 2019 included a $26 million benefit from releasing uncertain tax-position reserves after completion of the IRS audit of the 2015 federal return, alongside other tax-rate changes.
- Notable 2019 items included the $15 million RealWear impairment, $8.2 million pension actuarial losses, and a $22.2 million gain from reducing MiR contingent consideration, partly offset by an increase in AutoGuide contingent consideration. Teradyne acquired Lemsys and AutoGuide during 2019.
- Key exposures include semiconductor and electronics industry cyclicality, customer concentration, competitive pressure, supply-chain and outsourced-manufacturing dependence, and international trade and export restrictions. Estimated revenue driven by Huawei, including sales through its contract manufacturers, was 11% of consolidated revenue in 2019, up from 4% in 2018. Huawei and 68 affiliates were placed on the U.S. Entity List in 2019; proposed additional export-control changes could affect sales.
- About 85% of 2019 revenue came from customers outside the United States, and manufacturing relies substantially on contractors with operations in China and Malaysia. The coronavirus outbreak had disrupted operations in China by early 2020, but had not materially affected the business as of the filing; further disruption could have a material impact.
- MiR goodwill was $123.6 million; its estimated fair value exceeded carrying value by 14%. Management identified forecast revenue, discount rate and earnings assumptions as sensitive inputs that could lead to future impairment. Legal claims were described as ordinary-course matters, with losses not expected to materially affect results or financial position.
Investor verification priorities
- Assess the sustainability of the 2020 test-business outlook and whether Industrial Automation growth improves, particularly given its 2019 segment loss.
- Track Huawei-related sales, export-control developments, and customer concentration through direct and contract-manufacturer channels.
- Review the quality of earnings and comparability, including tax benefits, contingent-consideration adjustments, pension actuarial items and the RealWear impairment.
- Monitor MiR goodwill headroom and AutoGuide/MiR contingent consideration against actual performance and acquisition assumptions.
- Confirm cash generation, working-capital needs, and the execution of planned buybacks and dividends amid cyclical demand and China-related disruption.
The auditor issued an unqualified opinion on the financial statements and concluded that internal control over financial reporting was effective as of December 31, 2019.