01—Abstract
Summary
Summary of the 10-K filed March 27, 2000. Cited figures are marked; the original filing is the authoritative source.
Teradyne, Inc. (TER) reported a strong 1999, with net sales rising 20% to a record $1,790.9 milliona from $1,489.2 million in 1998, and net income more than doubling to $191.7 million ($1.07 diluted EPS) from $102.1 million.
The growth was driven primarily by a 25% increase in semiconductor test system shipments tied to semiconductor capacity expansion, which accounted for 68% of sales, and a 39% rise in backplane connection system sales. Incoming orders surged 82% to a record $2,190.6 millionb, pushing backlog up 69% to a record $979.5 million, with most of the semiconductor and backplane backlog expected to ship in 2000. Operating margin improved as cost of sales fell from 64% to 59% of sales, though the other test systems segment (telecom and circuit-board test) swung to a pre-tax loss of $14.3 million as telecom orders fell 59%.
The balance sheet strengthened, with cash, equivalents and marketable securities rising to $387.4 millionc, operating cash flow of $367.5 million, and shareholders' equity of $1.15 billion against only $13.6 million of long-term debt. The company repurchased $207.8 million of stock in 1999 and has never paid cash dividends. Investors should weigh the record bookings against the company's history of semiconductor industry cyclicality, customer concentration (top three customers accounted for 26% of sales, Motorola 11%), exposure to Asian markets, and the 2000 implementation of SAB 101, whose impact is not yet quantified.
The filing also flags risks including competitive pricing pressure, the possibility of order cancellations, and potential patent infringement claims. Year 2000 remediation was completed within the $5.0 milliond budget with no material disruptions reported.
02—Key points
Key Highlights
- Record 1999 net sales of $1,790.9 million, up 20% year over year, with net income of $191.7 million, up 88%.
- Incoming orders rose 82% to a record $2,190.6 million; backlog grew 69% to a record $979.5 million.
- Semiconductor test systems (68% of sales) grew 25% in shipments; backplane connection systems sales rose 39%.
- Other test systems segment fell 18% in sales and posted a pre-tax loss of $14.3 million, driven by a 45% drop in telecom test systems.
- Gross margin improved as cost of sales dropped to 59% of sales from 64%, aided by manufacturing overhead absorption.
- Strong liquidity: $387.4 million in cash and marketable securities, $367.5 million operating cash flow, and only $13.6 million of long-term debt.
- Customer concentration: top three customers were 26% of sales, with Motorola at 11%; 52% of sales were outside the U.S.
03—Questions
Frequently Asked Questions
What drove Teradyne's strong 1999 performance?
Demand for semiconductor test systems surged as chip manufacturers expanded capacity. Semiconductor test orders rose 130%, and backplane connection systems benefited from growth in networking and data storage customers. Higher volume also improved manufacturing overhead absorption, lifting gross margins.
What are the main risks to investors?
The semiconductor industry is highly cyclical, and the filing warns that bookings increases may not be sustained. Other risks include intensifying price competition, possible order cancellations, customer concentration, exposure to South Asian and Taiwanese economies, and the potential financial impact of SAB 101 revenue recognition guidance in 2000, which has not yet been quantified.
Why did the other test systems segment decline?
Telecommunications test system sales fell 45% as telephone operators cut investment in traditional voice testing, and circuit-board test sales dropped 20% as customers sought lower-cost or new solutions. Software test systems grew 42%, partially offsetting the decline, but the segment still posted a pre-tax loss as engineering spending was maintained.
Is Teradyne's balance sheet healthy and does it return capital to shareholders?
The balance sheet is strong, with $387.4 million in cash and marketable securities, minimal long-term debt of $13.6 million, and a $120 million undrawn credit line. The company repurchased $207.8 million of its stock in 1999 and has never paid cash dividends, instead retaining earnings for growth and buybacks.
Does the record backlog guarantee 2000 revenue growth?
Not entirely. About 99% of the semiconductor and backplane backlog is expected to ship in 2000, but the company acknowledges that some backlog orders may be canceled, and the filing notes that past semiconductor demand has been prone to sharp cyclical swings.
04—Continue