Teradyne, Inc. — FY2013 Form 10-K
Business context and reporting period. Teradyne supplies automatic test equipment for semiconductors, wireless devices, and system-test markets, including military/aerospace, storage, and circuit-board testing. This annual report covers the fiscal year ended December 31, 2013; quarterly figures below identify the fourth quarter where relevant. The company acquired wireless-test supplier ZTEC in October 2013.
Financial performance and liquidity
| Metric | FY2013 | FY2012 |
|---|---|---|
| Revenue | $1.428 billion | $1.657 billion |
| Gross profit / margin | $808.8 million / 56.6% | $886.0 million / 53.5% |
| Operating income / margin | $190.7 million / 13.4% | $287.4 million / 17.3% |
| Net income | $164.9 million | $217.0 million |
| Diluted EPS | $0.70 | $0.94 |
| Operating cash flow | $267.3 million | $403.1 million |
- Revenue fell 13.8% year over year. Semiconductor Test revenue declined 9% to $1.023 billion; Wireless Test fell 12% to $251.9 million; System Test fell 37% to $153.0 million.
- Gross margin improved 3.1 percentage points despite lower sales, reflecting favorable product mix, pension income, lower inventory provisions, and no purchase-accounting inventory step-up; lower volume partly offset these factors.
- FY2013 investing cash outflow was $281.8 million, including $106.7 million in capital expenditures and $15.0 million net cash paid for ZTEC. Financing activities provided $17.3 million.
- Cash, cash equivalents, and marketable securities totaled approximately $1.20 billion at year-end, up $193.3 million from 2012. Current assets were $1.440 billion and current liabilities $475.6 million.
- Debt carrying value was $186.7 million, all classified as current at year-end. The $190 million 4.50% convertible notes matured March 15, 2014; contractual debt principal and interest obligations due in 2014 totaled $190.953 million. The company intended to use cash and its convertible-note hedge in settlement.
Material changes and unusual items
- Product revenue decreased 17% to $1.155 billion, while service revenue was essentially flat at $273.0 million. The Semiconductor Test decline primarily reflected weaker system-on-chip sales tied to a lower application-processor market; System Test was affected by lower hard-disk-drive demand and PC shipments.
- FY2013 net income included a $34.2 million gain from the sale of an equity investment. The gain was recorded in interest expense and other; $5.2 million of additional sale proceeds was held in escrow for potential indemnification.
- Research and development spending rose to $264.1 million, or 18.5% of revenue, from $255.9 million, or 15.4%. Selling and administrative expense was $279.6 million, broadly flat in dollars but higher as a share of revenue.
- Inventory provisions were $16.6 million versus $26.8 million in 2012. Teradyne scrapped $35.3 million of inventory during 2013 and ended the year with $115.9 million of inventory reserves.
- Fourth-quarter 2013 revenue was $285.3 million and net income was $22.3 million, compared with revenue of $248.4 million and a net loss of $16.5 million in fourth-quarter 2012. The 2013 quarter included the investment-sale gain; pension and postretirement actuarial gains also increased fourth-quarter gross profit by $2.7 million and net income by $9.1 million.
- Apple represented 12% of FY2013 revenue, up from 10% in 2012. The three largest customers together accounted for 26% of revenue. Sales outside the United States were 84%; China and Taiwan represented 23% and 19%, respectively.
Outlook, risks, and contingencies
- Management described demand as cyclical and said lower PC shipments and hard-disk-drive demand were expected to continue affecting Storage Test. A headcount reduction was implemented in that business in 2013; further cost or capacity reductions may be needed if weakness persists.
- No numerical revenue or earnings guidance is provided in the filing. Management said available cash and marketable securities were expected to fund the quarterly dividend, working capital, and expenditures for at least the next 12 months.
- The board initiated a quarterly dividend in January 2014, declaring $0.06 per share for payment in June 2014. Future dividends remain discretionary.
- Near-term items include the March 2014 convertible-note maturity and potential dilution from the separate warrant transaction, whose net-share settlement was scheduled for June–September 2014. The company said the note hedge was expected to reduce dilution, while the warrants could dilute shareholders if the stock price exceeded the $7.67 strike.
- Other principal risks include semiconductor and electronics capital-spending cycles, customer concentration, intense competition, rapid technology and product changes, reliance on suppliers and contract manufacturers (including manufacturing in China), and international, tax, intellectual-property, environmental, and cybersecurity risks.
- The company reported a $63.965 million underfunded status for its defined-benefit pension plans. It also disclosed $181.0 million in non-cancelable purchase commitments and $56.8 million in operating lease commitments. The Boston Semi Equipment antitrust matter settled in October 2013 with no monetary consideration; other ordinary-course claims were not expected by management to have a material adverse effect.
- The U.S. research and development tax credit had expired at the end of 2013; management warned that failure to reenact it could raise the 2014 effective tax rate. Approximately $340 million of cash was held outside the United States and could incur additional taxes if repatriated.
- CEO Michael Bradley retired effective January 31, 2014; Mark Jagiela became CEO. The retirement agreement was expected to result in approximately $6.6 million of stock-based compensation expense in first-quarter 2014.
Most important facts for investors to verify
- Whether semiconductor and wireless demand recover, and whether Storage Test weakness continues to pressure revenue and require additional restructuring.
- How the March 2014 convertible notes were settled, the resulting cash usage and share issuance, and the subsequent effect of warrant settlements on dilution.
- How much of FY2013 earnings and margin performance is repeatable without the $34.2 million investment-sale gain and favorable pension-related effects.
- Customer concentration and regional exposure, particularly Apple, China, and Taiwan, as well as the reliability of backlog given customers’ ability to delay or cancel orders.
- Whether the R&D tax credit is renewed and how foreign cash repatriation, tax positions, and Singapore tax-holiday conditions affect future taxes and liquidity.