01—Abstract
Summary
Summary of the 10-K filed March 27, 1997. Cited figures are marked; the original filing is the authoritative source.
Teradyne, Inc. (TER) reported a year of sharply weaker profitability in fiscal 1996 after a record 1995.
Net sales declined 2% to $1,171.6 milliona from $1,191.0 million, while net income fell 41% to $93.6 million ($1.10 per share) from $159.3 million ($1.89 per share). The decline was driven by a 37% drop in semiconductor test system orders, which reduced total incoming orders 27% to $1,045.1 million. Results were also hit by $48.9 million of pre-tax nonrecurring charges, including a $34.1 million product line consolidation (Megatest and Teradyne VLSI lines) and a $10.8 million workforce reduction provision.
Excluding these charges, net income would have been about $125.6 millionb, still down from the prior year's comparable $164.9 million. Gross margin compressed as cost of sales rose to 62% of sales from 54%, partly due to fixed manufacturing costs and a shift toward lower-margin backplane and circuit-board products. The balance sheet remains strong.
Cash, cash equivalents and marketable securities totaled $431.5 millionc at year-end, with operating cash flow of $250.8 million, and total shareholders' equity rose to $842.0 million. Total debt is modest at roughly $17.4 million, and the company has an undrawn $120.0 million revolving credit line. Management believes liquidity is sufficient for 1997 working capital and capital expenditure needs.
The company also repurchased 1.4 million shares for $29.8 milliond under a 5.0 million share authorization and has never paid cash dividends. Looking forward, the year-end backlog fell to $516.4 million from $659.3 million, with about 82% of electronic test backlog and 91% of backplane backlog expected to ship in 1997.
The backlog includes $36.1 million of unfunded U.S. Navy orders, and the company notes that some orders may be canceled. Investors should weigh the cyclicality of the semiconductor capital equipment market, heavy exposure to international sales (54% of revenue), and the expectation of continued volatility in quarterly results against the company's cash position and its continued heavy investment in engineering and development, which rose to 12% of sales.
02—Key points
Key Highlights
- Net sales fell 2% to $1,171.6 million in 1996 from $1,191.0 million, after a 53% increase in 1995.
- Net income declined 41% to $93.6 million ($1.10 per share) from $159.3 million ($1.89 per share), including $48.9 million of pre-tax nonrecurring charges.
- Incoming orders dropped 27% to $1,045.1 million, with semiconductor test system orders down 37%, and year-end backlog fell to $516.4 million from $659.3 million.
- Gross margin compressed as cost of sales rose to 62% of sales from 54%, including a $34.1 million product line consolidation charge.
- Strong liquidity: $431.5 million in cash and marketable securities, $250.8 million operating cash flow, $842.0 million shareholders' equity, and $17.4 million total debt.
- International sales were 54% of 1996 revenue, and semiconductor test systems accounted for 64% of net sales, creating concentration and cyclicality risk.
- Company repurchased 1.4 million shares for $29.8 million under a 5.0 million share authorization; no cash dividends have ever been paid.
03—Questions
Frequently Asked Questions
Why did Teradyne's earnings decline sharply in 1996?
Net income fell to $93.6 million from $159.3 million because orders for semiconductor test systems dropped 37% as chipmakers cut back spending. The company also recorded $48.9 million in pre-tax nonrecurring charges, including a $34.1 million product line consolidation and a $10.8 million workforce reduction provision. Lower sales volume pressured margins as fixed manufacturing costs were spread over less revenue.
Is Teradyne's balance sheet strong enough to weather a downturn?
Yes, based on these filings. The company held $431.5 million in cash and marketable securities, had only about $17.4 million of long-term debt and related obligations, and had an undrawn $120.0 million revolving credit line. Shareholders' equity increased to $842.0 million, and management believes resources are sufficient for 1997.
What does the backlog decline mean for 1997 revenue?
Year-end backlog fell to $516.4 million from $659.3 million, a signal that near-term orders have softened. About 82% of the electronic test backlog and 91% of the backplane backlog were expected to ship in 1997, so the backlog provides partial visibility. However, some orders may be canceled, and $36.1 million of Navy orders are unfunded, so the backlog should not be treated as fully secure revenue.
Does Teradyne pay dividends or buy back stock?
Teradyne has never paid cash dividends and expects to retain all earnings for growth. The Board authorized repurchases of up to 5.0 million shares in August 1996, and the company bought 1.4 million shares for $29.8 million during the year to offset shares issued under employee stock plans.
How concentrated and cyclical is Teradyne's business?
The business is highly concentrated in semiconductor test systems, which made up 64% of 1996 net sales, and depends on semiconductor capital spending, which the filing describes as highly cyclical. International customers accounted for 54% of sales, and no single customer represented 10% or more of revenue in 1996, which limits customer concentration risk.
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