Why did net income decline in 1998 despite record sales?

Although sales rose 18% to a record $1,489.2 million, cost of sales increased to 64% of sales from 58% in 1997. This reflected a $23.0 million charge for excess semiconductor inventory, higher costs for new product shipments, and fixed manufacturing costs spread over lower second-half semiconductor volumes. Engineering and development spending also rose by $32.6 million, and net income fell to $102.1 million from $127.6 million.

How serious is the decline in orders and backlog?

Quite serious for near-term visibility. Incoming orders fell 25% to $1,206.5 million, and backlog dropped 33% to $579.8 million at year-end 1998. Semiconductor test system orders fell 40%, reflecting the semiconductor industry downturn. Management expects about 98% of semiconductor backlog to ship in 1999, so 1999 revenue will depend heavily on whether new orders recover quickly. The company also noted that some backlog orders may be canceled.

Is Teradyne financially strong enough to weather a prolonged downturn?

The balance sheet is solid. The company had $297.9 million in cash and marketable securities, a $120.0 million undrawn revolving credit line, and total debt of only about $14.5 million. Shareholders' equity was $1,026.4 million. However, it has significant fixed commitments, including the new North Reading facility under construction and $36.6 million in noncancellable lease obligations, and it continued share repurchases in 1998.

What are the main risks to Teradyne's future results?

The main risks are the cyclical nature of semiconductor capital spending, intense competition from firms with greater resources and from customers' internal suppliers, and the risk that competitors' new products could erode market share or force price cuts. Other risks include dependence on a small number of large customers (the top three accounted for 23% of 1998 sales), reliance on sole-source suppliers, international political and currency exposure, and potential patent infringement claims.

Is the Year 2000 issue expected to affect Teradyne materially?

Management does not expect a material adverse effect on financial condition or operating trends. Year 2000 readiness expenditures are estimated at less than $5.0 million through 1999, and most current products have been assessed as Year 2000 ready. However, the company has not yet adopted formal contingency plans and is still developing them, and it acknowledges that supplier failures could cause disruptions.

TER 10-K FY1998 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 30, 1999. Cited figures are marked; the original filing is the authoritative source.

Teradyne, Inc. (TER) reported record 1998 net sales of $1,489.2 million^a, up 18% from $1,266.3 million in 1997, driven by strong beginning-of-year backlog and a 14% increase in semiconductor test system shipments.

However, profitability declined: net income fell 20% to $102.1 million^b ($1.19 diluted EPS) from $127.6 million, as cost of sales rose to 64% of sales (including a $23.0 million excess inventory charge) and engineering and development spending increased. Excluding the inventory charge, the company's pre-tax income would have fallen from $198.4 million to $168.9 million in the wake of the semiconductor downturn. The outlook is weaker.

Incoming orders fell 25% to $1,206.5 million^c, with semiconductor test system orders down 40%, and total backlog declined 33% to $579.8 million. Management attributed this to the semiconductor industry downturn, and approximately 98% of semiconductor backlog is expected to ship in 1999, leaving limited visibility beyond that. Despite this, the balance sheet remains strong, with $297.9 million in cash and marketable securities, no borrowings under a $120.0 million revolver, and shareholders' equity of $1,026.4 million.

The company continued to repurchase stock ($51.2 million^d in 1998) and has never paid cash dividends. Investors should weigh the record revenue and solid liquidity against the sharp order decline, margin compression, and heavy reliance on the cyclical semiconductor test market, which generated 65% of 1998 sales. Capital spending remained elevated at $164.4 million, including a new 273,000 square foot North Reading, Massachusetts facility, which adds fixed-cost exposure if order volumes do not recover.

02—Key points

Key Highlights

Record 1998 net sales of $1,489.2 million, up 18% year over year, but net income declined 20% to $102.1 million ($1.19 diluted EPS).
Incoming orders fell 25% to $1,206.5 million, with semiconductor test system orders down 40%, and year-end backlog dropped 33% to $579.8 million.
Gross margin pressure: cost of sales rose to 64% of sales from 58%, including a $23.0 million excess inventory charge tied to semiconductor demand weakness.
Semiconductor test systems represented 65% of 1998 sales, leaving the company highly exposed to cyclical semiconductor capital spending.
Strong liquidity: $297.9 million in cash and marketable securities, no revolver borrowings against a $120.0 million credit line, and $1,026.4 million in shareholders' equity.
Capital intensity increased, with $164.4 million in property additions in 1998, including a new 273,000 sq. ft. North Reading, MA facility expected to open in 1H 1999.
International exposure is significant: 46% of 1998 sales were to customers outside the U.S., down from 54% in 1996, with Asia Pacific economic instability cited as a risk.

03—Questions

Frequently Asked Questions

Why did net income decline in 1998 despite record sales?
Although sales rose 18% to a record $1,489.2 million, cost of sales increased to 64% of sales from 58% in 1997. This reflected a $23.0 million charge for excess semiconductor inventory, higher costs for new product shipments, and fixed manufacturing costs spread over lower second-half semiconductor volumes. Engineering and development spending also rose by $32.6 million, and net income fell to $102.1 million from $127.6 million.
How serious is the decline in orders and backlog?
Quite serious for near-term visibility. Incoming orders fell 25% to $1,206.5 million, and backlog dropped 33% to $579.8 million at year-end 1998. Semiconductor test system orders fell 40%, reflecting the semiconductor industry downturn. Management expects about 98% of semiconductor backlog to ship in 1999, so 1999 revenue will depend heavily on whether new orders recover quickly. The company also noted that some backlog orders may be canceled.
Is Teradyne financially strong enough to weather a prolonged downturn?
The balance sheet is solid. The company had $297.9 million in cash and marketable securities, a $120.0 million undrawn revolving credit line, and total debt of only about $14.5 million. Shareholders' equity was $1,026.4 million. However, it has significant fixed commitments, including the new North Reading facility under construction and $36.6 million in noncancellable lease obligations, and it continued share repurchases in 1998.
What are the main risks to Teradyne's future results?
The main risks are the cyclical nature of semiconductor capital spending, intense competition from firms with greater resources and from customers' internal suppliers, and the risk that competitors' new products could erode market share or force price cuts. Other risks include dependence on a small number of large customers (the top three accounted for 23% of 1998 sales), reliance on sole-source suppliers, international political and currency exposure, and potential patent infringement claims.
Is the Year 2000 issue expected to affect Teradyne materially?
Management does not expect a material adverse effect on financial condition or operating trends. Year 2000 readiness expenditures are estimated at less than $5.0 million through 1999, and most current products have been assessed as Year 2000 ready. However, the company has not yet adopted formal contingency plans and is still developing them, and it acknowledges that supplier failures could cause disruptions.

04—Continue

← View all 10-K filings