TERADYNE, INC annual report, FY2018

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Teradyne, Inc. — FY 2018 Form 10-K

Reporting period: Fiscal year ended December 31, 2018. The filing also reports fourth-quarter results. Teradyne supplies semiconductor and electronics test systems and industrial automation products, including collaborative and autonomous mobile robots. Figures below are in U.S. dollars.

Financial performance

  • FY revenue: $2.101 billion, down 1.7% from $2.137 billion in 2017. Product revenue fell 3% to $1.730 billion; service revenue rose 5% to $371.2 million.
  • FY profitability: Gross profit was $1.220 billion, approximately flat year over year; gross margin improved to 58.1% from 57.2%. Operating income was $473.8 million, down from $525.3 million, with operating margin of 22.6% versus 24.6%. Net income was $451.8 million, or $2.35 diluted EPS, compared with $257.7 million, or $1.28, in 2017.
  • Fourth quarter: Revenue was $519.6 million, net income was $143.8 million, and diluted EPS was $0.79. The comparable 2017 quarter had revenue of $479.4 million and a net loss of $105.9 million, substantially affected by tax-reform charges.
  • Cash flow: Operating cash flow was $476.9 million, down from $626.5 million in 2017. Investing activities provided $923.0 million, largely reflecting marketable-security maturities and sales; financing activities used $903.4 million, principally for share repurchases and dividends.
  • Liquidity and debt: Cash, cash equivalents and marketable securities totaled $1.205 billion at year-end, down $699 million from 2017. Current assets were $1.732 billion and current liabilities $476.3 million. Convertible notes had $460 million principal and a $380.0 million net carrying amount; the notes bear a 1.25% coupon and mature in 2023. The $350 million revolving credit facility was undrawn, and Teradyne reported compliance with its covenants.
  • Capital returns: Teradyne repurchased $823.5 million of stock in 2018 and paid $67.3 million in dividends. The declared dividend was $0.09 per share per quarter. Management intended to repurchase $500 million of stock in 2019.

Material changes versus 2017

  • Semiconductor Test revenue fell 10% to $1.492 billion, mainly due to lower mobility and microcontroller test sales; memory and analog test sales and service revenue partly offset the decline.
  • Industrial Automation revenue grew 54% to $261.5 million, driven by collaborative-robot demand and the MiR acquisition. System Test revenue rose 12% to $216.1 million; Wireless Test revenue rose 18% to $132.0 million.
  • Selling and administrative expense increased $41.8 million to $390.7 million, partly due to Industrial Automation spending and the MiR and Energid acquisitions. Engineering and development expense decreased $5.8 million to $301.5 million.
  • The effective tax rate fell to 3.4% from 50.9%. FY 2018 included a $49.5 million tax benefit from finalizing the U.S. transition-tax estimate; FY 2017 included $186.0 million of provisional tax expense related to U.S. tax reform. These tax items materially affect the net-income comparison.
  • Teradyne adopted ASC 606 in 2018. On a legacy-GAAP basis, the filing presents 2018 revenue of $2.062 billion and net income of $427.6 million, versus reported ASC 606 revenue of $2.101 billion and net income of $451.8 million. Comparisons with 2017 therefore require attention to accounting basis.

Outlook, commentary and risks

  • Management said it intended to invest in the business, grow market share, expand addressable markets and manage costs. The filing does not provide company-wide numerical revenue or earnings guidance for 2019.
  • Teradyne planned to introduce a high-speed DRAM test version of its Magnum platform in 2019. It said cash and marketable securities were expected to support dividends, the authorized repurchase program, working capital and expenditures for at least the next 12 months.
  • The business is cyclical and depends on customer capital spending. Test-equipment sales are concentrated: one OEM customer, including sales through its supply partners, was estimated to drive 13% of 2018 consolidated revenue, down from 22% in 2017. The five largest customers represented 27% of revenue.
  • International exposure is significant: 87% of revenue came from outside the United States, and Taiwan accounted for 25% of revenue. Risks include demand swings, competition, reliance on suppliers and contract manufacturers, and potential disruption from tariffs, export controls or geopolitical events.
  • Trade measures included U.S. tariffs on certain China-made products and Chinese retaliatory tariffs. Management said operational changes were expected to mitigate identified U.S. tariff effects, while warning that future export controls or trade restrictions could materially affect sales or operations.
  • Acquisitions added contingent payment obligations. Year-end contingent consideration was $70.5 million; MiR’s maximum potential contingent consideration was $115 million. MiR contributed $24.1 million of revenue and a $7.6 million pretax loss from acquisition through year-end.
  • Other notable items include $11.2 million of 2018 inventory provisions and a $0.3 million pension settlement loss associated with transferring approximately 1,700 retiree obligations to an insurer. No goodwill impairment was recorded in 2018; the filing recalls substantial Wireless Test goodwill and intangible-asset impairments in 2016.
  • PwC issued an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded controls were effective at year-end.

Investor verification points

  • Verify the 2018 versus 2017 comparison on a consistent revenue-recognition basis, and distinguish operating performance from the unusually low 2018 tax rate and 2017 tax-reform charge.
  • Track Semiconductor Test demand, particularly mobility and microcontroller trends, alongside memory and analog sales, and monitor the largest OEM-driven customer exposure.
  • Assess whether Industrial Automation growth and the MiR and Energid acquisitions translate into sustainable profits, considering acquisition costs, amortization and contingent consideration.
  • Review cash generation and working-capital movements, especially the reduction in cash and securities, higher inventory and supplier prepayments, and substantial repurchases.
  • Monitor the $460 million convertible-note principal, potential dilution from the warrants above their $39.78 strike price, and the timing and amount of acquisition earn-out payments.