What drove Teradyne's revenue and earnings growth in 1997?

Growth came mainly from semiconductor test systems, where shipments rose 12% as chipmakers expanded capacity after a weak 1996. Backplane connection systems grew 23% on demand from networking, data storage and other high-technology customers. Net income also benefited from lower nonrecurring charges ($5.0 million in 1997 versus $48.9 million in 1996) and better overhead absorption. Telecommunications and circuit-board test sales declined.

Why did operating cash flow drop so sharply despite higher profits?

Cash from operations fell to $13.5 million from $250.8 million because the company built large working-capital positions. Accounts receivable increased $122.5 million, largely from a $150.4 million rise in fourth-quarter sales, and inventories rose $133.4 million to support the record backlog. Management attributes this to new products that need longer manufacturing and test cycles during ramp-up.

How strong is the order backlog and how much of it is likely to convert to 1998 revenue?

Backlog reached $862.5 million at year-end 1997, up 67%. About 88% of the electronic test systems backlog and 86% of the backplane backlog are expected to be delivered in 1998. However, the company notes that part of the backlog may be canceled, and $20.3 million of the electronic test backlog consists of unfunded U.S. Navy orders scheduled for delivery in 1999.

How exposed is Teradyne to customer concentration, international sales and cyclicality?

Sales outside the U.S. were 51% of 1997 revenue, with exposure to Asia Pacific, Europe and Japan, and the company hedges part of its currency risk. The three largest customers accounted for 26% of sales, though no single customer reached 10%. The semiconductor industry is highly cyclical, and the 1996 downturn cut semiconductor test orders by 37%, so future results may be volatile.

Is Teradyne's liquidity sufficient to fund its expansion, and what are its capital return policies?

Management says its $249.9 million in cash and marketable securities, operating cash flow, and the undrawn $120.0 million credit line will cover 1998 working capital and capital expenditure needs. Capital spending is rising, with $273,000 sq ft under construction in North Reading and 212,000 sq ft at Agoura Hills being prepared for occupancy. The company does not pay dividends and is retaining earnings, though it repurchased 2.6 million shares for $104.5 million in 1997 under a 5.0 million share authorization.

TER 10-K FY1997 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 30, 1998. Cited figures are marked; the original filing is the authoritative source.

Teradyne, Inc. (NYSE: TER) reported record 1997 net sales of $1,266.3 million^a, up 8% from $1,171.6 million in 1996, and net income of $127.6 million ($1.48 diluted EPS), up 36% from $93.6 million.

The growth was driven by a 12% increase in semiconductor test system shipments and a 23% rise in backplane connection system sales, partly offset by declines in telecommunications and circuit-board test systems. Results were also helped by a smaller nonrecurring charge ($5.0 million^b pre-tax in 1997 versus $48.9 million in 1996), and the gross margin improved as cost of sales fell from 62% to 58% of sales. Order momentum was the most notable development.

Incoming orders rose 54% to $1,612.4 million^c, and total backlog grew 67% to $862.5 million at year-end, with about 88% of electronic test backlog expected to ship in 1998. However, the backlog build pushed working capital sharply higher: operating cash flow fell to $13.5 million from $250.8 million, accounts receivable rose $122.5 million, inventories rose $133.4 million, and cash plus marketable securities declined $181.6 million to $249.9 million. Capital spending nearly doubled to $132.1 million to expand production capacity, and the company repurchased $104.5 million of stock.

Investors should weigh the strong order book and earnings recovery against the cyclical semiconductor exposure, customer concentration (the three largest customers were 26% of sales), and the cash-flow strain from rapid growth. The company has never paid cash dividends and intends to retain earnings. Management states that existing liquidity and an undrawn $120.0 million^d revolving credit line are sufficient for 1998 needs, and no material litigation was reported.

02—Key points

Key Highlights

Record 1997 net sales of $1,266.3 million, up 8% year over year, led by a 12% increase in semiconductor test system shipments.
Net income rose 36% to $127.6 million, or $1.48 per diluted share, versus $93.6 million in 1996; gross margin improved as cost of sales fell from 62% to 58% of sales.
Incoming orders jumped 54% to $1,612.4 million, and year-end backlog grew 67% to $862.5 million, with most of it expected to ship in 1998.
Operating cash flow collapsed to $13.5 million from $250.8 million as receivables (+$122.5 million) and inventories (+$133.4 million) built up to support backlog.
Cash, equivalents and marketable securities fell $181.6 million to $249.9 million, while capital expenditures rose to $132.1 million and $104.5 million was spent on share buybacks.
Customer and cyclicality risk is significant: the three largest customers accounted for 26% of 1997 sales, and the company cites the semiconductor industry's cyclical downturns, such as the 37% drop in semiconductor test orders in 1996.
The company has never paid cash dividends and plans to retain earnings; a $120.0 million revolving credit line remained undrawn at year-end 1997.

03—Questions

Frequently Asked Questions

What drove Teradyne's revenue and earnings growth in 1997?
Growth came mainly from semiconductor test systems, where shipments rose 12% as chipmakers expanded capacity after a weak 1996. Backplane connection systems grew 23% on demand from networking, data storage and other high-technology customers. Net income also benefited from lower nonrecurring charges ($5.0 million in 1997 versus $48.9 million in 1996) and better overhead absorption. Telecommunications and circuit-board test sales declined.
Why did operating cash flow drop so sharply despite higher profits?
Cash from operations fell to $13.5 million from $250.8 million because the company built large working-capital positions. Accounts receivable increased $122.5 million, largely from a $150.4 million rise in fourth-quarter sales, and inventories rose $133.4 million to support the record backlog. Management attributes this to new products that need longer manufacturing and test cycles during ramp-up.
How strong is the order backlog and how much of it is likely to convert to 1998 revenue?
Backlog reached $862.5 million at year-end 1997, up 67%. About 88% of the electronic test systems backlog and 86% of the backplane backlog are expected to be delivered in 1998. However, the company notes that part of the backlog may be canceled, and $20.3 million of the electronic test backlog consists of unfunded U.S. Navy orders scheduled for delivery in 1999.
How exposed is Teradyne to customer concentration, international sales and cyclicality?
Sales outside the U.S. were 51% of 1997 revenue, with exposure to Asia Pacific, Europe and Japan, and the company hedges part of its currency risk. The three largest customers accounted for 26% of sales, though no single customer reached 10%. The semiconductor industry is highly cyclical, and the 1996 downturn cut semiconductor test orders by 37%, so future results may be volatile.
Is Teradyne's liquidity sufficient to fund its expansion, and what are its capital return policies?
Management says its $249.9 million in cash and marketable securities, operating cash flow, and the undrawn $120.0 million credit line will cover 1998 working capital and capital expenditure needs. Capital spending is rising, with $273,000 sq ft under construction in North Reading and 212,000 sq ft at Agoura Hills being prepared for occupancy. The company does not pay dividends and is retaining earnings, though it repurchased 2.6 million shares for $104.5 million in 1997 under a 5.0 million share authorization.

04—Continue

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